The productivity of GCC Islamic and conventional banks after Basel III announcement

Abstract

Purpose This study aims to analyse Gulf Cooperation Council (GCC) Islamic and conventional banks’ productivity and to investigate the impact of Basel III on their productivity change. This study is conducted on 73 GCC banks (45 conventional and 28 Islamic) over the period of 2005-2015. Design/methodology/approach This study uses the data envelopment analysis-type Malmquist productivity change index and its component indexes to obtain a deep insight into the source of productivity change. Findings The results show that Islamic banks are less productive than their conventional counterparts. Also, the results indicate that Basel III accord has impeded the GCC banks’ productivity and this negative effect is larger on Islamic banks. However, there is scale efficiency progress in the past years that offsets the production frontier deterioration, which leads to stagnation in total productivity change for both banks. Originality/value This study differs from the previous GCC banks’ productivity studies in several ways. Firstly, it covers a recent period that includes major events such as the global crisis and focuses on the influence of Basel III accord on GCC banks’ productivity. Secondly, as opposed to the previous studies, this study will estimate the GCC banks’ productivity index and its components based on separate frontiers for Islamic and conventional banks that will ensure the homogeneity in the sample and the robustness of the results. Thirdly, this study uses a combination of parametric and non-parametric tests to confirm and check the robustness of the findings. Lastly, to the best of the knowledge of the authors, this is the first study that tries to analyse the GCC banking sector productivity around the new Basel III announcement.

Do Islamic versus conventional banks progress or regress in productivity level?

“…More recently, Saleh et al [52] reveal that the Gulf Cooperation Council (GCC) banks encountered a decline in productivity after the global financial crisis of 2008-2009. They also indicate that the disparity in inefficiency between Islamic and conventional banks has narrowed substantially and that Islamic banks have been able to cross and reduce the gap with conventional banks over the study period from 2005 to 2014. This finding is also supported by Alsharif et al [5] in which six GCC countries were studied between 2005 and 2015. The findings suggest that Islamic banks are less productive than conventional banks.…”

“…4 Taylor's Business School, Faculty of Business and Law, Taylor's University, Taylor's Lakeside Campus, 1 Jalan Taylor's, 47500 Subang Jaya, Selangor Darul Ehsan, Malaysia. 5 University of Economics and Human Science, Okopowa 59, 01-043 Warsaw, Poland. 6 School of Economics and Management, Xiamen University Malaysia, 43900 Sepang, Selangor Darul Ehsan, Malaysia.…”

Risk, efficiency and capital in a dual banking industry: evidence from GCC banks

“…However, more capital interestingly results in lower cost efficiency in GCC Islamic banks as the capital increases by one percentage point change, ceteris paribus, the efficiency of Islamic banks decreases by 0.0185 units on average. This is supported by the finding of Alsharif et al (2019) who found that the production frontier of GCC Islamic banks was regressed by far more than the GCC conventional banks production frontier after the introduction of Basel III. This result indicates the presence of the agency cost theory in GCC Islamic banks, which supports the argument of Ghosh (2014) who states that the shareholders' incentives are more prevalent in Islamic banks due to the risk-sharing nature of the Islamic banking model.…”

“…Moreover, the cost efficiency is estimated based on the constant returns to scale (CRS) assumption, as the variable returns to scale (VRS) tends to overestimate the efficiency of large and small banks (Dyson et al , 2001). To ensure the robustness of the results, the cost efficiency of GCC conventional and Islamic banks is calculated based on a separate or specific production frontier that reflects the business model of each bank (Alsharif et al , 2019) [3].…”

“…This is consistent with the finding of Alqahtani et al (2017), who argued that GCC Islamic banks lost their superiority after the global financial crisis when the adverse impact reached the real economy. Another explanation is the implementation of Basel III, as Alsharif et al (2019) found that GCC Islamic banks were more adversely affected by the introduction of Basel III than GCC conventional banks. Moreover, GCC conventional banks have assets approximately twice the size of GCC Islamic banks, which indicates the dominance of conventional banks in the GCC area.…”