Efficiency of Islamic and conventional banks during financial crisis: Empirical evidence from Malaysia

The global financial crisis that engulfed the world in the mid of 2007 till the end of 2009 slightly affected the Asian countries such as Malaysia has focused attention on the flaws of the conventional banking system. Islamic banks seem much stronger to recover in financial crisis compared to conventional banks because of the inherent nature of Islamic banks, which prohibits the interest payments in all transactions. Thus, this study examines the efficiency level of Islamic and conventional banks during financial crisis particularly in 2007 to 2012. The efficiency of Islamic and conventional banks is measured utilizing Data Envelopment Analysis by adopting the intermediation approach. The data are extracted by Bankscope and Annual Report from 2007 to 2012. The samples consisted of Islamic and conventional banks in Malaysia. The results indicate that pure technical efficiency contributed more to the overall technical efficiency of Islamic banks. In conventional banks, the scale efficiency dominates the overall technical efficiency. In overall, the finding shows that Islamic banks are exhibited higher technical efficiency compared to the conventional banks attributed to the higher pure technical efficiency. Hence, the findings of this study have policy implications, and make a contribution to policy-making by providing empirical evidence on the performance of the Islamic and conventional banks and their efficiency level