Comparison of the efficiency measurement of the conventional and Islamic banks
Keywords:Islamic banks, conventional banks, efficiency, DEA
Research background: Islamic banks appeared on the world scene as active players over two decades ago. Many of the principles upon which Islamic banking is based have been commonly accepted all over the world. Financial institutions driven by Islamic principles acquire new clientele without excessive marketing, due to preservation of conservative values. Contrary to the conventional investment banks, their value is based on real money, and not on virtual activities from swap and derivative assets. Competition between conventional (or traditional) and Islamic banks is increasing every day, moreover, Islamic financial institutions are more resistant to the crisis. Our study contains analysis and comparison of economic efficiency of the conventional and Islamic banks. Besides the fact that traditional and Islamic banks apply inputs differently, the reason of better efficiency of Islamic banks may be connected with different approach to the risk management and control of the banking operations by the Sharia commission.
Purpose of the article: The main aim of the article is to compare the economic efficiency of the conventional and Islamic banks in Europe.
Methods: To achieve the aim of the paper, firstly the selected financial indicators of traditional and Islamic banks in Europe were compared. The second, the analysis of the economic efficiency of the selected 1460 conventional and Islamic financial institutions using DEA methods was conducted.
Findings & Value added: Research results indicated methodological differences in the economic efficiency measuring in the Islamic banks. At the same time, the higher economic efficiency of Islamic banks was confirmed. The results are motivating for the follow-up investigation into the causes of higher efficiency of Islamic banks compared to traditional banks.
Abdul-Majid, M., Saal, D. S., & Battisti, G. (2011). The impact of Islamic banking on the cost efficiency and productivity change of Malaysian commercial banks. Applied Economics, 43(16). doi: 10.1080/00036840902984381.
Abdul-Wahab, A. H., & Haron, R. (2017). Efficiency of Qatari banking industry: an empirical investigation. International Journal of Bank Marketing, 35(2). doi: 10.1108/IJBM-07-2016-0090.
Abu-Alkheil, A. (2012). Ethical banking and finance: a theoretical and empirical framework for the cross-country and inter-bank analysis of efficiency, productivity, and financial performance. Retrieved from http://opus.uni-hohenheim.de/volltexte/2012/747/ (15.08.2019).
Ahmad, W., & Luo, R. (2011). Comparison of banking efficiency in Europe: Islamic versus conventional banks. International Finance Review, 11. doi: 10.1108/S1569-3767(2010)0000011016.
Assaf, A., Berger, A. N., Roman, R. A., & Tsionas, E. G. (2017). Does efficiency help banks survive and thrive during financial crises? Retrieved from https://sc.edu/study/colleges_schools/moore/documents/finance/berger/assaf-berger-roman-tsionas_2017-05-17.pdf. (22.11.2019).
Aysan, A., F., Disli, M., Duygun, M., & Ozturk, H. (2018). Religiosity versus rationality: depositor behavior in Islamic and conventional banks. Journal of Comparative Economics, 46(1). doi: 10.1016/j.jce.2017.03.001
Baele, L., Farooq, M., & Ongena, S. (2014). Of religion and redemption: evidence from default on Islamic loans. Journal of Banking and Finance, 44(C). doi: 10.1016/j.jbankfin.2014.03.005.
Batir, T. E., Volkman, D. A., & Gungor, B. (2017). Determinants of bank efficiency in Turkey: participation banks versus conventional banks. Borsa Istanbul Review, 17(2). doi: 10.1016/j.bir.2017.02.003.
Beck, T., Demirgüç-Kunt, A., & Merrouche, O. (2013). Islamic vs. conventional banking: business model, eﬃciency and stability. Journal of Banking and Finance, 37(2). doi: 10.1016/j.jbankfin.2012.09.016.
Berger, A., Hancock, D., & Humphrey, D. (1993). Banking efficiency derived from the profit function. Journal of Banking and Finance, 17(2-3). doi: 10.1016/0378-4266(93)90035-C.
