Academic journal article International Journal of Business and Society

Malaysian Islamic Banks' Efficiency: An Intra-Bank Comparative Analysis of Islamic Windows and Full-Fledged Subsidiaries

Academic journal article International Journal of Business and Society

Malaysian Islamic Banks' Efficiency: An Intra-Bank Comparative Analysis of Islamic Windows and Full-Fledged Subsidiaries

Article excerpt


This paper aims to fill an apparent dearth of empirical studies that compare the efficiency of Islamic banks in Malaysia during their operation as Islamic windows and later transformation to full-fledged Islamic banks. Data obtained from the annual financial reports of the sampled banks is analyzed using the Data Envelopment Analysis (DEA) via DEAP 2.1 software to assess both the technical and scale efficiency of the banks under sample. Results obtained indicate that the banks have improved over the years in tenus of both scale and technical efficiency although the fonner takes prominence. In general the banks were found to be more efficient as Islamic windows compared to being full-fledged subsidiaries. This augurs well for the cunent disposition where, as per the Islamic Financial Service Act 2013, Islamic banks in Malaysia may now operate as full-fledged banks from their hitherto Islamic banking window status.

Keywords: Scale Efficiency; Technical Efficiency; Islamic Window; Full-Fledged Banks.

(ProQuest: ... denotes formulae omitted.)


The banking industry is arguably the most regulated in any part of the world. This may be due to a plethora of reasons including the nature of their product - money, as well as their dual but conflicting obligations of liquidity and profitability to their depositors and shareholders respectively. As such, the need for banks to be efficient cannot be discounted. As rightly noted by Sufian (2007b), factors like globalisation, deregulation, financial innovation, etc and their consequential implication for financial stability advertises the need for banks to place performance upon themselves to sort through the often-impassioned arguments. Therefore, it is by design rather than happenstance that recently, numerous policies and academic attention has been placed on banks' efficiency (Hasan, Koetter, & Wedow, 2009). However, in contrast to the enormous researches on banking efficiency especially from the conventional perspective, a dearth of empirical studies from the Islamic banking perspective leaves a lacuna in the extant banking efficiency literature. This is rather ironical especially viewed against the backdrop of the monumental growth witnessed in the Islamic banking industry since the early 2000 (Laldin, 2008).

The Islamic banking system (IBS) is gradually becoming a global phenomenon and it is incontrovertible that Malaysia is one of the major hubs of the burgeoning industry. In Malaysia for instance, Islamic banking operates in two folds and under two different acts vis. the Islamic Financial Services Act 2013 and the Financial Services

Act 2014. As such, there are the full-fledged Islamic banks and conventional banks' Islamic window both of which have grown tremendously over the past years (Mokhtar, Abdullah, & Al-Habshi, 2006). In a report by the Bank Negara Malaysia (Central Bank of Malaysia), Islamic banking sector has increased in total assets to RM 434.6 million 2011. This amounted to 22.4% of the total banking assets in the country as at the end of 2011 (Porter, 2012).

Arguably, the gradual development witnessed in the Islamic banking industry is reflected in its ability to withstand financial crisis. According to Derbel, Bouraoui & Dammak (2011), the effect of the 2007/2008 global financial crisis on the Islamic banks is relatively mild compared to the conventional banks. This arouses interest on whether these banks are more efficient compared to their conventional counterparts. In this regard, numerous studies have compared both types of banks in terms of some efficiency benchmarks. For instance, studies like Bader, Mohamad, Ariff & Hassan (2008) and Rafiuddin & Alam (2012) found that the Islamic banks are more profit efficient while the conventional banks are more cost efficient. This may not be unexpected given that either bank's operational philosophy differs.1 However, an apparent lacuna is noted in lack of efficiency studies based on intra-banking system in which case, a full-fledged Islamic bank's efficiency is yet to be compared to its performance during operation as an Islamic window. …

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