Determinants of Bank Efficiency: Conventional versus Islamic

Abstract

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

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