Comparative study of bank efficiency between Islamic and conventional banks in Malaysia / Atiqah Batrisyia Zainalabiden and Tengku Hanim Syamimi Tengku Mokhtar

Malaysian banking system is unique as it practices the dual banking system that comprises of Islamic and conventional banks. The dual banking system allows conventional banks to work in parallel with Islamic banks in the country. The practice of Islamic banks and conventional banks are different with the former follows the Shariah law and the latter consist of prohibited elements such as riba (interest), gharar (uncertainty) and maysir (gambling). Due to this reason, the study believes it is relevant to compare these two (2) groups of banks in term of their cost efficiency. The purpose of this study is twofold. First, is to examine the determinants of cost efficiency for Islamic and conventional banks and second, to compare the cost efficiency between the two (2). The sample of this study covers from the period of 2008 until 2017 and consists of 14 Islamic banks and 16 conventional banks with a total of 231 observations. This study uses financial ratio of overhead cost to revenue to measure the cost efficiency for banks in Malaysia. The study employs the Random Effect Model (REM) and develop three (3) models which include Islamic banks (Model A), conventional banks (Model B) and all banks (Model C). The study discovers that asset quality and profitability have significant impact on cost efficiency for both Islamic and conventional banks. On the other hand, size is only influential to the banks cost efficiency for the Islamic banks model. Aside from asset quality and profitability conventional banks must take into consideration capitalization and liquidity in managing their cost efficiency. This study is designed to guide the banking sectors and regulators in the process of managing and monitoring their cost efficiency.