Banks’ stability-efficiency within dual banking system: a stochastic frontier analysis

Abstract

Purpose – The purpose of this paper is to examine and compare the market power and the efficiency-stability of Islamic and conventional banks in the MENA zone and South East Asia during the 2005-2012 period. Design/methodology/approach – The author applied an empirical approach in two steps. First, the author estimates the Lerner indicator, which is a measure of competition. Then, this measure is regressed and other explanatory variables on the banking “stability-efficiency” are derived simultaneously from the estimation of a stability stochastic frontier. Findings – The author concludes that increased competition in the Islamic banking sector promotes the overall banking stability. Besides, whether there is a low or high competitiveness, the size of an Islamic bank is positively related to financial stability. However, large conventional banks operating in market with limited competitiveness become more involved in the risk behavior. The author concludes that capitalization has a positive effect on stability only in case of low competitiveness. Originality/value – The originality of this research lies in the application of the stochastic frontier approach (SFA) on the Z-score indicator. This methodology enables to take into account the differences between the current and the optimum stability that each bank can achieve, thus creating a new measure of financial stability called “efficiency-stability”.

The effect of earnings management on bank efficiency

“…The literature review indicates that researchers prefer to use SFA cost efficiency as the parametric frontier analysis to examine the banking sectors on the basis that heavily regulated industries such as banks, have limited control on their profit margin as compared to their cost. Louati and Boujelbene (2015) examined the effects of competition on financial stability of 12 countries practicing dual banking systems. Most of the banks are from the Middle East and North Africa (MENA) and South-East Asia (SEA) regions.…”

Determinants of islamic banking adoption across different religious groups in Ghana: A panoptic perspective

“…Islamic Banking (IB) encompasses provision of financial services in compliance with sharia law and it operates commonly in the Islamic economies (Mariadas, et al, 2017;Nurdin, 2017;Setybudi et al, 2016;Riaz et al, 2017;AlMaimani et al, 2015;Buchari et al, 2015;Butt et al, 2010;Muhamat et al, 2008;Akbar, 2008), Islamic Banking is now of world's greatest concern due to the global goal of poverty alleviation (Mariadas, et al, 2017;Louati et al, 2015;Kamarulzamn et al, 2013;Akbar, 2008) and improved socio-economic status of the people in Islamic economy and the rest of the world (Setybudi et al, 2016;AlMaimani et al, 2015;Buchari et al, 2015).…”

Spin-off, market structure, and deposit funds: case in the Indonesian Islamic banking industry

“…The policy should be directed to increase the market share of the most efficient banks (Fu & Heffernan, 2009). Ajide & Ajileye (2015); Louati & Boujelbene (2015); Rahim (2016); Rashid, Yousaf, & Khaleequzzaman (2017); Schaeck, Cihak, & Wolfe (2009) stated that the policies promoting competition among banks, if well executed, have the potential to improve the financial stability and the financial soundness. Hamza and Kachtouli (2014) stated the in a competitive environment; each bank is required to analyze the market structure and competitive condition.…”