Efficiency and Risk-Taking in Dual Banking System: Evidence from Emerging Markets

Abstract

With the rapid growth of Islamic banking system as an alternative to an established conventional banking system many countries across the globe are embarking on dual banking system. This paper analyses and compares efficiency and risk taking of 165 commercial banks and 70 Islamic banks from 11 emerging markets between 2000 and 2010. This paper also analyzes the relationship between risk and efficiency within the two banking systems. Empirical evidence shows that bank inefficiency and risk are positively related for conventional banks and inversely related for Islamic banks which clearly highlight the inherent difference between risk–efficiency relationships among these two distinct bank types. The mean cost efficiency scores for the conventional banking industry is higher than Islamic banking sector while, Islamic banks profit efficiency scores have outperformed conventional banks profit efficiency scores. Our evidence also shows that environmental factors can considerably prejudice the banking efficiency scores.

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