Efficiency measurement of Islamic and conventional banks in Saudi Arabia:an empirical and comparative analysis

Saudi Arabia, beside Malaysia and many other Muslim countries, is one of those countries where Islamic and conventional banking operate in parallel. Over the last decade, the country’s banking industry is growing at rapid pace that accounts for the largest share in GCC. The present study measures and compares the performance of Saudi conventional and Islamic banking industry and identifies the areas where the strategic measures are required to improve the banking performance. It applies non-parametric Data Envelopment Analysis (DEA) for the data from 2008-2016 of Saudi banking industry and provides comprehensive empirical results at individual bank vis-a-vis industry levels. The empirical results demonstrate a mix trend among the banks in achieving technical, pure technical and scale efficiency. It is observed that with the common pledge to expanding market share and performance, both conventional and Islamic banks have been successful in improving their levels of efficiency. At individual bank level, Al-Rajhi is the only bank that has achieved the highest score in terms of technical, pure technical and scale efficiency, while in the conventional banking group, both Saudi Hollandi and National Commercial banks are found on the top position. Despite the growth of incomes and deposits of entire banking industry in Saudi Arabia, this study particularly recommends for the Islamic banks to redirect their short term and long-term marketing strategies and to focus on improving their management skills at the branch level

The Efficiency Performance of Global Islamic Banks

This paper examines the efficiency performance of the Islamic banks that consist of 14 countries namely Bahrain, Bangladesh, Iran, Jordan, Kuwait, Lebanon, Malaysia, Pakistan, Qatar, Saudi, Tunisia, Turkey, UAE, and Yemen during the period of 2004-2011 with 44 Islamic banks involved. The efficiency estimates of individual banks are evaluated using the Data Envelopment Analysis (DEA) approach. The empirical findings suggest that during the period of study, pure technical efficiency outweighs scale efficiency in the global Islamic banking sector implying that the Islamic banks have been managerially efficient in exploiting their resources to the fullest extent. The empirical findings seem to suggest that the global Islamic banks have exhibited high pure technical efficiency. During the period of study it is found that pure technical efficiency has greater influence in determining the total technical inefficiency of the Global Islamic banking sectors

Efficiency of Islamic banks in GCC countries: International Evidence using the Stochastic Frontier Approach (SFA)

This study estimates and compares the efficiency of 18 full-fledged Islamic banks in 5 of Gulf Cooperation Council countries. The time period between 2006 and 2011 is selected in order to capture the impact of Global Financial Crisis on Islamic banks. Moreover, this paper uses five environmental variables to control cross-country differences in the environment in which banks operate. The study employs SFA distance functions and intermediation approach to measure the technical and cost efficiency of these banks. The results suggest that, on average, the technical efficiency scores widely fluctuated between 62% and 95%. The low scores in 2007 and 2008 are attributed to the fact that GCC countries were among the countries that have suffered from the financial crisis. The banks in Saudi Arabia and Qatar performed better than the other GCC countries banks due to their natural economies of scale and economies of scope. In contrast, U.A.E. banks had the lowest efficiency scores because of the significant exposure to construction and real estate sector. The results also suggest that increase in Loans and operating expenses have positive impact, while increase in other operating income and personal expenses have negative impact on banks efficiency level. However, there is substantial room for improvement in cost efficiency of these Islamic banks

Technical efficiency analysis of banks in major oil exporting Middle East countries

This paper investigates efficiency performance of thirty six banks operating in Gulf Cooperation Council (GCC) countries during the period 2006-2008 . Our results indicate in general GCC banks showed considerable pure technical efficiency in the past three years with the year 2007 exhibit the most efficient year, as the number of pure technical efficient banks reached 33 percent of the total banks compared to 25 percent in 2008. The fall in technical efficiency in 2008 is due to simultaneous fall in pure technical efficiency and the scale efficiency. The output loss caused by scale inefficiency (fall of scale operations below optimum level) in 2008 is estimated 16 percent compared to 5 percent in 2007. Our results also indicate scale efficiency is inversely related to banks' size implying a major source of scale inefficiency in GCC banks is due to sub-optimal size of operations. It is also indicated in the paper that scale efficiency is inversely related to risk, implying effective risk management policies may also enhance scale efficiency.technical efficiency;scale efficiency;DEA

Efficiency, Survival, and Non-Performing Loans in Islamic and Conventional Banking in the GCC

