Hyperbolic distance function, technical efficiency and stability to shocks: A comparison between Islamic banks and conventional banks in MENA region

In this paper, we compare banking performance and resiliency between Islamic banks and conventional banks in MENA region over the period 2002–2014. Stochastic hyperbolic and radial output distance functions are employed to evaluate banking performances. Furthermore, hyperbolic distance function methodology is extended to evaluate bank's business risk through simulations. Historical extreme observed situations in terms of profit loss from the industry are used in order to simulate their impact on the overall profit distribution within the industry. More precisely, we compare the observed profit and the simulated one followed by an abrupt fall in bank lending and non-lending activities. Results find evidence of technical efficiency differences with bank type, some evidence with bank size. It is found that conventional banks are much more vulnerable to an important drop on their lending activities than non-lending activities, while Islamic banks are equally vulnerable to any drop of the activity. Furthermore, Islamic banks are found to be less vulnerable than their counterparts when they are exposed to shocks on their lending activities. Very large banks are much more resilient than small banks whatever is the bank stream. It is also found that bank vulnerability is more important when the banks are not able to adjust their costs in the short run, and increases with the exposure to higher shocks in magnitude.