Cost Efficiency and Total Factor Productivity of Islamic and Conventional Banks in Pakistan

Abstract

Purpose – The purpose of the study is to compare the Cost Efficiency and Total Factor Productivity growth rate of Islamic, Conventional and Conventional Islamic Windows banks in Pakistan from 2007-2011.Design/methodology/approach – a sample of fifteen banks has been selected from the whole of population. Five banks from each of the banking sector have been chosen by random sampling technique. Secondary data for the subject study has been taken from the banks statistics of Pakistan, annual statements of the respective banks and periodical reports of State Bank of Pakistan. For the comparison of cost efficiency Data Envelopment Analysis (DEA) is used. To find out the total factor productivity growth rate, we used Malmquist productivity indices (MPI). Tobit Regression Analysis was used to determine the bank specific factors on cost efficiency.Findings – The findings of the study suggest that the cost efficiency of Islamic banks is lower than its comparing counterparts. But on the other side the total factor productivity growth rate of the Islamic banks is on the boom as compared to its peers. The factors like SIZE and DEPOSITS indicate an inverse association with the cost efficiency of banks. While checking for the factors i.e. ROE and DEBT, both have a positive significant relationship with the cost efficiency of banks.

Keywords:  Cost efficiency, DEA, MPI, Islamic banks, Conventional banks,