Performance of Conventional and Shari´ah - Compliant Banks: A Data Envelopment Analysis Approach

Abstract

This study aims at examining the comparative performance of Islamic and conventional banks over the sample period from 2005 to 2016. The sample banks consist of a list of Islamic and conventional banks from twenty countries from Asia, Africa, the Middle East, Gulf region, and Europe. Banks performance is proxied by efficiency scores. The nonparametric Data Envelopment Analysis (DEA) is used to estimate the banks' relative efficiency scores. Additionally, the paper applies the two-sample t-test to compare whether the performance averages of the two types of banks are significantly different in the pre, during, and post crisis of 2008. Findings show that both Islamic and conventional banks appear to be on “average” technically inefficient. Inefficiencies are driven largely by the disproportionate size of operations. Poor management practices contribute partially to banks´ inefficiency. Surprisingly, Islamic banks seem to have on “average” a significantly better and less volatile efficiency performance than conventional banks in the pre, crisis, and post-crisis periods. They, therefore, show better chances to improve efficiency by shrinking down activities to control costs and applying suitable changes to determining an appropriate input-output combination.