Bitar, M., Pukthuanthong, K., & Walker, T. (2019). Efficiency in Islamic vs. conventional banking: the role of capital and liquidity. Global Finance Journal, 100487. doi: 10.1016/j.gfj.2019.100487.
Boda, M. (2015). A slacks-based measure DEA methodology for identification of returns to scale in the Slovak banking sector. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 63(6). doi: 10.11118/actaun201563061 847.
Boda, M., & Zimkova, E. (2014). An insight into SBM efficiency of Slovak commercial banks. Financial Assets and Investing, 5(2). doi: 10.5817/FAI2 014-2-1.
Boda, M., & Zimkova, E. (2015). Efficiency in the Slovak banking industry: a comparison of three approaches. Prague Economic Papers, 24(4). doi: 10.18 267/j.pep.546.
Casu, B., & Molyneux, P. (2003). Comparative study of efficiency in European banking. Applied Economics, 35(17). doi: 10.1080/0003684032000158109.
Cook, W., Hababou, M., & Liang, L., G. (2005). Financial liberalization and efficiency in Tunisan banking industry: DEA tests. International Journal of Information Technology and Decision Making, 4(3). doi: 10.1142/S0219622 005001684.
Doumpos, M., Hasan, I., & Pasiouras, F. (2017). Bank overall financial strength: Islamic versus conventional banks. Economic Modelling, 64. doi: 10.1016 /j.econmod.2017.03.026.
Erfani, G., & Vasigh, B. (2018). The impact of the global financial crisis on profitability of the banking industry: a comparative analysis. Economies, 6(4). doi: 10.3390/economies6040066.
Fiorentino, E., Karmann, A., & Koetter, M. (2006). The cost efficiency of German banks: a comparison of SFA and DEA. Discussion Paper Series 2: Banking and Financial Studies, Frankfurt am Main: Deutsche Bundesbank, 10.
Grira, J., Hassan, M., & Soumaré, I. (2016). Pricing beliefs: empirical evidence from the implied cost of deposit insurance for Islamic banks. Economic Modelling, 55(C). doi: 10.1016/j.econmod.2016.01.026.
Hassan, T., Mohamad, S., Khaled, I., & Bader, M. (2009). Efficiency of conventional versus Islamic banks: evidence from the Middle East. International Journal of Islamic and Middle Eastern Finance and Management, 2(1). doi: 10.1108/17538390910946267.
Hoque, R., & Rayhan, I. (2012). Data Envelopment Analysis of banking sector in Bangladesh. Russian Journal of Agricultural and Socio-Economic Sciences, 5(5). doi: 10.18551/rjoas.2012-05.02.
Ismail, F., Shabri Abd. Majid, M., & Rahim, R. (2013). Efficiency of Islamic and conventional banks in Malaysia. Journal of Financial Reporting and Accounting, 11(1). doi: 10.1108/JFRA-03-2013-0011.
Jablonsky, J., & Dlouhy, M. (2004). Models of efficiency evaluation of production units. Politicka ekonomie, 52(2). doi: 10.18267/j.polek.458.
Johnes, J., Izzeldin, M., & Pappas, V. (2014). A comparison of performance of Islamic and conventional banks 2004–2009. Journal of Economic Behavior and Organization, 103. doi:10.1016/j.jebo.2013.07.016.
Kabir, M. D., Worthington, A., & Gupta, R. (2015). Copmarative credit risk in Islamic and conventional bank. Pacific-Basin Finance Journal, 34. doi: 10.1016/j.pacfin.2015.06.001.
Kamarudin, F., Nordin, B. A. A., Muhammad, J., & Hamid, M. A. A. (2014). Cost, revenue and profit efficiency of Islamic and conventional banking sector: empirical evidence from Gulf Cooperative Council countries. Global Business Review, 15(1). doi: 10.1177/0972150913515579.
Kamarudin, F., Nordin, B. A. A., & Nasir, A. M. (2013). Price efficiency and returns to scale of banking sector in gulf cooperative council countries: Empirical evidence from Islamic and conventional banks. Economic Computation and Economic Cybernetics Studies and Research, 47(3).
