The efficiency of Islamic banking industry in Malaysia

Abstract

Access to this document was granted through an Emerald subscription provided by NORTH CAROLINA STATE UNIVERSITY For Authors:If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service. Information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comWith over forty years' experience, Emerald Group Publishing is a leading independent publisher of global research with impact in business, society, public policy and education. In total, Emerald publishes over 275 journals and more than 130 book series, as well as an extensive range of online products and services. Emerald is both COUNTER 3 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -To examine the relative efficiency between the domestic and foreign banks Islamic banking operations in Malaysia. Design/methodology/approach -The paper utilises the Data Envelopment Analysis (DEA) methodology, which allows for the decomposition of technical efficiency into its pure technical and scale efficiency components. The authors further examined whether the domestic and foreign banks are drawn from the same population by performing a series of parametric and non-parametric tests. Finally, the authors attempt to investigate the consistency of the estimated DEA efficiency scores by examining its relationship with the traditional measures of banks performance. Findings -The results from the DEA suggest that Malaysian Islamic banks efficiency declined in year 2002 to recover slightly in years 2003 and 2004. The domestic Islamic banks were more efficient compared to the foreign Islamic banks albeit marginally. The source of inefficiency of Malaysian Islamic banks in general has been scale, suggesting that Malaysian Islamic banks have been operating at the wrong scale of operations. The results from the parametric and non-parametric tests further suggest that the foreign and domestic banks are drawn from the same population, as most of the test results could not reject the null hypothesis at the 0.05 levels of significance. The results from the correlation coefficients have further confirmed the dominance of scale in determining the technical efficiency of Malaysian Islamic banks. The results also suggest that profitability is significantly and positively correlated to all efficiency measures.Research limitations/implications -The paper can be extended to consider the production approach along with the intermediation approach, which has been applied in this paper. Investigation of changes in productivity over time as a result of technical change or technological progress or regress by employing the Malmquist Total Factor Productivity Index could yet be another extension to the paper. Originality/value -This paper provides ne...

Islamic Versus Conventional Banking: An Insight into the Malaysian Dual Banking System

“…Thus, it can be argued in the context of efficiency ratios that CBs are relatively more efficient than IBs in using shareholders and customers' funds to result in higher profit. These results also support the findings of Sufian (2007) and Mokhtar et al (2008) who argue that IBs are less proficient than compared to their counterpart conventional banks operating in Malaysia.…”

“…However, the descriptive statistics have us to believe that the operations of conventional banking sector are much more vulnerable to financial shocks as compared to the IBs operations. These views are being supported by various researchers such as Sufian (2007); Mokhtar et al (2008) and Yahya et al (2012). Moreover, Islamic banking industry in Malaysia is indeed the fastest growing sector which succeeded in acquiring an asset base of USD 65.5 billion having Mean growth rate of 15-20% annually.…”

A comparison of performance of Islamic and conventional banks 2004–2009

“…It has been suggested that an indicator of risk-taking should explicitly be incorporated into any model of banking efficiency (Charnes et al 1990), and this aspect is likely to be particularly important in a context which compares Islamic and conventional banks where one would expect a difference in risk-taking behaviour (Sufian 2006). There are several suggestions of measures of risktaking activity.…”

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“…of employees (x1) (Wu et al, 2006), total fixed assets (x2) (EL Moussawi and Obeid, 2011), and deposits (x3) (Sufian, 2007;Sufian, 2009;Sufian, 2011). Variables y1, y2, x2, and x3 measured in millions of Libyan Dinar.…”