Main Article Content
Abstract
The Malaysian Islamic banking industry holds one of the top three market shares for global Islamic banking assets. Apparently, a dual banking system involving conventional and full-fledged Islamic banks are currently operating in Malaysia. The main objective of this study is to evaluate and compare the efficiency of conventional-owned Islamic banks and full-fledged Islamic banks using three banking approaches. To achieve this objective, information from the annual reports of 15 Islamic banks were utilised from 2011 to 2018. The findings provided mixed evidence subject to the different approaches of DEA methodology. Full-fledged Islamic banks outperformed conventional-owned Islamic banks in the intermediation approach, while conventional-owned Islamic banks outperformed in the production and operating approaches. The findings provide inputs for banks to increase their competency at the managerial level and for policymakers to sustain the growth momentum of the industry.
Keywords
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Copyright (c) 2022 Mohammad Abdul Matin Chowdhury, Razali Haron
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References
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- Ahmad, W., & Prentice, D. (2019). How large are productivity differences between Islamic and conventional banks? Singapore Economic Review, 1–20.
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- An, Q., Liu, X., Id, Y. L., & Xiong, B. (2019). Resource planning of Chinese commercial banking systems using two-stage inverse data envelopment analysis with undesirable outputs. PLoS ONE, 14(6), 1–20.
- Ariff, M. (2017). Islamic banking in Malaysia: The changing landscape. Institutions and Economies, 9(2), 1–13.
- Avkiran, N. K. (2000). Rising productivity of Australian trading banks under deregulation 1986-1995. Journal of Economics and Finance, 24(2), 122–140.
- Azad, M. A. K., Munisamy, S., Masum, A. K. M., Saona, P., & Wanke, P. (2017). Bank efficiency in Malaysia: a use of malmquist meta-frontier analysis. Eurasian Business Review, 7(2), 287–311.
- Banker, R. D., Charnes, A., & Cooper, W. W. (1984). Some models for estimating technical and scale inefficiencies in data envelopment analysis. Management Science, 30(9), 1078–1092.
- Banya, R., & Biekpe, N. (2018). Banking efficiency and its determinants in selected frontier african markets. Economic Change and Restructuring, 51(1), 69–95.
- Basri, M. F., Muhamat, A. A., & Jaafar, M. N. (2018). The efficiency of Islamic banks in Malaysia: Based on DEA and Malmquist productivity index. Journal of Emerging Economies & Islamic Research, 6(3), 15–27.
- Batchelor, V. B. (2005). A comparable cross-system bank productivity measure: Empirical evidence from the Malaysian dual banking system (Doctoral Thesis, Edith Cowan University, 2005). Retrieved from https://ro.ecu.edu.au/theses/5
- Benston, G. J. (1965). Branch banking and economies of scale. Journal of Finance, 20(2), 312–331.
- Benston, G. J., & Smith, C. W. (1976). A transactions cost approach to the theory of financial intermediation. The Journal of Finance, 31(2), 215–231.
- Berger, A. N., & DeYoung, R. (1997). Problem loans and cost efficiency in commercial banks. Journal of Banking & Finance, 21, 849–870.
- Cerovic, L., Sulji, S., & Maradin, D. (2017). Comparative analysis of conventional and Islamic banking: Importance of market regulation. Ekonomska Misao i Praksa, 1(13), 241–264.
- Charnes, A., Cooper, W. W., & Rhodes, E. (1978). Measuring the efficiency of decision making units. European Journal of Operational Research, 2, 429–444.
- Chowdhury, M. A. M., Al Masud, M. A., Atiullah, M., & Tanvir, J. I. (2020). Contemporary responses to the criticism of Islamic banks in Malaysia. European Journal of Islamic Finance, 15, 1–10.
- Chowdhury, M. A. M., & Haron, R. (2021). The efficiency of Islamic Banks in the Southeast Asia (SEA) Region. Futur Bus J, 7(16), 1–16.
- Chowdhury, M. A. M., Haron, R., Sulistyowati, M. I. K., & Masud, M. A. Al. (2020). The efficiency of commercial banks in Indonesia. International Journal of Economic Policy in Emerging Economies, 1(1), 1–23.
