The impact of Islamic banking on the cost efficiency and productivity change of Malaysian commercial banks

Abdul-Majid, Mariani and Saal, David (2007). The impact of Islamic banking on the cost efficiency and productivity change of Malaysian commercial banks. Working Paper. Aston University, Birmingham (UK).


This study employs stochastic frontier analysis to analyze Malaysian commercial banks during 1996-2002, and particularly focuses on determining the impact of Islamic banking on performance. We derive both net and gross efficiency estimates, thereby demonstrating that differences in operating characteristics explain much of the difference in costs between Malaysian banks. We also decompose productivity change into efficiency, technical, and scale change using a generalised Malmquist productivity index. On average, Malaysian banks experience moderate scale economies and annual productivity change of 2.68 percent, with the latter driven primarily by technical change, which has declined over time. Our gross efficiency estimates suggest that Islamic banking is associated with higher input requirements. However, our productivity estimates indicate that full-fledged Islamic banks have overcome some of these cost disadvantages with rapid technical change, although this is not the case for conventional banks operating Islamic windows. Merged banks are found to have higher input usage and lower productivity change, suggesting that bank mergers have not contributed positively to bank performance. Finally, our results suggest that while the East Asian financial crisis had a short-term cost-reducing effect in 1998, the crisis triggered a more lasting negative impact by increasing the volume of non-performing loans.

Divisions: Aston Business School > Economics finance & entrepreneurship
Aston Business School > Economics finance & entrepreneurship research group
Aston Business School > Operations & information management
Uncontrolled Keywords: Malaysia commercial banks,1996-2002,Islamic banking,performance,efficiency estimates,operating characteristics,efficiency,technical,scale change,Malmquist productivity index
Published Date: 2007-09
Authors: Abdul-Majid, Mariani
Saal, David


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