Efficiency of Conventional versus Islamic Banks

Conventional and Islamic banks operate on different principles in maximizing the wealth of their shareholders and are subjected to the competitive regulatory environment. The cost, revenue, and profit efficiencies of Islamic banks and conventional banks are analyzed based on size, age, and region. The average and over-time efficiency for these banks are analyzed using Data Envelopment Analysis (DEA) and Financial Ratios. Overall cost and profit efficiencies are ascertained using the Stochastic Frontier Approach (SFA). The findings suggest that there are no significant differences between the overall efficiency results of conventional and Islamic banks irrespective of the method of analysis. Based on the documented evidence on efficiency of conventional banks, these findings imply that the banking transactions compliant with the Shari¿ah are not an impediment to efficiency of Islamic banks. However, there is a substantial avenue to further improve the cost, revenue and profit efficiencies in both the banking systems. Overall, the results on the efficiency of conventional and Islamic banks are consistent with the documented literature.