HOW LARGE ARE PRODUCTIVITY DIFFERENCES BETWEEN ISLAMIC AND CONVENTIONAL BANKS?

Despite the enormous growth in Islamic banking, most studies, using DEA/Stochastic Frontier Analysis, find Islamic banks are either equally or less productive than conventional banks. We apply the Olley-Pakes (OP) and Ackerberg-Caves-Frazer (ACF) approaches for estimating the production functions of conventional, Islamic and mixed banks in Bahrain and Malaysia between 1990 and 2011. The ACF results are the most plausible. Though Islamic banks tend to be less efficient than conventional banks the difference is not statistically significant. In Malaysia, mixed banks are significantly more productive than other banks and tend to have faster productivity growth.