Conventional versus Islamic bank efficiency: A dynamic network data-envelopment-analysis approach

Issue title: Fuzzy systems and applications in innovation and sustainability

Guest editors: Ernesto Leon-Castro, Fabio Blanco-Mesa, Victor Alfaro-Garcia, Anna M. Gil-Lafuente and Jose M. Merigo

Article type: Research Article

Authors: Azad, Md Abul Kalam^a | Talib, Muzalwana Binti Abdul^b | Kwek, Kian-Teng^c | Saona, Paolo^{d; *}

Affiliations: [a] Department of Business and Technology Management, Islamic University of Technology, Board Bazar, Gazipur, Bangladesh | [b] Department of Applied Statistics, Faculty of Economics and Administration, University of Malaya, Kuala Lumpur, Malaysia | [c] Department of Economics, Faculty of Economics and Administration, University of Malaya, Kuala Lumpur, Malaysia | [d] Richard A. Chaifetz School of Business, Saint Louis University, Madrid Campus, Av. Del Valle, 34, 28232, Madrid, Spain; Faculty of Economics and Business Administration, Universidad Pontificia Comillas, C/Alberto Aguilera, 23, 28015, Madrid, Spain & Faculty of Economics and Administrative Sciences, Universidad Católica de la Santísima Concepción, Alonso de Ribera 2850, Concepción, Chile

Correspondence: [*] Corresponding author. Paolo Saona, Saint Louis University – Madrid Campus, Business and Economics Department, Avda. del Valle, 34 28003 Madrid, Spain & Universidad Católica de la Santísima Concepción, Faculty of Economics and Administration, Avda. Alonso de Ribera 2850, Concepción, Chile. E-mail: paolo.saona@slu.edu.

Abstract: This study compares the efficiency of conventional and Islamic banks in Malaysia by engaging in a dynamic three-step (production, intermediation, and profitability) network data envelopment analysis (DEA). The inputs and outputs for the DEA model are selected based on the CAMELS rating. The major contributions of this study are threefold. First, this study investigates the efficiency of Malaysian banks using a novel dynamic network DEA model. Second, the Malaysian banking industry is found to be efficient in creating earning assets rather than in creating loans or profit. The results reveal that only a few banks in Malaysia have been efficient in converting deposits and equities into profit. Third, Islamic banks, in general, have been performing efficiently in the production and profitability approaches. Conventional banks, in contrast, are found to have been efficient in the intermediation approach. Policy implications are derived from the main conclusions.

Keywords: Data envelopment analysis, efficiency, network DEA, Malaysia

DOI: 10.3233/JIFS-189196

Journal: Journal of Intelligent & Fuzzy Systems, vol. 40, no. 2, pp. 1921-1933, 2021