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The impact of Islamic banking on the cost efficiency and productivity change of Malaysian commercial banks

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  • Mariani Abdul-Majid
  • David Saal
  • Giuliana Battisti

Abstract

This study employs Stochastic Frontier Analysis (SFA) to analyse Malaysian commercial banks during 1996-2002, and particularly focuses on determining the impact of Islamic banking on performance. We derive both net and gross efficiency estimates, thereby demonstrating that differences in operating characteristics explain much of the difference in costs between Malaysian banks. We also decompose productivity change into efficiency, technical, and scale change using a generalized Malmquist productivity index. On average, Malaysian banks experience moderate scale economies and annual productivity change of 2.68%, with the latter driven primarily by Technical Change (TC), which has declined over time. Our gross efficiency estimates suggest that Islamic banking is associated with higher input requirements. However, our productivity estimates indicate that full-fledged Islamic banks have overcome some of these cost disadvantages with rapid TC, although this is not the case for conventional banks operating Islamic windows. Merged banks are found to have higher input usage and lower productivity change, suggesting that bank mergers have not contributed positively to bank performance. Finally, our results suggest that while the East Asian financial crisis had a short-term cost-reducing effect in 1998, the crisis triggered a long-lasting negative impact by increasing the volume of nonperforming loans.

Suggested Citation

  • Mariani Abdul-Majid & David Saal & Giuliana Battisti, 2011. "The impact of Islamic banking on the cost efficiency and productivity change of Malaysian commercial banks," Applied Economics, Taylor & Francis Journals, vol. 43(16), pages 2033-2054.
  • Handle: RePEc:taf:applec:v:43:y:2011:i:16:p:2033-2054
    DOI: 10.1080/00036840902984381
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    References listed on IDEAS

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    1. Tim Coelli & Antonio Estache & Sergio Perelman & Lourdes Trujillo, 2003. "A Primer on Efficiency Measurement for Utilities and Transport Regulators," World Bank Publications, The World Bank, number 15149.
    2. Loretta J. Mester, "undated". "Efficiency of Banks in the Third Federal Reserve District," Rodney L. White Center for Financial Research Working Papers 2-94, Wharton School Rodney L. White Center for Financial Research.
    3. Matthews, Kent & Ismail, Mahadzir, 2006. "Efficiency and Productivity Growth of Domestic and Foreign Commercial Banks in Malaysia," Cardiff Economics Working Papers E2006/2, Cardiff University, Cardiff Business School, Economics Section.
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    Citations

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    Cited by:

    1. Kao, Chiang & Liu, Shiang-Tai, 2014. "Measuring performance improvement of Taiwanese commercial banks under uncertainty," European Journal of Operational Research, Elsevier, vol. 235(3), pages 755-764.
    2. Pejman Abedifar & Paolo Giudici & Shatha Hashem, 2017. "Heterogeneous Market Structure and Systemic Risk: Evidence from Dual Banking Systems," DEM Working Papers Series 134, University of Pavia, Department of Economics and Management.
    3. repec:eee:finsta:v:34:y:2018:i:c:p:12-43 is not listed on IDEAS
    4. Ab-Rahim, Rossazana & Kadri, Norlina & Ismail, Farhana, 2013. "Efficiency performance of Malaysian Islamic banks," MPRA Paper 46238, University Library of Munich, Germany.
    5. repec:eee:riibaf:v:42:y:2017:i:c:p:1327-1335 is not listed on IDEAS
    6. Alireza Tamadonnejad & Aisyah Abdul-Rahman & Mariani Abdul-Majid & Mansor Jusoh, 2017. "The evaluation of East Asian banks by considering economic and political conditions as well as country risk," International Economics and Economic Policy, Springer, vol. 14(1), pages 27-41, January.
    7. Pejman Abedifar & Shahid M. Ebrahim & Philip Molyneux & Amine Tarazi, 2015. "Islamic Banking And Finance: Recent Empirical Literature And Directions For Future Research," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 637-670, September.
    8. repec:eee:pacfin:v:46:y:2017:i:pa:p:1-13 is not listed on IDEAS
    9. Wahida Ahmad & David Prentice, 2015. "How large are productivity differences between Islamic and Conventional Banks?," Discussion Papers 2015/09, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    10. Mariani Abdul-Majid & David Saal & Giuliana Battisti, 2010. "Efficiency in Islamic and conventional banking: an international comparison," Journal of Productivity Analysis, Springer, vol. 34(1), pages 25-43, August.
    11. Jill Johnes & Marwan Izzeldin & Vasileios Pappas, 2012. "A comparison of performance of Islamic and conventional banks 2004 to 2009," Working Papers 12893801, Lancaster University Management School, Economics Department.
    12. repec:eee:finsta:v:33:y:2017:i:c:p:96-119 is not listed on IDEAS
    13. Vigren, Andreas, 2016. "Cost efficiency in Swedish public transport," Research in Transportation Economics, Elsevier, vol. 59(C), pages 123-132.

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