International Research Journal of Finance and Economics ISSN 1450-2887 Issue 4 !

2010" # EuroJournals $u%lishin&' Inc( 2010

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Efficiencies .om)arison of Islamic and .on/entional 0an1s of $a1istan

2asee% Shahid 3ahore 0usiness School' the 4ni/ersit5 of 3ahore E-mail* hasee%6ms%fumtlhr7hotmail(com Rami8 ur Rehman 9ssistant $rofessor' 3ahore 0usiness School' the 4ni/ersit5 of 3ahore E-mail* rami86rehman7hotmail(com :el* ; 2-42<5<2145=-=0> Fa?* ; 2-42<5<217=0 @hulam Sha%%ir Ahan Nia8i 9ssistant $rofessor' Be)artment of 9dministrati/e Sciences Cuaid e 98am 4ni/ersit5' Islama%ad E-mail> &s1nia8i75ahoo(com 9,ais Raoof 9ssociate $rofessor' 3ahore 0usiness School' the 4ni/ersit5 of 3ahore E-mail* a,ais6raoof7hotmail(com :el* ; 2-42<5<2145=-=0> Fa?* ; 2-42<5<217=0 9%stract :his stud5 in/esti&ates the com)arison %et,een the efficienc5 of .on/entional and Islamic 0an1s of $a1istan( :he histor5 of con/entional %an1s of $a1istan is /er5 affluent in com)arison to the Islamic %an1s( Islamic %an1in& industr5 in $a1istan is in its earl5 sta&es' /er5 fe, %an1s are o)eratin& in this sector ,hich )erforms )ure Islamic %an1in&( For this stud5' ,e ta1e a sam)le of fi/e Islamic and fi/e con/entional %an1s from !2005-200 "( 9 BE9 model is a))lied to measure the efficiencies of %oth %an1in& sectors under .RS and DRS a))roach( :he results sho, that the :E of con/entional %an1s is %etter than the Islamic %an1s' %ut in .E and 9E %oth sectors sho, a health5 com)etition( :he t-statistics sho,s that there is no si&nificant difference in mean efficiencies scores of con/entional and Islamic %an1s e?ce)t in 5ear 2008( Ae5,ords* Bata En/elo)ment 9nal5sis !BE9"' :echnical Efficienc5 !:E"' 9llocati/e Efficienc5 !9E"' .ost Efficienc5 !.E"' .onstant Return to Scale !.RS"' Daria%le Return to Scale !DRS"

1( Introduction
:he role of financial sector in economic de/elo)ment of an5 nation is formida%le( 9 /er5 close relationshi) e?ists %et,een &ro,th in financial and economic sector( 9n efficient financial sector is necessar5 for %etter usa&e of financial resources for a nation( Economic de/elo)ment can %e achie/ed onl5 %5 usin& the a/aila%le resources in a %etter ,a5 and hence im)ro/in& the out)ut )erformance(

