Comparison of efficiency and productivity changes of Islamic and conventional banks: Evidence from Europe and Muslim-Majority countries?

Abstract

This paper examines the efficiency performance of Bosna Bank International (BBI) in Bosnia-Herzegovina and Islamic Bank of Britain (IBB) in the UK, against small conventional banks in each country and also against small and large Islamic banks from Muslim-majority countries. This paper also estimates the productivity changes of IBB and BBI relative to small Islamic banks, within and outside Europe, and relative to small conventional banks in the UK and Bosnia respectively. Finally, this paper utilizes OLS regression analysis to check the robustness of the overall data envelopment analysis (DEA) results, as well as to determine the impact of internal and external factors on bank's efficiency. The analysis covers the 4-year period from 2005 through 2008. The findings suggest that IBB and BBI are technically inefficient. In comparison with small banks, inefficiency is largely due to mismanagement. Inefficiency becomes scale in nature relative to large Islamic banks. As compared to Islamic banks, BBI yields higher pure technical efficiency than IBB, but IBB records higher positive growth in estimated efficiency. IBB and BBI yield upward growth in total factor productivity and technical efficiency but record negative growth in technology innovations. Results also suggest that the IBB and BBI lag relatively behind their conventional peer banks in terms of efficiency and productivity performance. BBI shows much better efficiency performance relative to conventional banks than IBB. Overall, a bank that is more efficient is found to be larger, more profitable, acquire less debt, invest more in skills, and operates in countries with a higher GDP per capita. © 2012 The Clute Institute.