- Cooper, W. W., Seiford, L. M., & Tone, K. (2007). Data Envelopment Analysis: A Comprehensive Text with Models, Applications, References and DEA-Solver Software, 2nd edition. UK: Springer.
- Farrell, M. J. (1957). The measurement of productive efficiency. Journal of the Royal Statistical Society. Series A (General), 120(3), 253–290.
- Hamid, N., Ramli, N. A., & Hussin, S. A. S. (2017). Efficiency measurement of the banking sector in the presence of non-performing loan. AIP Conference Proceedings, 1795(020001), 1–8. https://doi.org/10.1063/1.4972145
- Haron, R., Abdul Subar, N., & Ibrahim, K. (2020). Service quality of Islamic banks: satisfaction, loyalty and the mediating role of trust. Islamic Economic Studies, 28(1), 3-23.
- Henriques, I. C., Sobreiro, V. A., Kimura, H., & Mariano, E. B. (2018). Efficiency in the Brazilian banking system using data envelopment analysis. Future Business Journal, 4(2), 157–178.
- ICD-Refinitiv. (2020). Islamic Finance Development Report 2020 Progressing through adversity. https://icd-ps.org/uploads/files/ICD-Refinitiv IFDI Report 20201607502893_2100.pdf
- Ji, Y. B., & Lee, C. (2012). Data envelopment analysis. In M. Pidd (Ed.), Measuring the Performance of Public Services; Principles and Practice (pp. 267–280). UK: Cambridge University Press.
- Kamarudin, F., Sufian, F., Nassir, A. M., Anwar, N. A. M., & Hussain, H. I. (2019). Bank efficiency in Malaysia: A DEA approach. Journal of Central Banking Theory and Practice, 71(1), 133–162.
- Karim, M. W., & Chowdhury, M. A. M. (2021). Antecedents of customer loyalty towards private commercial banks in bangladesh. Management and Accounting Review, 20(2), 35–57.
- Klimberg, R. K., Lawrence, K. D., Yermish, I., Lal, T., & Mrazik, D. (2009). Using regression and data envelopment analysis (DEA) to forecast bank performance over time. In Financial modeling applications and data envelopment applications. UK: Emerald Group Publishing Limited.
- Kwan, S. H. (2003). Operating performance of banks among Asian economies: An international and time series comparison. Journal of Banking & Finance, 27(3), 471-489.
- Kwon, H., & Lee, J. (2015). Two-stage production modeling of large U.S. banks: A DEA-neural network approach. Expert Systems With Applications, 42(19), 6758–6766.
- Malim, N. A. K., & Masro, T. A. (2018). What drives bank margins during and post-crisis? A comparison between islamic and conventional banks. Asian Academy of Management Journal of Accounting and Finance, 14(1), 107–126.
- Mostafa, M. (2007). Modeling the efficiency of GCC banks: A data envelopment analysis approach. International Journal of Productivity and Performance Management, 56(7), 623–643.
- Nugrohowati, R.N.I., Fakhrunnas, F., & Haron, R. (2020). Examining technological and productivity change in the Islamic banking industry. Pertanika Journal of Social Science and Humanities, 28(4), 3355 – 3374.
- Othman, F. M., Mohd-Zamil, N. A., Rasid, S. Z. A., Vakilbashi, A., & Mokhber, M. (2016). Data envelopment analysis: A tool of measuring efficiency in banking sector. International Journal of Economics and Financial Issues, 6(3), 911–916.
- Ouenniche, J., & Carrales, S. (2018). Assessing efficiency profiles of UK commercial banks: a DEA analysis with regression-based feedback. Annals of Operations Research, 266(1–2), 551–587.
- Panah, H. G. Y., Ahmadanuar, M., & Norhan, N. I. (2014). Inputs and outputs in Islamic banking system. Iranian Journal of Management Studies (IJMS), 7(1), 175–188.
- Ramanathan, R. (2007). Performance of banks in countries of the gulf cooperation council. International Journal of Productivity and Performance Management, 56(2), 137–154.
- Ravn, I. (2019). Werner’s typology of banking theories. Forum for Social Economics, 0(0), 1–18.
