Technology Gap and Managerial Efficiency: A Comparison between Islamic and Conventional Banks in MENA

Abstract

In this paper, we compare the technology gap and managerial efficiency between Islamic banks and conventional banks in 15 MENA countries. Using unbalanced panel data that covers the period 2002–2014, we estimate a stochastic meta cost frontier and find evidence of important technology heterogeneity in the region’s banking systems. It appears that the inefficiency caused by non-optimal use of the most advanced banking technology is much more important than managerial inefficiency. The technology gap is higher in Islamic banks and foreign banks than conventional domestic banks. We also investigate the determinants of these cost inefficiencies. Our results show that online banking is an important driver that can reduce the technology gap across banks and improve managerial efficiency, while size proves to have a negative impact on technology gap. Bank concentration has a positive impact on managerial efficiency restricted to Islamic banks.