Comparison of the efficiency measurement of the conventional and Islamic banks

Abstract

Research background: Islamic banks appeared on the world scene as active players over two decades ago. Many of the principles upon which Islamic banking is based have been commonly accepted all over the world. Financial institutions driven by Islamic principles acquire new clientele without excessive marketing, due to preservation of conservative values. Contrary to the conventional investment banks, their value is based on real money, and not on virtual activities from swap and derivative assets. Competition between conventional (or traditional) and Islamic banks is increasing every day, moreover, Islamic financial institutions are more resistant to the crisis. Our study contains analysis and comparison of economic efficiency of the conventional and Islamic banks. Besides the fact that traditional and Islamic banks apply inputs differently, the reason of better efficiency of Islamic banks may be connected with different approach to the risk management and control of the banking operations by the Sharia commission.
 Purpose of the article: The main aim of the article is to compare the economic efficiency of the conventional and Islamic banks in Europe.
 Methods: To achieve the aim of the paper, firstly the selected financial indicators of traditional and Islamic banks in Europe were compared. The second, the analysis of the economic efficiency of the selected 1460 conventional and Islamic financial institutions using DEA methods was conducted.
 Findings & Value added: Research results indicated methodological differences in the economic efficiency measuring in the Islamic banks. At the same time, the higher economic efficiency of Islamic banks was confirmed. The results are motivating for the follow-up investigation into the causes of higher efficiency of Islamic banks compared to traditional banks.

A strategy for strengthening public perception toward sharia banking

“…In practice, Islamic banking applies strong ethical values and risk minimization principles (Masvood, 2019), since the Islamic banking system does not recognize the interest in lending and borrowing activities. It is contrary to the conventional investment banks in which its value is built upon 'real money' -not upon virtual activity from swap or asset derivative (Musa et al, 2020). Besides, the difference between Islamic banking and the conventional banking can be seen through their profit concept and loss sharing paradigm (Masvood, 2019).…”

“…Besides, the difference between Islamic banking and the conventional banking can be seen through their profit concept and loss sharing paradigm (Masvood, 2019). Financial institutions driven by Islamic principles acquire new clients without over-marketing as the conservative values are continuing to be cultivated (Musa et al, 2020). In accordance with com-petition stability theory, the presence of Sharia banks does not affect profitability, but they have made the banking industry more stable (Rizvi et al, 2020).…”

The Impact of Macroeconomic, Social and Governance Factors on the Sustainability and Well-Being of the Economic Environment and the Robustness of the Banking System

“…In developed countries, banking crises significantly affect output, while in developing countries, the output is affected by currency crises [21]. Musa et al [22] show that a bank's efficiency is also affected by its profile.…”

Employment Protection and Banking Power: Evidence from Adoption of Wrongful Discharge Laws

“…According to Pampurini and Quaranta [54], bank efficiency that characterizes the production process has a strong relationship with sustainability, which indicates competitive advantage, because banks involved in sustainability issues can improve their reputation and credibility. From a long-term perspective, bank cost and profit efficiency are one of the most important premises for sustainability, and such importance motivates researchers to measure the economic efficiency of different bank institutions [55]. Considering the important role bank efficiency takes in providing better service quality for consumers and maintaining the financial stability of the banking system [9], researchers have given particular attention in investigating the determinants of bank efficiency, including internal micro or bank-specific determinants of efficiency, and external industry-specific and macroeconomic determinants [36].…”