Title: Comparative performance of Islamic and conventional banks in Europe

Authors: Ahmad M. Abu-Alkheil; Hans-Peter Burghof; Walayet A. Khan

Addresses: School of Management and Logistic Sciences, German Jordanian University, Amman, Jordan ' Institute of Financial Management, Department of Banking and Finance, University of Hohenheim, Stuttgart, Germany ' School of Business Administration, University of Evansville, 1800 Lincoln Avenue, Evansville, USA

Abstract: We employ data envelopment analysis (DEA) to examine the relative efficiency of Islamic and conventional banks in the UK and Switzerland during 2008-2009, accounting ratio analysis to measure the financial performance of the European Islamic Investment Bank (EIIB) during 2005-2008, and a matched-pairs t-test to determine the differences in the EIIB performance in the pre-versus post financial crisis periods, respectively. Results suggest that the Islamic banks in Europe experience lower cost efficiency, higher allocative inefficiency and poor, but relatively better, technical efficiency compared to conventional banks. The inefficiency of the banks is mostly due to their sub-optimal size of operations. Findings further show that the EIIB exhibits a clear paradox between its high operating efficiency and low profitability. EIIB gradually became illiquid but still remains solvent. A comparison of the bank's performance in the periods before and after the crisis does not show statistically significant differences.

Keywords: data envelopment analysis; DEA; X-efficiency performance; Islamic banks; UK; United Kingdom; Islamic finance; conventional banks; banking efficiency; accounting ratio analysis; financial performance; European Islamic Investment Bank; EIIB; cost efficiency; technical efficiency; banking inefficiency; operating efficiency; profitability; bank performance.

DOI: 10.1504/AJFA.2013.057167

American Journal of Finance and Accounting, 2013 Vol.3 No.1, pp.1 - 23

Received: 18 Jan 2012
Accepted: 12 Sep 2012
Published online: 04 Sep 2014 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article