Cost Malmquist productivity analysis during the COVID-19 outbreak: evidence from the largest dual banking industry

Abstract

PurposeThis study attempts to comprehensively analyze the cost Malmquist productivity index of conventional and Islamic banks in Saudi Arabia, the largest dual banking sector in the world, during the COVID-19 pandemic.Design/methodology/approachThis study employs the novel approach of cost Malmquist productivity index, which focuses on production costs, to measure the change in cost productivity so that the actual impact of the COVID-19 pandemic could be captured.FindingsThe Saudi Central Bank has successfully mitigated the impact of the COVID-19 epidemic on the Saudi banking sector by implementing several policies and services. This success is reflected in the large positive shift in the production frontier of Saudi banks. Moreover, it was found that Islamic Saudi banks were by far more productive than conventional Saudi banks during the COVID-19 pandemic. However, the total cost productivity index (CMPCH) of Islamic Saudi banks starts to decline sharply in the last quarter of 2022 compared to conventional Saudi banks, indicating that Islamic banks in Saudi Arabia are suffering the most from the tighter monetary policy recently implemented by the Saudi Central Bank.Practical implicationsThe results provide insights for policymakers and investors on how different types of banks respond differently to economic crises and monetary policy changes. Targeted support measures may be needed to ensure all banks remain productive and efficient.Originality/valueTo the author’s knowledge, this is the first study to use this innovative methodology to assess the impact of COVID-19 on bank performance in a dual banking sector.