This study compares the efficiency of conventional and Islamic banks in Malaysia by engaging in a dynamic three-step (production, intermediation, and profitability) network data envelopment analysis (DEA). The inputs and outputs for the DEA model are selected based on the CAMELS rating. The major contributions of this study are threefold. First, this study investigates the efficiency of Malaysian banks using a novel dynamic network DEA model. Second, the Malaysian banking industry is found to be efficient in creating earning assets rather than in creating loans or profit. The results reveal that only a few banks in Malaysia have been efficient in converting deposits and equities into profit. Third, Islamic banks, in general, have been performing efficiently in the production and profitability approaches. Conventional banks, in contrast, are found to have been efficient in the intermediation approach. Policy implications are derived from the main conclusions.
LiuJ.S., et al., A survey of DEA applications, Omega-International Journal of Management Science41(5) (2013), 893–902.
2.
ParadiJ.C. and ZhuH.Y., A survey on bank branch efficiency and performance research with data envelopment analysis, Omega-International Journal of Management Science41(1) (2013), 61–79.
3.
AvkiranN.K., An illustration of dynamic network DEA in commercial banking including robustness tests, Omega-International Journal of Management Science55 (2015), 141–150.
4.
KaoC., Network data envelopment analysis: A review, European Journal of Operational Research239(1) (2014), 1–16.
5.
AzadM.A.K., Kian-TengK. and TalibM.A., Unveiling black-box of bank efficiency: An adaptive network data envelopment analysis approach, International Journal of Islamic and Middle Eastern Finance and Management10(2) (2017), 149–169.
6.
KamarudinF., et al., Bank efficiency in Malaysia a DEA approach, Journal of Central Banking Theory and Practice8(1) (2019), 133–162.
7.
Abdul-MajidM., SaalD.S. and BattistiG., Efficiency in Islamic and conventional banking: an international comparison, Journal of Productivity Analysis34(1) (2010), 25–43.
8.
Abdul-MajidM., SaalD.S. and BattistiG., Efficiency and total factor productivity change of Malaysian commercial banks, The Service Industries Journal31(13) (2011), 2117–2143.
9.
Abdul-MajidM., SaalD.S. and BattistiG., The impact of Islamic banking on the cost efficiency and productivity change of Malaysian commercial banks, Applied Economics43(16) (2011), 2033–2054.
10.
AhmadS. and RahmanA.R.A., The efficiency of Islamic and conventional commercial banks in Malaysia, International Journal of Islamic and Middle Eastern Finance and Management5(3) (2012), 241–263.
11.
SufianF., The Impact of the Asian Financial Crisis on Bank Efficiency: The Experience of Malaysia and Thailand, Journal of International Development22(7) (2010), 866–889.
12.
WankeP., AzadM.A.K. and BarrosC.P., Financial distress and the Malaysian dual baking system: A dynamic slacks approach, Journal of Banking & Finance66 (2016), 1–18.
13.
KrishnasamyG., RidzwaA.H. and PerumalV., Malaysian post merger banks’ productivity: application of Malmquist productivity index, Managerial Finance30(4) (2004), 63–74.
14.
SufianF., Mergers and acquisitions in the Malaysian banking industry: technical and scale efficiency effects, International Journal of Financial Services Management2(4) (2007), 304–326.
15.
SufianF. and HabibullahM.S., Do mergers and acquisitions leads to a higher technical and scale efficiency? A counter evidence from Malaysia, African Journal of Business Management3(8) (2009), 340–349.
16.
SufianF., et al., Assessing the effect of mergers and acquisitions on revenue efficiency: Evidence from Malaysian banking sector, Vision: The Journal of Business Perspective16(1) (2012), 1–11.
17.
WankeP., AzadM.A.K. and BarrosC.P., Predicting efficiency in Malaysian Islamic banks: A two-stage TOPSIS and neural networks approach, Research in International Business and Finance36 (2016), 485–498.
18.
WankeP., et al., Predicting performance in ASEAN banks: an integrated fuzzy MCDM–neural network approach, Expert Systems33(3) (2015), 213–229.
19.
WankeP., et al., Predicting efficiency in Islamic banks: An integrated multicriteria decision making (MCDM) approach, Journal of International Financial Markets, Institutions and Money45(November) (2016), 126–141.
20.
FäreR. and GrosskopfS., Network DEA, Socio-Economic Planning Sciences34(1) (2000), 35–49.
21.
SufianF., Factors Influencing Bank Profitability in a Developing Economy Empirical Evidence from Malaysia, Global Business Review10(2) (2009), 225–241.
22.
KarimM.Z.A., Comparative Bank Efficiency across Select ASEAN Countries, ASEAN Economic Bulletin18(3) (2001), 289–304.
23.
OmarM.A., et al., Efficiency of commercial banks in Malaysia, Asian Academy of Management Journal of Accounting and Finance2(2) (2006), 19–42.
