Determinants of Bank Efficiency: Conventional versus Islamic

Abstract

This study explores the area of bank efficiency with the usage of Stochastic Frontier Analysis. The main objective is to identify determinants affecting conventional and Islamic banks' efficiency, focusing towards banks in Malaysia. Year-end financial data was obtained from a sample of 19 conventional banks and 16 Islamic banks that operate in Malaysia, where these banks' annual reports from the years 2008 until 2011 were referred for the purpose of analysis. An overall view of the results indicates that the levels of profit efficiency for both conventional and Islamic banks in Malaysia were highly similar. Further, it could be observed that efficiency would be better for conventional banks with the increment of bank size and also the decrement of both operational cost and credit risk, while the efficiency for Islamic banks would be better with only the decrement of operational cost.