The success of Islamic banks is determined by several factors, among which are their performance, efficiency, stability and ability to grow in conjunction with the economic and financial growth of the GCC’s national economy. Due to the successes resulting from these factors, which are located within the inherent value system of Islamic finance, the GCC’s Islamic banks were praised for their resilience during the recent financial crisis. This research thus aims to examine the efficiency, performance, survival-time analysis and issues related to non-performing loans (NPL) in the case of the Islamic banks within the GCC through four different yet interconnected empirical essays. The first essay aims to examine the technical efficiency of the Saudi Arabian Islamic banks in a comparative analysis with the Sharia-compliant windows of Saudi Arabian conventional banks by using Data Envelopment Analysis (DEA) for the period from 2005 to 2010. In doing so, some selected variables related to the banks’ characteristics also are examined through second stage regression of the DEA model. Overall, the results indicate that the performance of Islamic banks decreased sharply until it reached its lowest level in 2008. In addition, as a result of the influence of environmental variables, it has been found that the efficiency of Islamic banks was affected negatively more than traditional banks during the period in question. The second essay aims to measure the efficiency and productivity growth of the banking sector in the GCC through DEA meta-frontier analysis for the period from 2005 to 2010. This essay offers a comparative study on two levels: between each country and between three types of bank, namely Islamic banks, conventional banks providing Islamic windows and conventional banks. The second stage of the analysis attempts to examine the influence of the banks’ characteristics, financial structures and rule-of-law variables on technical efficiency (TE) scores by applying a two-stage approach via panel random effect and bootstrap models. The findings reveal that Islamic banks have underperformed in comparison with Islamic window banks during the specified period. However, the catch-up value of the total factor productivity illustrates that Islamic banks appear to be the most productive group. The third essay aims to investigate the survival time of Islamic and conventional banks in the GCC countries, taking into account the impact of the global financial crisis by employing the discrete-time duration models for the period of 1995 to 2011. In addition, to examine the differences between banks, a range of explanatory variables from both the micro- and macro-levels are included in several models. The results from hazard and survivor functions indicate that the Islamic and conventional banks form two distinct bank types, where Islamic banks potentially have a higher incidence of failure and therefore a shorter survival time. The discrete-time duration model findings for the all-banks-pooled model confirm that the hazard rate increases with Islamic banks. Furthermore, the analysis of each bank type reveals that the effect of covariates on survival time differs between Islamic and conventional banks. For instance, increasing the net interest margin ratio causes the hazard rate in Islamic banks to rise, whereas this rate is lowered in conventional banks. The fourth essay aims to identify the macro- and micro-level factors determining NPL in Islamic banking within the GCC via the panel data econometrics model for the period from 2005 to 2011. In addition, this paper examines the impact of the sectoral distribution of Islamic financing on the NPL in the GCC banking system as a whole by utilising dynamic panel data models. The findings indicate that the relationship between efficiency and NPL supports the “bad management” and “bad luck” hypotheses. Further, the sectoral distribution of Islamic financing extended by the GCC Islamic banks shows an adverse impact on NPL, thus demonstrating that Islamic bank financing, which is related to real estate and construction projects, increases the credit risk exposure. It is suggested that increasing financing by profit-and-loss-sharing instruments could enhance loan quality, thereby implying that the growth influence of fixed-income debt contracts could increase NPL more than profit-and-loss-sharing contracts

An empirical investigation of efficiency, competitiveness, performance and market structure in the G.C.C. countries' banking industry

This thesis analyses the market structure, competitiveness, efficiency, and performance of the GCC countries' banking sector over the period 1993--2002. The study first examines the banking industry concentration using the concentration ratio of three largest banks (CR3) and Herfindahl-Hirschman Index (HHI) of concentration. Then, it assesses the competitive conditions using the Panzar-Rosse model. Third, it investigates the technical, pure technical and scale efficiency of commercial and Islamic banks using the Data Envelopment Analysis (DEA). In addition, change in banks' productivity growth was measured at this part by Malmquist Index. Finally, it investigates four different hypotheses explaining the relationship between market structure and performance using the Structure-Conduct-Performance (SCP) model. In relation to measurement of market concentration, it was found that the GCC banking industries are highly concentrated. Thus both indices indicated that these banking industries were ranging from 'some what' to 'very' concentrated markets. In terms of assessing competitive conditions, the results show that banks in Kuwait, Saudi Arabia and the UAE are earning their revenue under perfect competition. Bahraini and Qatari banks make their revenue in monopolistic competition. Oman's banks were making their total revenue under an 'undetermined' environment. Concerning technical efficiency and productivity growth, the results reveal that smaller banks exhibited superior performance in terms of overall technical efficiency than larger ones, mainly associated with diseconomies of scale. A decomposition of technical efficiency into pure technical and scale efficiency showed that large banks proved to be more successful in adopting best available technology (pure technical efficiency) while medium banks proved to be more successful in choosing optimal levels of output (scale efficiency). Islamic banks proved to be more successful in both the adoption of the best available technology and choosing optimal levels of output than commercial banks. Malmquist analysis showed downward shift in the average efficiency of banks. In last part, the thesis assesses the relevance of the Structure-Conduct-Performance (SCP) and the Relative-Market-Power (RMP) hypothesis and the Efficient-Structure (ES) hypotheses in the form of Technical efficiency or Scale efficiency to explain the performance of the banking industry in GCC countries and, finally, to test the existence of 'Quiet Life Hypothesis' in these markets. Results observed supported the Market Structure hypotheses and the quiet life effect was also observed. Thus, GCC banks were working in concentrated markets and were enjoying 'Quiet Life', therefore, gaining their profits in a more relaxed environmen