24.
SufianF., The efficiency of Islamic banking industry in Malaysia, Humanomics23(3) (2007), 174–192.
25.
DuK. and SimN., Mergers, acquisitions, and bank efficiency: Cross-country evidence from emerging markets, Research in International Business and Finance36 (2016), 499–510.
26.
MokhtarH.S.A., AbdullahN. and Al-HabshiS.M., Efficiency of Islamic banking in Malaysia: A stochastic frontier approach, Journal of Economic Cooperation27(2), 37–70.
27.
CharnesA., et al., Two phase data envelopment analysis approaches to policy evaluation and management of army recruiting activities: Tradeoffs between joint services and army advertising, (1986), Center for Cybernetic Studies, University of Texas-Austin Austin, Tex, USA.
28.
MokhtarH.S.A., AbdullahN. and AlhabshiS.M., Efficiency and competition of Islamic banking in Malaysia, Humanomics24(1) (2008), 28–48.
29.
YahyaM.H., MuhammadJ. and HadiA.R.A., A comparative study on the level of efficiency between Islamic and conventional banking systems in Malaysia, International Journal of Islamic and Middle Eastern Finance and Management5(1) (2012), 48–62.
30.
IsmailF. and Ab RahimR., Productivity of Islamic and conventional banks of Malaysia: an empirical analysis, IUP Journal of Bank Management12(3) (2013), 7–19.
31.
MatthewsK. and IsmailM., Efficiency and productivity growth of domestic and foreign commercial banks in Malaysia, (2006), Cardiff University, Cardiff Business School, Economics Section: UK.
32.
MudaM., ShaharuddinA. and EmbayaA., Comparative analysis of profitability determinants of domestic and foreign Islamic banks in Malaysia, International Journal of Economics and Financial Issues3(3) (2013), 559–569.
33.
HasanM.Z. and KamilA.A., Evaluation of the domestic banks’technical efficiency in Malaysia, Bulletin of Mathematics7(1) (2015), 65–79.
34.
JadahH.M., Financial Performance Evaluation of Domestic Commercial Banks: An Empirical Study in Malaysia, Asian Journal of Multidisciplinary Studies4(8) (2016), 120–127.
35.
SufianF and HabibullahM.S., The impact of forced mergers and acquisitions on banks’ total factor productivity: empirical evidence from Malaysia, Journal of the Asia Pacific Economy19(1) (2013), 151–185.
36.
LaiM.C., et al., Financial Performance of Malaysia Local Banks: During Periods of Pre-Merger and Post-Merger, Journal of Economics Business and Anagement3(9) (2015), 826–831.
37.
GhroubiM. and AbaoubE., A Meta-Frontier Function for the Estimation of Islamic and Conventional Banks’ Cost and Revenue Efficiency: The Case of Malaysia from to, International Journal of Business and Management11(5) (2016), 254.
38.
SufianF., KamarudinF. and NoorN.H.H.M., Revenue efficiency and returns to scale in Islamic banks: Empirical evidence from Malaysia, Journal of Economic Cooperation and Development35(1) (2014), 47–80.
39.
MarimuthuM. and ArokiasamyL., Conventional banks and productivity level: The Malaysian perspective, African Journal of Business Management5(6) (2011), 2493–2500.
40.
KamarudinF., et al., Does productivity of Islamic banks endure progress or regress? Humanomics (online first), (2017).
41.
MuhmadS.N. and HashimH.A., Using the camel framework in assessing bank performance in Malaysia, in International Journal of Economics, Management and Accounting. Cardiff University, Cardiff Business School, Economics Section: UK. (2015), 245–268.
42.
SufianF., KamarudinF. and NassirA.m., Determinants of efficiency in the Malaysian banking sector: Does bank origins matter?Intellectual Economics10(1) (2016), 38–54.
43.
AzadM.A.K., et al., Bank efficiency in Malaysia: a use of malmquist meta-frontier analysis, Eurasian Business Review2017(03) (2016), 1–25.
44.
ChanS.-G., et al., Market structure, institutional framework and bank efficiency in ASEAN 5, Journal of Economics and Business82 (2015), 84–112.
45.
SalamiO.L. and AdeyemiA.A., Malaysian islamic banks’efficiency: An intra-bank comparative analysis of islamic windows and full-fledged subsidiaries, International Journal of Business and Society16(1) (2015), 19–44.
46.
SufianF., Determinants of Malaysian bank efficiency: evidence from bootstrap data envelopment analysis, International Journal of Applied Nonlinear Science2(1–2) (2015), 100–119.
47.
SufianF. and HabibullahM.S., Does Foreign Banks Entry Fosters Bank Efficiency? Empirical Evidence from Malaysia, Engineering Economics21(5) (2015), 464–474.
