The efficiency of Islamic banks versus conventional banks: an empirical study of an emerging economy

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The purpose of this study is to investigate the efficiency of two different banking systems operating in Egypt (Islamic versus conventional banks). A sample of 35 banks has been used to examine the technical efficiency before and after the financial crisis using data envelopment analysis model. Evaluating the technical efficiency of Egyptian banks will enable policymakers to support which banking system is more efficient to facilitate the financial inclusion and enhance the economic development.
Before the financial crisis, conventional banks outperformed conventional banks with Islamic windows and Islamic banks, scale technical efficiency outperformed pure technical efficiency when analyzing conventional banks and conventional banks with Islamic windows. In terms of Islamic banks, pure efficiency outperformed scale efficiency. After the financial crisis, technical efficiency of all banks decreased. However, pure technical efficiency of Islamic banks has improved as a result of the quality of management and outperformed both conventional banks and conventional banks with Islamic windows. These results imply that Islamic banks have not been affected by the financial crisis. Therefore, the increased adoption and support of the Islamic banks in Egypt is addressed to develop the economy and push forward entrepreneurship projects, support the financial inclusion and the informal economy integration.

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    • Figure 1. Islamic finance contributions to the banking sector in Egypt
    • Table 1. Total assets, deposits and loans for the years 2003 to 2017
    • Table 2. Input and output variables
    • Table 3. Measures of efficiency of all banks before the crisis
    • Table 4. Measures of efficiency of conventional commercial banks before the crisis
    • Table 5. Measures of efficiency of conventional banks with Islamic windows before the crisis
    • Table 6. Measures of efficiency of Islamic banks before the crisis
    • Table 7. Input and output variables after the crisis
    • Table 8. Measures of efficiency of all banks after the crisis
    • Table 9. Measures of efficiency of conventional banks after the crisis
    • Table 10. Measures of efficiency of conventional banks with Islamic windows after the crisis
    • Table 11. Measures of efficiency of Islamic banks after the crisis
    • Table 12. Summary of conclusions
    • Table A1. The sample