Islamic bank vs conventional bank: intermediation, fee based service activity and efficiency

Dimas Satria Hardianto and Permata Wulandari

International Journal of Islamic and Middle Eastern Finance and Management, 2016, vol. 9, issue 2, 296-311

Abstract: Purpose - The aim of this research is to compare the differences of intermediation, fee-based service activity and efficiency of conventional banks vs Islamic banks in Indonesia for the 2011-2013 period. Moreover, this study also includes some control variables to find their effect on the dependent variables. Design/methodology/approach - This research uses two methods, namely, stochastic frontier approach and panel data regression. Findings - The result indicates that Islamic banks have a higher intermediation ratio, have higher proportion on fee income-to-total operating income and are less efficient. The control variable that has a positively significant effect on intermediation ratio is size; meanwhile, inefficiency and non–loan-earning asset are negatively affecting the intermediation ratio. The control variable that show a positively significant effect on the proportion of fee income-to-total operating income is size; meanwhile, the credit risk variable has no significant effect on the proportion of fee income-to-total operating income. Size and credit risk are the control variables that have a negative relation to efficiency. Originality/value - This study has significantly contributed to Indonesian Islamic banking based on which the Islamic banking manager should recognize that the intermediation level, fee-based service activity and efficiency are crucially important in establishing competition and maintaining sustainable Islamic banking.

Keywords: Efficiency; Islamic banks; Conventional banks; Fee-based income; Intermediation; Stochastic frontier approach (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:v:9:y:2016:i:2:p:296-311

DOI: 10.1108/IMEFM-01-2015-0003

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