Abstract
The purpose of this study is to investigate the efficiency of two different banking systems operating in Egypt (Islamic versus conventional banks). A sample of 35 banks has been used to examine the technical efficiency before and after the financial crisis using data envelopment analysis model. Evaluating the technical efficiency of Egyptian banks will enable policymakers to support which banking system is more efficient to facilitate the financial inclusion and enhance the economic development.Before the financial crisis, conventional banks outperformed conventional banks with Islamic windows and Islamic banks, scale technical efficiency outperformed pure technical efficiency when analyzing conventional banks and conventional banks with Islamic windows. In terms of Islamic banks, pure efficiency outperformed scale efficiency. After the financial crisis, technical efficiency of all banks decreased. However, pure technical efficiency of Islamic banks has improved as a result of the quality of management and outperformed both conventional banks and conventional banks with Islamic windows. These results imply that Islamic banks have not been affected by the financial crisis. Therefore, the increased adoption and support of the Islamic banks in Egypt is addressed to develop the economy and push forward entrepreneurship projects, support the financial inclusion and the informal economy integration.
Highlights
The financial crisis opened the door for raising many questions regarding the current global financial system led by conventional banks to adopt the concept of interest rate in all financial transactions
Pure technical efficiency of Islamic banks has improved as a result of the quality of management and outperformed both conventional banks and conventional banks with Islamic windows
In terms of Islamic banks, results revealed that pure technical efficiency outperformed scale efficiency meaning that Islamic banks are efficient in using their input resources
Summary
The financial crisis opened the door for raising many questions regarding the current global financial system led by conventional banks to adopt the concept of interest rate in all financial transactions. If the business model of conventional banks has contributed as a major factor to the global financial crisis. Two important factors support the business model of the conventional banks: the use of interest rate as a market indicator, or in the form of return when investing funds. All financial transactions of conventional banks contain a degree of risk and uncertainty. Conventional banks introduce several financial products to suit the finance requirements of individuals and businesses. Products offered by conventional banks include a degree of uncertainty, so an interest rate is calculated as the cost of borrowing or remuneration. Shari’ah prohibits usury or interest paid to all loans.
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