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Ehen one tal1s a%out %etter utili8ation of an5 &i/en resource the /er5 %asic conce)t that comes in ones mind is of FEfficienc5(G In order to allocate resources efficientl5 %an1s should %e sound and efficient in identif5in& the ri&ht set of o))ortunities( $a1istanHs financial sector com)romises of commercial %an1s-local and forei&n' financial institutions' Islamic 0an1s' In/estment 0an1s' micro finance %an1s' modar%as' Stoc1 e?chan&es and insurance com)anies( :he o%-ecti/e of this research )a)er is to measure the efficienc5 of con/entional %ased %an1in& and Islamic %an1in& and to understand the results o%tained from the stud5 conducted in later sections( 0ut first ,e need to understand the terms F.on/entional 0an1in&G 'GIslamic 0an1in&G their differences and F0an1in& efficienc5G( Islamic 0an1in& refers to %an1in& s5stem %ased on )rinci)les of Islamic la, !Sharia" and its )ractical im)lementation throu&h de/elo)ment of Islamic economics( It )romotes ris1 sharin& %et,een $ro/ider of ca)ital !in/estor" and user of funds !Entre)reneur"(Similar to con/entional %an1in&' rates of )rofits are aimed at ma?imi8ation su%-ect to Sharia )rinci)les( Ine of the im)ortant as)ects of Islamic 0an1in& s5stem is inclusion of Ja1at not onl5 on customers %ut also on the indi/iduals &o/ernin& such a s5stem( Islamic 0an1in& s5stem ensures an eKual contri%ution to all )arties in/ol/ed' ,hether in )rofita%ilit5 or in case of an5 loss incurred( .ustomers are al,a5s &i/en status of )artners or contri%utors in an5 financial transaction or 0usiness deal( $a1istan has emer&ed as one of )otential &ro,in& Islamic 0an1in& mar1et and till to date fi/e Islamic %an1s are o)erational in accordance to Sharia )rinci)les and loo1in& for,ard to seein& more of these in the future( .on/entional 0an1in& is %ased on )ure financial model' in ,hich %an1s mainl5 %orro, from sa/ers and lend to enter)rises or indi/iduals( :he5 ma1e )rofit amon& the difference of rate of interests amon& %orro,in& and lendin& of mone5( 9)art from these con/entional %an1s also earn from the ser/ices the5 )ro/ide such as letter of credits ' !In ,hich the5 earn the )rofit %ased on ser/ices of intermediatel5 )art5 amon& im)orters and e?)orters of an5 said &oods or ser/ices" etc( Ine dra,%ac1 of con/entional %an1in& is that it )rohi%its from tradin& in the share holdin& of the %orro,in& concern( 0ecause of fractional re/erse s5stem 'the5 )roduce deri/ati/e de)osits ,hich hel)s them multi)l5 their lo,-cost resources (.on/entional 0an1in& sector of $a1istan is a))ro?imatel5 %ased on <5 %an1s ' ,hich ,ill &ro,n faster in comin& 5ears ( :he term FEfficienc5G refers to the ma?imi8in& of out)uts in such a ,a5 the in)ut resources are less utili8ed( 0an1in& efficienc5 is defined as difference %et,een o%ser/ed Kuantit5 of in)ut and out)ut /aria%les ,ith res)ect to o)timal Kuantit5 of in)ut and out)ut /aria%les( :he efficient %an1 can achie/e a ma?imum /alue of one in com)arison to inefficient %an1 can reduce to le/el of 8ero( In this research ,e are &oin& to see the difference amon& efficiencies of Islamic and .on/entional %ased %an1in& s5stem of $a1istan( 9s of current ,e are choosin& fi/e Islamic and .on/entional 0an1s for time )eriod of !2005-200 "( In follo,in& )arts of current issue ,e ,ill discuss )re/ious research in the said to)ic' Bata methodolo&5 follo,ed %5 results and hence ,e dra, a conclusion in final section of research(

2( 3iterature Re/ie,
Ehile there has %een e?tensi/e literature e?aminin& the efficienc5 features of contem)orar5 %an1in& sector ')articularl5 the ,or1 on 4S and Euro)ean %an1in& mar1ets and similarl5 in rest of ,orld %ut ,or1 on Islamic %an1in& is still in its infanc5( 2o,e/er ' this t5)e of research is &raduall5 chan&in& as a num%er of recent studies ha/e sou&ht to a))l5 /arious techniKues to estimate efficienc5 of Islamic and .on/entional %ased %an1in&(( Ifte1har 2assan and Aatherin Larton !2000" stud5 the Be/elo)ment and Efficienc5 of 0an1in& sector in a :ransitional Econom5 in conte?t of 2un&erian e?)erience(:he5 used Econometric Frontier 9))roach !EF9" model to estimate )rofit and cost inefficienc5 of 154 %an1s for the )eriod of !1 <1 7" (:he results indicate that the a/era&e %an1 could im)ro/e its cost and )rofit cate&ories %5 21(= and 2 (1 )ercent res)ecti/el5 ' thus matchin& its )erformance ,ith %est )racticed 0an1s(

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International Research Journal of Finance and Economics - Issue 4 !2010"

