Comparative performance analysis between conventional and Islamic banks: empirical evidence from OIC countries

Abstract

This article investigates the performance of Islamic (IBs) versus conventional banks (CBs) around the recent financial crisis in 18 OIC (Organization of Islamic Conference) countries. The study primarily employs two dominant frontier approaches of efficiency measurement in banking literature. The study also estimates the soundness score of the banks by using Z-score methodology and attempts to explore the relationship between efficiency and financial stability of banks. The results based on the data envelopment analysis (DEA) and stochastic frontier analysis (SFA) approaches report that CBs are more efficient than their Islamic counterparts. On the contrary, Z-score reports that IBs were financially more stable than CBs. However, the dominance of IBs has been drastically lost afterwards. This might be originated by the decrease of Z-score of IBs in Bahrain, Kuwait and UAE, which were found as main front-runners among IBs in terms of financial stability. To the best of authors’ knowledge, it is the first study that examines the efficiency of IBs versus CBs using two different frontier efficiency analyses and collates the result of frontier efficiency methods with stability indicator. The practical implication of the findings for IBs is to explore additional investment opportunity and for CBs is to uphold more financial stability.