- Salami, O. L., & Adeyemi, A. A. (2015). Malaysian Islamic banks’ efficiency: An intra-bank comparative analysis of Islamic windows and full-fledged subsidiaries. International Journal of Business and Society, 16(1), 19–38.
- Samad, A. (1999). Comparative efficiency of the Islamic bank vis-à-vis conventional banks in Malaysia. International Journal of Economics, Management and Accounting, 7(1), 1–27.
- San, O. T., Theng, L. Y., & Heng, T. B. (2011). A comparison on efficiency of domestic and foreign banks in Malaysia : A DEA approach. Business Management Dynamics, 1(4), 33–49.
- Sherman, H. D., & Zhu, J. (2006). Service Productivity Management: Improving Service Performance using Data Envelopment Analysis (DEA). US: Springer.
- Sufian, F. (2007). The efficiency of Islamic banking industry in Malaysia: Foreign vs domestic banks. Humanomics, 23(3), 174–192.
- Sufian, F., & Kamarudin, F. (2015). Determinants of revenue efficiency of Islamic banks: Empirical evidence from the Southeast Asian countries. International Journal of Islamic and Middle Eastern Finance and Management, 8(1), 30.
- Sufian, F., Kamarudin, F., & Noor, N. H. H. M. (2014). Revenue efficiency and returns to scale in Islamic banks: Empirical evidence from Malaysia. Journal of Economic Cooperation and Development, 35(1), 47–80.
- Tahir, I. M., Bakar, N. M. A., & Haron, S.-. (2009). Evaluating efficiency of Malaysian banks using data envelopment analysis. International Journal of Business and Management, 4(8), 96–106.
- Tamatam, R., Dutta, G., Dutta, P., & Lessmann, S. (2019). Efficiency analysis of Indian banking industry over the period 2008 – 2017 using data envelopment analysis. Benchmarking: An International Journal, 26(8), 2417–2442.
- Wanke, P., Azad, M. D. A. K., & Barros, C. P. (2016). Predicting efficiency in Malaysian Islamic banks: A two-stage TOPSIS and neural networks approach. Research in International Business and Finance, 36, 485–498.
- Werner, R. A. (2014). Can banks individually create money out of nothing? - The theories and the empirical evidence. International Review of Financial Analysis, 36(C), 1–19.
- Werner, R. A. (2016). A lost century in economics: Three theories of banking and the conclusive evidence. International Review of Financial Analysis, 46, 361–379.
References
Abdul-Majid, M., Saal, D. S., & Battisti, G. (2011). The impact of Islamic banking on the cost efficiency and productivity change of Malaysian commercial banks. Applied Economics, 43(16), 2033–2054.
Ahmad, W., & Prentice, D. (2019). How large are productivity differences between Islamic and conventional banks? Singapore Economic Review, 1–20.
Alam, S. M. S., Chowdhury, M. A. M., & Razak, D. B. A. (2021). Research evolution in banking performance: a bibliometric analysis. Futur Bus J, 7(66), 1–19.
An, Q., Liu, X., Id, Y. L., & Xiong, B. (2019). Resource planning of Chinese commercial banking systems using two-stage inverse data envelopment analysis with undesirable outputs. PLoS ONE, 14(6), 1–20.
Ariff, M. (2017). Islamic banking in Malaysia: The changing landscape. Institutions and Economies, 9(2), 1–13.
Avkiran, N. K. (2000). Rising productivity of Australian trading banks under deregulation 1986-1995. Journal of Economics and Finance, 24(2), 122–140.
Azad, M. A. K., Munisamy, S., Masum, A. K. M., Saona, P., & Wanke, P. (2017). Bank efficiency in Malaysia: a use of malmquist meta-frontier analysis. Eurasian Business Review, 7(2), 287–311.
Banker, R. D., Charnes, A., & Cooper, W. W. (1984). Some models for estimating technical and scale inefficiencies in data envelopment analysis. Management Science, 30(9), 1078–1092.
Banya, R., & Biekpe, N. (2018). Banking efficiency and its determinants in selected frontier african markets. Economic Change and Restructuring, 51(1), 69–95.
