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The impact of Islamic banking on the cost efficiency and productivity change of Malaysian commercial banks

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Abdul-Majid, Mariani, Saal, David S. and Battisti, Giuliana (2011) The impact of Islamic banking on the cost efficiency and productivity change of Malaysian commercial banks. Applied Economics, 43 (16). pp. 2033-2054. doi:10.1080/00036840902984381

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Official URL: http://dx.doi.org/10.1080/00036840902984381

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Abstract

This study employs Stochastic Frontier Analysis (SFA) to analyse Malaysian commercial banks during 1996–2002, and particularly focuses on determining the impact of Islamic banking on performance. We derive both net and gross efficiency estimates, thereby demonstrating that differences in operating characteristics explain much of the difference in costs between Malaysian banks. We also decompose productivity change into efficiency, technical, and scale change using a generalized Malmquist productivity index. On average, Malaysian banks experience moderate scale economies and annual productivity change of 2.68%, with the latter driven primarily by Technical Change (TC), which has declined over time. Our gross efficiency estimates suggest that Islamic banking is associated with higher input requirements. However, our productivity estimates indicate that full-fledged Islamic banks have overcome some of these cost disadvantages with rapid TC, although this is not the case for conventional banks operating Islamic windows. Merged banks are found to have higher input usage and lower productivity change, suggesting that bank mergers have not contributed positively to bank performance. Finally, our results suggest that while the East Asian financial crisis had a short-term cost-reducing effect in 1998, the crisis triggered a long-lasting negative impact by increasing the volume of nonperforming loans.

Item Type: Journal Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Warwick Business School > Entrepreneurship, Innovation & Management
Faculty of Social Sciences > Warwick Business School
Journal or Publication Title: Applied Economics
Publisher: Taylor & Francis Ltd.
ISSN: 0003-6846
Official Date: 2011
Dates:
DateEvent
2011Published
Volume: 43
Number: 16
Page Range: pp. 2033-2054
DOI: 10.1080/00036840902984381
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access

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