This study aims to analyze both technical efficiency and allocative efficiency per input within the banking sector, focusing on the interplay among Islamic banks, conventional banks and conventional banks offering Islamic Banking Services (CBIBS). It also investigates the impact of competition on these efficiencies.
Using data from 37 Islamic banks, 38 CBIBS and 126 conventional banks across 14 countries in the MENA region and Southeast Asia over the period 2002–2022, the authors applied a stochastic frontier production model with first-order conditions, a two-step system generalized method of moments estimator and the Tobit model for robustness checks.
The findings indicate that Islamic banks demonstrate the highest technical efficiency, whereas CBIBS exhibit the lowest. Despite this, Islamic banks encounter significant challenges in allocative inefficiency, particularly in managing financial capital, which adversely affects their cost efficiency. Interestingly, competition enhances the allocative efficiency of financial capital in conventional banks and CBIBS but diminishes it in Islamic banks. Furthermore, control variables show varied impacts on efficiencies across different banking categories.
These findings emphasize the need for collaboration between regulators and researchers to develop an efficiency measurement method that integrates financial, ethical and social aspects. It also highlights the importance of aligning banking with ethical financing practices and innovating products that optimize resource allocation, thereby enhancing both financial and ethical performance.
To the best of the authors’ knowledge, this paper is the first to analyze the allocative efficiency per input for the three categories of banks: Islamic, conventional and CBIBS, while highlighting the variety of competition effects.
