Academic journal article International Journal of Business and Management Science

Different Parametric and Non-Parametric Approaches to Model the Efficiency of Islamic and Conventional Banks in Bangladesh

Academic journal article International Journal of Business and Management Science

Different Parametric and Non-Parametric Approaches to Model the Efficiency of Islamic and Conventional Banks in Bangladesh

Article excerpt

INTRODUCTION

In Bangladesh, Banking sector started working since its independence and has started to emerge in 1990s. By December 2009, there are 4 public limited bank, 5 specialized bank, 30 domestic private bank and 9 foreign private bank working across the country.

The first Shari'ah based Islamic bank, in Bangladesh is Islami Bank Bangladesh Limited (IBBL), and has started its functioning on 30 March, 1983. During the last two decades, the IBBL, like other parts of the world, has significantly expanded its network in home and abroad, and have been able to mobilize large amount of deposit, and promote many economic ventures. The volume of its business is more than double of the business of any other private bank of the country. The development of Islamic Bank has been accelerated since Bangladesh Bank (the central bank of Bangladesh) allowed conventional banks to open Islamic branch because this was thought to be the most effective and efficient mode of increasing the number of institutions offering Islamic banking services at the lowest cost and within the shortest time frame.

Presently, interest-free banking have been growing in Bangladesh very quickly and accepted widely by the public. By December 2009 the Islamic banking system in Bangladesh is represented by 7 Islamic banks, 8 conventional banks having Islamic branches channeling spread throughout the country. They offer comprehensive and wide range of Islamic financial products and services. Some conventional banks having Islamic branches are offering Islamic banking products and services separated from its conventional parent with its own infrastructure, including staff and branches.

By doing so, it would also force the Bangladeshi banking industry to be more competitive. One important aspect of competitiveness is efficiency. Inefficiency would become a great disadvantage to face a fierce competition in the banking industry. To win the competition, banks should know the strengths and weaknesses of themselves as well as of their competitor. Know yourself and know your competitor is a halfway to success. Therefore, analysis of the efficiency of IBBL comparison with other Islamic and conventional counterparts it is very important to provide a big picture of the strengths and weaknesses of IBBL and its competitors.

Despite of the importance, there are very limited studies comparing the efficiency of Islamic and conventional banks within a country using parametric and nonparametric approach, especially in Bangladesh. Therefore, there should be a study that measure technical, allocative, cost, scale and profit efficiency of Islamic and conventional banks using parametric and nonparametric approaches in Bangladesh to provide comparison and to improve the robustness of previous measurements. These measures could also be used as a guide for IBBL to improve its weakness to be able to compete head to head with other Islamic and conventional banks and to achieve the intended goals to improve the market share. Moreover, the goal to strengthen IBBL structure could be achieved.

The results of this study will be very useful for many stakeholders of conventional and Islamic banks in Bangladesh, especially the regulator (Bangladesh Bank), to formulate appropriate policy recommendations to improve the synergy between conventional and Islamic banks in facilitating intermediation to the real sector. Conventional and Islamic banks in Bangladesh will also be benefited from this study to see where they are in the competitiveness of the banking system. They will also be able to determine the potential improvements of weak aspects.

REVIEW OF LITERATURE

According to Obaidullah (2005), efficiency of the financial institutions can be defined as ability to mobilize the savings from the savings-surplus units and allocate these funds among savings-deficit units in the economy. Moreover, Kumbhakar and Lovell, (2003) stated that efficiency can be measured with respect to maximization of output, minimization of cost or maximization of profits. …

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