Basri, M. F., Muhamat, A. A., & Jaafar, M. N. (2018). The efficiency of Islamic banks in Malaysia: Based on DEA and Malmquist productivity index. Journal of Emerging Economies & Islamic Research, 6(3), 15–27.
Batchelor, V. B. (2005). A comparable cross-system bank productivity measure: Empirical evidence from the Malaysian dual banking system (Doctoral Thesis, Edith Cowan University, 2005). Retrieved from https://ro.ecu.edu.au/theses/5
Benston, G. J. (1965). Branch banking and economies of scale. Journal of Finance, 20(2), 312–331.
Benston, G. J., & Smith, C. W. (1976). A transactions cost approach to the theory of financial intermediation. The Journal of Finance, 31(2), 215–231.
Berger, A. N., & DeYoung, R. (1997). Problem loans and cost efficiency in commercial banks. Journal of Banking & Finance, 21, 849–870.
Cerovic, L., Sulji, S., & Maradin, D. (2017). Comparative analysis of conventional and Islamic banking: Importance of market regulation. Ekonomska Misao i Praksa, 1(13), 241–264.
Charnes, A., Cooper, W. W., & Rhodes, E. (1978). Measuring the efficiency of decision making units. European Journal of Operational Research, 2, 429–444.
Chowdhury, M. A. M., Al Masud, M. A., Atiullah, M., & Tanvir, J. I. (2020). Contemporary responses to the criticism of Islamic banks in Malaysia. European Journal of Islamic Finance, 15, 1–10.
Chowdhury, M. A. M., & Haron, R. (2021). The efficiency of Islamic Banks in the Southeast Asia (SEA) Region. Futur Bus J, 7(16), 1–16.
Chowdhury, M. A. M., Haron, R., Sulistyowati, M. I. K., & Masud, M. A. Al. (2020). The efficiency of commercial banks in Indonesia. International Journal of Economic Policy in Emerging Economies, 1(1), 1–23.
Cooper, W. W., Seiford, L. M., & Tone, K. (2007). Data Envelopment Analysis: A Comprehensive Text with Models, Applications, References and DEA-Solver Software, 2nd edition. UK: Springer.
Farrell, M. J. (1957). The measurement of productive efficiency. Journal of the Royal Statistical Society. Series A (General), 120(3), 253–290.
Hamid, N., Ramli, N. A., & Hussin, S. A. S. (2017). Efficiency measurement of the banking sector in the presence of non-performing loan. AIP Conference Proceedings, 1795(020001), 1–8. https://doi.org/10.1063/1.4972145
Haron, R., Abdul Subar, N., & Ibrahim, K. (2020). Service quality of Islamic banks: satisfaction, loyalty and the mediating role of trust. Islamic Economic Studies, 28(1), 3-23.
Henriques, I. C., Sobreiro, V. A., Kimura, H., & Mariano, E. B. (2018). Efficiency in the Brazilian banking system using data envelopment analysis. Future Business Journal, 4(2), 157–178.
ICD-Refinitiv. (2020). Islamic Finance Development Report 2020 Progressing through adversity. https://icd-ps.org/uploads/files/ICD-Refinitiv IFDI Report 20201607502893_2100.pdf
Ji, Y. B., & Lee, C. (2012). Data envelopment analysis. In M. Pidd (Ed.), Measuring the Performance of Public Services; Principles and Practice (pp. 267–280). UK: Cambridge University Press.
Kamarudin, F., Sufian, F., Nassir, A. M., Anwar, N. A. M., & Hussain, H. I. (2019). Bank efficiency in Malaysia: A DEA approach. Journal of Central Banking Theory and Practice, 71(1), 133–162.
Karim, M. W., & Chowdhury, M. A. M. (2021). Antecedents of customer loyalty towards private commercial banks in bangladesh. Management and Accounting Review, 20(2), 35–57.
Klimberg, R. K., Lawrence, K. D., Yermish, I., Lal, T., & Mrazik, D. (2009). Using regression and data envelopment analysis (DEA) to forecast bank performance over time. In Financial modeling applications and data envelopment applications. UK: Emerald Group Publishing Limited.
Kwan, S. H. (2003). Operating performance of banks among Asian economies: An international and time series comparison. Journal of Banking & Finance, 27(3), 471-489.
