The impact of foreign-owned Islamic banks and Islamic bank subsidiaries on the efficiency and productivity change of Malaysian banks

Abstract EN

Abstract.

The paper examines the efficiency of a sample of Islamic and conventional banks in Malaysia for the period 2000 to 2008, using a stochastic frontier approach, and mainly focuses on determining the impact of foreign-owned Islamic bank and Islamic banking subsidiaries on performance.

We model the impact of bank characteristics such as Islamic banking and foreign ownership, after taking into account the distinction between full-fledged Islamic banks as opposed to Islamic banking windows operating within conventional banks as well as Islamic banks operating as subsidiaries of conventional banks.

We also test the impact of economic crisis, public ownership and mergers on bank efficiency.

In contrast to domestic conventional banks with Islamic window, our results show that full-fledged Islamic banks have higher input requirements.

In addition, using a generalised Malmquist productivity index, we decompose productivity change into efficiency, technical, and scale change.

Unlike foreign full-fledged Islamic banks, conventional banks with Islamic bank subsidiary have relatively higher efficiency.

However, both foreign full-fledged Islamic banks and conventional banks with Islamic bank subsidiary exhibited negative productivity change, attributed to negative rate of technical change and scale change effects.

Despite the flexibility in operation, the newly converted bank subsidiary may need sometimes to develop technology, while foreign Islamic banks may need more time to overcome their output disadvantages.