Operational efficiency of Islamic versus conventional mutual funds during the COVID-19 crisis: A two-stage data envelopment analysis of Malaysian funds (2015–2022)
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DOIhttp://dx.doi.org/10.21511/imfi.23(2).2026.35
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Article InfoVolume 23 2026, Issue #2, pp. 483–499
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Type of the article: Research Article
Abstract
The global growth of Islamic finance and the recurrence of systemic financial crises have intensified scholarly interest in whether Shariah-compliant investment structures offer measurable performance advantages over conventional counterparts, yet operational efficiency comparisons using non-parametric frontier methods remain scarce. This study aims to evaluate the operational efficiency of Islamic versus conventional mutual funds in Malaysia during the period 2015–2022, with a special focus on efficiency behavior during the COVID-19 crisis (2020–2021), using a two-stage Data Envelopment Analysis framework. A sample of 108 Malaysian mutual funds (52 Islamic and 56 conventional) was analyzed using output-oriented constant-returns-to-scale DEA with annualized return volatility and fund turnover ratio as inputs and the Sharpe ratio as the output, followed by second-stage ordinary least squares regression to identify contextual efficiency determinants. Islamic funds achieved a mean efficiency score of 0.6545 compared to 0.5967 for conventional funds, a statistically significant difference of 5.78 percentage points (t = 2.549, p = 0.012). During the COVID-19 crisis, this gap widened to 14.93 percentage points, with Islamic fund efficiency rising to 0.7281 and conventional fund efficiency declining to 0.5788 (t = 3.519, p = 0.002). Regression analysis confirmed that higher return volatility consistently reduces efficiency (β = −0.043, p < 0.001), while the Islamic×Crisis interaction term indicates a crisis-specific efficiency premium (β = 0.026, p = 0.071). The structural constraints of Islamic finance – prohibiting leverage, speculation, and synthetic instruments – function as resilience mechanisms under macroeconomic pressure, supporting differentiated regulatory consideration for Shariah-compliant funds within dual financial systems.
Acknowledgment
This work was supported by the Deanship of Scientific Research, Vice Presidency for Graduate Studies and Scientific Research, King Faisal University, Saudi Arabia [KFU263216].
- Keywords
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JEL Classification (Paper profile tab)G23, G01, G11, C67
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References62
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Tables5
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Figures4
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- Figure 1. Two-stage DEA conceptual framework for Islamic and conventional mutual fund efficiency
- Figure 2. DEA efficiency frontier for Islamic and conventional mutual funds (output-oriented CRS model)
- Figure 3. Efficiency score distributions by fund type
- Figure 4. Marginal effect of Islamic fund classification on efficiency
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- Table 1. Descriptive statistics of DEA efficiency scores
- Table 2. DEA efficiency scores during normal and crisis periods
- Table 3. Regression results – Model 1 (core fund characteristics)
- Table 4. Regression results – Model 2 (extended with crisis controls)
- Table 5. Hypothesis testing summary
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