Kamarudin, F., Sufian, F., Loong, F. W., & Anwar, N. A. M. (2017). Assessing the domestic and foreign Islamic banks efficiency: insights from selected Southeast Asian countries. Future Business Journal, 3(1). doi: 10.1016/j.fbj.2017.01.005.
Kliestik, T. (2009). Estimation of the efficiency of transport companies' activities using data envelopment analysis. E+M, Economics and Management, 12(1).
Miah, D., & Uddin, H. (2017). Efficiency and stability: a comparative study between Islamic and conventional banks in GCC countries. Future Business Journal, 3(2). doi: 10.1016/j.fbj.2017.11.001.
Musa, H. (2011). Islamic finance and banking. Bratislava: Iura Edition,
Musa, H., & Musova, Z. (2010). Islamic finance and banking - challenges and prospects. In Proceedings of the 5th international conference. Ostrava: VŠB - Technical University of Ostrava.
Musa, H., Kliestik, T., Frajtova-Michalikova, K., & Debnarova, L. (2015). The tradition approach to credit risk and its estimation for selected banks in Slovakia. Procedia Economics and Finance, 24. doi: 10.1016/S2212-5671(15) 00702-9.
Narayan, P. K., & Phan, D. H. B. (2019). A survey of Islamic banking and finance literature: issues, challenges and future directions. Pacific-Basin Finance Journal, 53. doi: 10.1016/j.pacfin.2017.06.006.
Omar, M., Majid, M., & Rulindo, R. (2007). Efficiency and productivity performance of the national private banks in Indonesia. Gadjah Mada International Journal of Business, 9(1). doi: 10.22146/gamaijb.5603.
Repkova, I. (2014). Efficiency of the Czech banking sector employing the DEA window analysis approach. Procedia Economics and Finance, 12. doi: 10.1016/ S2212-5671(14)00383-9.
Rosman, R., Wahab, M., & Zainol, Z. (2014). Efficiency of Islamic banks during the financial crisis: an analysis of Middle Eastern and Asian countries. Pacific-Basin Finance Journal, 28(C). doi: 10.1016/j.pacfin.2013.11.001.
Safiullah, M., & Shamsuddin, A. (2019). Risk-adjusted efficiency and corporate governance: evidence from Islamic and conventional banks. Journal of Corporate Finance, 55. doi: 10.1016/j.jcorpfin.2018.08.009.
Shawtari, F. A., Salem, M. A., & Bakhit, I. (2018). Decomposition of efficiency using DEA window analysis. Benchmarking: An International Journal, 25(6). doi: 10.1108/BIJ-12-2016-0183.
Sorwar, G., Pappas, V., Pereira, J., & Nurullah, M., (2016). To debt or not to debt: are Islamic banks less risky than conventional banks? Journal of Economic Behavior and Organization, 132(S). doi: 10.1016/j.jebo.2016.10.012.
Staub, R., da Silva e Souza, G., & Tabak, B. (2010). Evolution of bank efficiency in Brazil: a DEA approach. European Journal of Operational Research, 202. doi: 10.1016/j.ejor.2009.04.025.
Tahir, I., Bakar, N., & Haron, S. (2009). Evaluating efficiency of Malaysian banks using Data Envelopment Analysis. International Journal of Business and Management, 4(8). doi: 10.5539/ijbm.v4n8p96.
Vujcis, B., & Jemric, I. (2001). Efficiency of banks in transition: a DEA approach. Dubrovnik: Croatian National Bank.
Yu, M. M., Chen., L. H., Chen, K. Ch., & Tone, K. (2013). Operational efficiency in Taiwan banks with consideration of nonperforming loans: A dynamic network DEA. Retrieved from http://www.grips.ac.jp/cms/wp-content/uploads/2013/03/DEA_Chapter9.pdf (15.04.2016).
Zimkova, E. (2014). Technical efficiency and super-efficiency of the banking sector in Slovakia. Procedia Economics and Finance, 12. doi: 10.1016/S2212-5671(14)00405-5.
Zimkova, E. (2015). Retail production process in commercial banking and its evaluation. Bratislava: Wolters Kluwer.