A Technical Recitation on Efficiency of Islamic and Traditional Banking System in Kingdom of Bahrain

Abstract

Banking industry plays a vital role in the for economic development of a country. This research aims at identifying which banking regime proves to be more efficient and its significance using Financial Ratio Analysis (FRA), composed of cost efficiency, revenue efficiency and profit efficiency ratios along with the One-way ANOVA test. The traditional banking system governs the financial sector by dealing with the majority of financial transactions of a country and the existence of Islamic and conventional banks has contributed for the development of the economy. The present study focuses on the comparative analysis of financial performance of Islamic and traditional banks in terms of cost and income in Bahrain. The study uses financial tools like profitability, liquidity and solvency, commitment to economy and community, efficiency and productivity of both streams of banks. The findings indicate that the traditional banking system is superior in terms of cost, revenue and profit efficiencies, furthermore, the results of the multiple regression analysis on the banks’ return on assets and return on equity imply that the efficiency of Islamic banks have more influence on their profitability compared to their traditional counterparts. Inflation had minimal effect on the efficiency of both banking system