Determinants of Bank Efficiency: Conventional versus Islamic

Nabilah Rozzani, Rashidah Abdul Rahman


This study explores the area of bank efficiency with the usage of Stochastic Frontier Analysis. The main
objective is to identify determinants affecting conventional and Islamic banks’ efficiency, focusing towards
banks in Malaysia. Year-end financial data was obtained from a sample of 19 conventional banks and 16 Islamic
banks that operate in Malaysia, where these banks’ annual reports from the years 2008 until 2011 were referred
for the purpose of analysis. An overall view of the results indicates that the levels of profit efficiency for both
conventional and Islamic banks in Malaysia were highly similar. Further, it could be observed that efficiency
would be better for conventional banks with the increment of bank size and also the decrement of both
operational cost and credit risk, while the efficiency for Islamic banks would be better with only the decrement
of operational cost.

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