Risk-adjusted efficiency and corporate governance: Evidence from Islamic and conventional banks

Md Safiullah and Abul Shamsuddin ()

Journal of Corporate Finance, 2019, vol. 55, issue C, 105-140

Abstract: Previous studies have compared the efficiency of Islamic banks with their conventional counterparts using a common efficiency frontier and ignoring risks, in spite of the two bank groups operating under different technological, market and institutional conditions. We overcome this issue by estimating efficiency using the stochastic meta-frontier model for a large international sample, and show that compared to conventional banks, Islamic banks are 4 percentage points more cost efficient, but 17 percentage points less profit efficient on a risk-adjusted basis. For both bank types, higher bank risk reduces cost efficiency but increases profit efficiency, implying that risks contribute more to generating revenues than inflating costs. Having a stronger Shariah supervisory board is conducive to improving Islamic banks' profit efficiency. Our findings are robust to accounting for potential endogeneity in the governance-efficiency relationship.

Keywords: Cost efficiency; Profit efficiency; Islamic banking; Shariah supervisory board; Stochastic meta-frontier. (search for similar items in EconPapers)
JEL-codes: D24 G21 G28 G34 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0929119918301020
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:55:y:2019:i:c:p:105-140

DOI: 10.1016/j.jcorpfin.2018.08.009

Access Statistics for this article

Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter

More articles in Journal of Corporate Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().