Kwon, H., & Lee, J. (2015). Two-stage production modeling of large U.S. banks: A DEA-neural network approach. Expert Systems With Applications, 42(19), 6758–6766.
Malim, N. A. K., & Masro, T. A. (2018). What drives bank margins during and post-crisis? A comparison between islamic and conventional banks. Asian Academy of Management Journal of Accounting and Finance, 14(1), 107–126.
Mostafa, M. (2007). Modeling the efficiency of GCC banks: A data envelopment analysis approach. International Journal of Productivity and Performance Management, 56(7), 623–643.
Nugrohowati, R.N.I., Fakhrunnas, F., & Haron, R. (2020). Examining technological and productivity change in the Islamic banking industry. Pertanika Journal of Social Science and Humanities, 28(4), 3355 – 3374.
Othman, F. M., Mohd-Zamil, N. A., Rasid, S. Z. A., Vakilbashi, A., & Mokhber, M. (2016). Data envelopment analysis: A tool of measuring efficiency in banking sector. International Journal of Economics and Financial Issues, 6(3), 911–916.
Ouenniche, J., & Carrales, S. (2018). Assessing efficiency profiles of UK commercial banks: a DEA analysis with regression-based feedback. Annals of Operations Research, 266(1–2), 551–587.
Panah, H. G. Y., Ahmadanuar, M., & Norhan, N. I. (2014). Inputs and outputs in Islamic banking system. Iranian Journal of Management Studies (IJMS), 7(1), 175–188.
Ramanathan, R. (2007). Performance of banks in countries of the gulf cooperation council. International Journal of Productivity and Performance Management, 56(2), 137–154.
Ravn, I. (2019). Werner’s typology of banking theories. Forum for Social Economics, 0(0), 1–18.
Salami, O. L., & Adeyemi, A. A. (2015). Malaysian Islamic banks’ efficiency: An intra-bank comparative analysis of Islamic windows and full-fledged subsidiaries. International Journal of Business and Society, 16(1), 19–38.
Samad, A. (1999). Comparative efficiency of the Islamic bank vis-à-vis conventional banks in Malaysia. International Journal of Economics, Management and Accounting, 7(1), 1–27.
San, O. T., Theng, L. Y., & Heng, T. B. (2011). A comparison on efficiency of domestic and foreign banks in Malaysia : A DEA approach. Business Management Dynamics, 1(4), 33–49.
Sherman, H. D., & Zhu, J. (2006). Service Productivity Management: Improving Service Performance using Data Envelopment Analysis (DEA). US: Springer.
Sufian, F. (2007). The efficiency of Islamic banking industry in Malaysia: Foreign vs domestic banks. Humanomics, 23(3), 174–192.
Sufian, F., & Kamarudin, F. (2015). Determinants of revenue efficiency of Islamic banks: Empirical evidence from the Southeast Asian countries. International Journal of Islamic and Middle Eastern Finance and Management, 8(1), 30.
Sufian, F., Kamarudin, F., & Noor, N. H. H. M. (2014). Revenue efficiency and returns to scale in Islamic banks: Empirical evidence from Malaysia. Journal of Economic Cooperation and Development, 35(1), 47–80.
Tahir, I. M., Bakar, N. M. A., & Haron, S.-. (2009). Evaluating efficiency of Malaysian banks using data envelopment analysis. International Journal of Business and Management, 4(8), 96–106.
Tamatam, R., Dutta, G., Dutta, P., & Lessmann, S. (2019). Efficiency analysis of Indian banking industry over the period 2008 – 2017 using data envelopment analysis. Benchmarking: An International Journal, 26(8), 2417–2442.
Wanke, P., Azad, M. D. A. K., & Barros, C. P. (2016). Predicting efficiency in Malaysian Islamic banks: A two-stage TOPSIS and neural networks approach. Research in International Business and Finance, 36, 485–498.
Werner, R. A. (2014). Can banks individually create money out of nothing? - The theories and the empirical evidence. International Review of Financial Analysis, 36(C), 1–19.
Werner, R. A. (2016). A lost century in economics: Three theories of banking and the conclusive evidence. International Review of Financial Analysis, 46, 361–379.