Are Islamic Banks Less Efficient than other Banks? Evidence from Bangladesh

Abstract

Considering the recent shrinkage in Islamic banks’ profitability in Bangladesh, this study investigated whether these banks are less efficient than the conventional and mixed banks. Using 250 firm-year observations from 38 private commercial banks for the years from 2011 to 2017 and estimating operational efficiency through the Data Envelopment and Stochastic Frontier Analyses, we found robust evidence that Islamic banks are less efficient than the conventional and mixed banks. In additional analysis, it was found that the lower efficiency of Islamic banks was driven by their non-investment income. A significant negative shift in Islamic banks’ efficiency was evident in the most recent years compared to the earliest periods in our sample window. These findings helped us explain why the relative profitability of Islamic banks has declined recently. We suggest that Islamic banks’ management pay more attention to their portfolio of non-investment products and services in order to remain competitive in the fast-growing banking landscape in Bangladesh.