Purpose This paper aims to examine the efficiency of Islamic vs conventional banks in Malaysia by unveiling the traditional efficiency concept – black box – with a three-stage network structure of bank operations. Design/methodology/approach This paper applies data envelopment analysis (DEA) for examining bank efficiency. An adaptive three-step network DEA (NDEA) model is demonstrated for redefining the traditional black box of banking operations. Slack-based variable returns to scale approach is used. Data from all 43 commercial banks in Malaysia are examined over a six-year study period (2010-2015). Inputs and outputs of the model are selected based on CAMELS rating. Undesired output is also considered in time of examining bank efficiency in Malaysia. Findings The empirical results of this study signify that only a few banks in Malaysia have been performing well in converting deposits and equities into profit as well as minimizing loan loss provisions. Islamic banks in Malaysia have performed better both in production (converting deposits and equities into earning assets) and profitability (converting loans into net income). Conventional banks, however, have over scored in intermediation (converting earning assets into loans). Originality/value An adaptive NDEA approach proposed in this paper defines the core banking process instead of traditional approaches in examining bank efficiency based on individual functions (nodes in the network model). This approach has proven to provide better benchmark capacity.

This study compares the efficiency of conventional and Islamic banks in Malaysia by engaging in a dynamic three-step (production, intermediation, and profitability) network data envelopment analysis (DEA). The inputs and outputs for the DEA model are selected based on the CAMELS rating. The major contributions of this study are threefold. First, this study investigates the efficiency of Malaysian banks using a novel dynamic network DEA model. Second, the Malaysian banking industry is found to be efficient in creating earning assets rather than in creating loans or profit. The results reveal that only a few banks in Malaysia have been efficient in converting deposits and equities into profit. Third, Islamic banks, in general, have been performing efficiently in the production and profitability approaches. Conventional banks, in contrast, are found to have been efficient in the intermediation approach. Policy implications are derived from the main conclusions.