Partnership financing and bank efficiency

Abstract

This paper aims to analyze the effect of partnership financing on bank efficiency. Partnership financing, which has similar concept with venture capital, refers to the equitable sharing of risks and profits between the client and bank. By employing output distance function on Malaysian and Indonesian Islamic bank over 1996 to 2012, we estimate bank efficiency score using Stochastic Frontier Approach and examine its determinants. Our results show that banks with partnership financing are more efficient than other banks. Banks with low capital risk coupled with large amount of partnership financing tend to be more efficient. However, when estimating the probability of crises using an early warning system, banks with high partnership financing appear to be less efficient during crises. The results suggest that the use of partnership financing improves efficiency, especially for banks with low capital risk except during crisis.