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Determinants of bank Performance: Comparative Study Between Conventional and Islamic Banking in Bahrain

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Abstract

In this study, Data Envelopment Analysis (DEA) is used to examine the determinants of banking performance in Bahrain between 2005 and 2009. This performance is analyzed through a comparative study of 12 banks (six conventional and six Islamic banks). A diversity of internal and external banking characteristics were used to forecast this performance. The main of them are the return on assets (ROA), return on equity (ROE), and efficiency (EFF). Our determinant study of bank performance confirms previous investigations. The increase in size of Islamic banks and the rapid growth in the customers’ deposits are the important factors of performance. Moreover, our results indicate that the variables related to the government intervention have a negative impact on the banking performance in the conventional funding model.

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Notes

  1. In the DEA model of constant returns to scale (CRS) (Charnes et al. 1978), the higher x is (which constitutes the inputs or, in other words, the production factors used in the productive process), the more y increases (which constitute the output produced), at an equivalent quota. E.g., if the number of the productive factors is doubled, the quantity of the output is doubled as well. Figure 6 shows how an input (x) is used to produce an output (y). If assumed that the output is changed in direct proportion to the input (constant returns to scale), the efficiency frontier is defined by a straight line starting from the beginning of the axes (which determines the production function) and passes through the point of the unit with the highest ratio of outputs to inputs (Charnes et al., 1978). These units are (∅ 0 or P). Unit (∅ 0 or P) is “inefficient” since it could produce the same amount of output with less amount of input by (X”−X0). The inefficiency of ∅ 0 is determined by the ratio TE = y0 ∅ ' / y0 ∅.

  2. In the case of variable returns to scale (VRS), when x increases, then y increases either less (descending returns to scale) or more (increasing returns to scale) than the increasing quota of x. The DEA model of variable returns to scale (Banker et al. 1984) is chosen when it is not previously known if a percentage change of inputs would cause an equivalent percentage change in output/s. More specifically, in the case of increasing organizational complexity of the DMUs, due to an increase in the size and the variety of their activities, the outputs are not modified in a way directly proportional to the inputs (variable returns to scale) (Banker et al., 1984). According to (Fig. 6), the DMUs R, R’, P, and P’ that are found on the curve of the variable returns to scale are efficient. The efficiency frontier is formed if the efficiency data (outputs/inputs) of the specific DMUs are joined with straight lines. As a result, concerning VRS, the inefficiency of the organization (∅ 0) is expressed using the ratio TE = y0 ∅ 0 '/y0 ∅. This ratio shows that the magnitude of inefficiency is less in this case than when we have constant returns to scale such as OX’/OX” > OX0/OX”

  3. A particular kind of sale where the seller expressly mentions the cost of the commodity purchased, and sells it to another person by adding some profit thereon. Thus, Murabaha is not a loan given with interest, but a sale of a commodity for cash/deferred price.

  4. A contract of exchange with deferred delivery is applied to specified made-to-order items.

  5. Advance payment for goods which are to be delivered at a specified future date. Under normal circumstances, a sale cannot be affected unless the goods are in existence at the time of the bargain. However, this type of sale is an exception, provided that the goods are defined and the date of delivery is fixed. The objects of a sale must be tangible goods that can be defined on the basis of the quantity, quality, and workmanship.

  6. A special kind of partnership where one partner gives money to another to invest it in a commercial enterprise. The investment comes from the first partner called “rabb-ul-mal”, while the management and work is an exclusive responsibility of the second, who is called “mudarib”.

  7. A joint enterprise or partnership structure with profit/loss sharing implications is used in Islamic finance instead of interest-bearing loans

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Authors and Affiliations

  1. Faculty of Economics and Management of Sfax, Laboratory URECA, University of Sfax, Street of airport, km 4.5, LP 1088, Sfax, 3018, Tunisia

    Saida Daly & Mohamed Frikha

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  1. Saida Daly
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  2. Mohamed Frikha
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Correspondence to Saida Daly.

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Daly, S., Frikha, M. Determinants of bank Performance: Comparative Study Between Conventional and Islamic Banking in Bahrain. J Knowl Econ 8, 471–488 (2017). https://doi.org/10.1007/s13132-015-0261-8

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