Comparative efficiency measurement of Islamic banks and conventional banks: A DEA approach
Md. Nazmul Islam, Tanmay Biswas, Md. Al-Amin
Banks play a significant role in the economic development of a country. This study attempts to evaluate operational efficiency and effectiveness, covering 12 commercial banks in Bangladesh during 2009-2015, using multiple output and input variables by applying non parametric (DEA) techniques and parametric statistical tools. The study found that the technical efficiency under CRS approach was 1.00 for the DMU AABL, and BBL. The average efficiency score was 98 percentages and the lowest score possessed by ABBL. Average technical efficiency both for Islamic banks and conventional banks were 98 percentages under CRS approach. Under the VRS approach, 9 banks were able to obtain maximum efficiency score 1.00 and the rest 3 banks scored under maximum efficiency score. Islamic banks possessed about 100 percentage efficiency while conventional banks were 99 percentages under VRS approach. In case of scale efficiency, only two banks had the efficiency score 1.00 while rest 10 banks got the score under efficiency level. The calculated result also found that there was no significance difference between the Islamic and conventional banks regarding the efficiency scores obtained by DEA. And there was positive correlation of each of the partial productivity of inputs with efficiency scores obtained by DEA. The study suggests that the inefficient banks should improve loan recovery strategies and reduce their annual expenditures within reasonable extent. Finally, some suggestions & recommendations have been provided to run the banking industry with efficient and effective operations that ensure the sector with sound position.