Do Islamic and conventional banks have the same technology?

Is there a technology gap between Islamic and conventional banks? Do Islamic and conventional banks have different cost efficiency levels? We show that conventional and Islamic banks have similar mean (aggregate) cost efficiency levels in the MENA area and there is no technology gap between the two types of banks. At the country level, Islamic banks are more cost efficient than conventional banks in Indonesia, Pakistan, Turkey and United Arab Emirates, and less efficient in Bangladesh, Kuwait, Malaysia and Tunisia. We analyse a very large sample of banks in twelve MENA and South East Asian countries between 2000 and 2006 and we use the meta-frontier approach to account for the sample heterogeneity

The Efficiency of Islamic Banks: Empirical Evidence from the MENA and Asian Countries Islamic Banking Sectors

The paper investigates the efficiency of the Islamic banking sectors in 16 MENA and Asian countries during the period of 2001-2006. The efficiency estimates of individual banks are evaluated using the non-parametric Data Envelopment Analysis (DEA) method. The results suggest that the MENA Islamic banks have exhibited higher mean technical efficiency relative to their Asian Islamic bank counterparts.with pure technical inefficiency outweighs scale inefficiency in both the MENA and Asian countries banking sectors. The empirical findings also indicate that banks from the MENA region were the most efficient banks by dominating the top part of efficiency frontier over the period.Islamic Banks, Data Envelopment Analysis (DEA)

Islamic Currency Swap: Can Be the Best Way to Hedge Indonesia Hajj Fund?

The operational costs of Hajj in foreign currencies will always face the risk of changes in exchange rates. Hajj operational costs will continue to grow in line with the increasing number of pilgrims. But at present, the government (BPKH) does not have a currency hedging policy to reduce the risk of fluctuating currency values. Hajj operational costs are saved in rupiah, dollar and riyal currencies. As a result, deposits of pilgrims will continue to be overshadowed by the reduction in value due to the depreciation of the rupiah against the dollar and riyals. Hedging policy is a necessity in the management of Hajj funds. This study will use an Islamic currency swap simulation analysis. According to the MUI DSN No 96 in 2015, a swap is a contract that starts a spot transaction followed by a forward agreement by setting a forward exchange rate. Then it is settled by spot transactions using the agreed forward exchange rate. The results of the study show that the dollar and riyal in 2018 are in a state of high volatility, so hedging is needed to reduce cash outflows. Based on analysis, Islamic currency swap can be the best hedging to the operational costs of Hajj in USD is with tenors 30 days, 180 days, 360 days. while the operational costs of Hajj are in Saudi Arabia Riyal currency, efficient in overnight tenors, 30 days, 90 days and 180 days

A review of credit guarantee schemes in the Middle East and North Africa Region

Many countries in the MENA region have established partial credit guarantee schemes to facilitate SME access to finance. These schemes can play an important role, especially in a period where MENA governments are making efforts to improve the effectiveness of credit registries and bureaus and strengthen creditor rights. This paper reviews the design of partial credit guarantee schemes in MENA, and assesses their preliminary outcomes. The paper is based on a survey conducted in 10 MENA countries in early 2010. The authors find that the average size of guarantee schemes in MENA (measured by the total value of outstanding guarantees) is in line with the international average, although there are wide differences across countries, and some schemes seem too small to make any significant impact. Most importantly, the number of guarantees looks generally small while their average value looks large. This suggests that guarantee schemes are not yet reaching the smaller firms. Guarantee schemes in MENA look financially sound and most schemes have room to grow. However, this growth should be accompanied by an improvement of some key design and management features, as well as the introduction of systematic impact evaluation reviews.Access to Finance,Debt Markets,Bankruptcy and Resolution of Financial Distress,Microfinance,Banks&Banking Reform