Abstract
<p>We measure cost and revenue efficiency of the Islamic and conventional Malaysian banks by using the stochastic frontier method and the meta-frontier analysis (MFA) over the period 2006-2012. The use of MFA allows for the correction of the efficiency measurement errors caused by the technological and operational gap. The specific as well as the common frontiers obtained by the stochastic frontier method show the superiority of Islamic banks (IBs) compared to conventional banks (CBs) in terms of cost and revenue efficiency. This can reflect their high managerial capability. Efficiency measurement using MFA partially revealed different results. CBs have higher annual averages of cost efficiency scores than those of IBs over the period 2006-2011. The observed evolutionary trends of these averages contradict those of the capital base. This change in results is explained according to Johnes et al. (2013) by the modus operandi of IBs which seems in average less efficient than that of CBs. As for revenue efficiency, IBs are more efficient than CBs over the entire study period even though the evolution of the technological gap ratio confirms the inefficiency of their modus operandi. These results may be useful to political decision-makers and regulatory authorities. ch indicate the complexity of the audited firm and the characteristics of the audit.</p>
Highlights
For the first time, the last financial crisis offered the possibility to the Islamic financial system to emerge as a substitute for the conventional financial system. Chapra (2008) states that the subprime crisis would not have taken place with an Islamic financial system
The obtained results, based on specific and common frontiers, reveal that the average of cost and revenue efficiency scores of Islamic banks (IBs) are superior to those of conventional banks (CBs) and that the differences are statistically significant at the 1% level
The results show that the average of efficiency scores of CBs is higher than that of IBs and that the difference is statistically significant
Summary
The last financial crisis offered the possibility to the Islamic financial system to emerge as a substitute for the conventional financial system. Chapra (2008) states that the subprime crisis would not have taken place with an Islamic financial system. As for the principle of sharing profits and losses, it bears on two fiqh rules (Quaed fiqhia), “Alghounmou Bilghourmi or Alghourmou Bilghounmi” (the yield (or gain) obtained is based on endured difficulties and incurred expenses) and “Alkharajou biddhaman” (revenue or yield in exchange of the corresponding guarantee). According to both rules, the usufruct, revenue or yield associated with a property belongs to the person or people who are willing to endure its potential losses (Owaida (2010) and Shekhar (2008)).
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