Nº 19-71: Efficiency Convergence in Islamic and Conventional Banks

This paper compares the efficiency dynamics of Islamic and community banks relative to their conventional counterparts. We employ parametric and non-parametric methods to analyze: i) a cross-country panel of Islamic and conventional banks from 23 countries; and, ii) a panel of community and conventional banks from the US. Parametric methods find no significant differences between the steady states and convergence rates for Islamic and conventional banks, but reveal distinctive patterns between community and conventional banks. To identify factors pertaining to these observed differences, we subject both data sets to further analyses. For the cross-country panel, factors like financial depth, transparency, economic stability and banking concentration can explain the different steady state levels and convergence rates between Islamic and conventional banks across sample countries. For the US panel, efficiency and liquidity creation compete as objectives for conventional banks, while liquidity creation is not penalized in steady state efficiency terms among community banks. In addition, for these banks steady state efficiency is positively related with profitability and negatively with capitalization.