9na .anhoto' and Jean Bermine !2000" in/esti&ate the efficienc5 of $ortu&uese %an1s for the )eriod of !1 0-1 5"( :he5 used non-)arametric )ro&rammin& techniKue ' Bata En/elo)ment 9nal5sis !BE9" model to estimate efficienc5 of 20 0an1s ,hich ,ere dri/ided in to se&ments of Ild .ommercial %an1s ' Ild sa/in&s %an1s and Ne, %an1s( :he results indicate that o/er the )eriod of time techonolo&ical chan&es as calculated %5 BE9 model )ro/es that efiicienc5 of ne, %an1s is risen %5 5 M as com)ared to old %an1in& s5stem( .a/det 9( Beni8er and Lustafa Binc ' and Lurat :arimcilar !2000" stud5 the 0an1in& efficienc5 in a )re and )ost-li%erali8ation en/ironment %5 dra,in& on :ur1ish e?)erience( :he5 used non-)arametric )ro&rammin& techniKue ' Bata En/elo)ment 9nal5sis !BE9" model to calculate effiecienc5 chan&es in 0an1in& sector ,(e(f of li%erali8ation )ro&ram %5 o,nershi) or %5 function for )eriod of !1 70-1 4" for the Sam)le %an1s ran&in& 2 !1 7=-1 77" to 5< !1 1" (:he results indicates that total efficienc5 scores %5 functionalit5 or o,nershi) su&&ests' li%erali8ation didnHt )ro/ide antici)ated efficienc5 &ains( None of efficienc5 scores dis)la5ed consistent increase after introduction of ne, )olic5( Baniel sta/are1 !200<" stud5 the commercial %an1s efficienc5 in the Dise&rad re&ion %efore -oinin& the E4 and also to consider differences in efficienc5 across the countries( 2e used non)arametric )ro&rammin& techniKue ' Bata En/elo)ment 9nal5sis !BE9" model to estimate efficienc5 of different %an1s for )eriod of !1 -2002" (:he Sam)le sets for e/er5 5ear ,ere 5 %an1s in 1 ' 72 in 2000 ' 70 in 2001 and =2 in 2002 res)ecti/el5( :he results indicates that a/era&e efficienc5 of %an1in& intermediation in 2002 ' the D4 %an1in& industries can %e distuin&ushed as more and less efficient(.8ech and 2un&arian %an1in& sectors ,ere on a/era&e e/aluated as the most efficient follo,ed ,ith a ' non-mar&inal distance' %5 the $oolish %an1in& sector( :he Slo/a1 %an1in& sector stands a)art ,ith a su%staintional &a) in efficienc5 scores( Bons5ah Nudistira !200<" in/esti&ate the efficienc5 )erformance of 18 Islamic %an1s o/er the )eriod of !1 7-2000"( 2e used non-)arametric )ro&rammin& techniKue ' Bata En/elo)ment 9nal5sis !BE9" model to estimate efficienc5 of 18 Islamic 0an1s for )eriod !1 7-2000" (:he results indicates that Islamic %an1s sho,s considera%le o/erall efficienc5 across the sam)le )eriod( Near 2000 %een the most efficient 5ear ha/in& efficienc5 /alue !0( 0 " com)ared to !0( 02'0(870 and 0(8 7" for 5ears !1 7'1 8 and 1 " res)ecti/el5( 0ut the o/erall efficienc5 results indicates that o/erall inefficienc5 of 18 Islamic %an1s is considera%le lo, !10M " as com)ared to .on/entional counter)arts(Loreo/er ' Islamic %an1s ,ithin Liddle east are less efficient than their counter)arts outside the re&ion(Reason )ro/ided %5 author descri%es that Islamic %an1s outside the middle east re&ion are relati/el5 ne, and are &o/erned %5 their res)ecti/e re&ulators( 2amim S( 9hmed Lo1htar ' Na8iruddin 9%dullah and S5ed L( 9l-2a%shi !200=" in/esti&ate the efficienc5 of full-fled&ed Islamic 0an1s ' Islamic ,indo,s ' and con/entional %an1s in Lala5sia(:he5 used Stochastic Frontier 9)rroach model to calculate technical and cost efficienc5 of 288 )anel data from annual re)orts of 20 Islamic ,indo,s ' 2 full-fled&ed Islamic 0an1s and 20 con/entional %an1s for )eriod of !1 7-200<"(:he results indicates that Lala5sian Islamic 0an1in& industr5 ' in terms of assets ' de)osits and Financial %ase ' has &ro,n /er5 ra)idl5 %et,een !1 7200<" as com)ared to .on/entional %an1in& (:echnical and .ost efficiencies In Islamic 0an1in& are e?)ected to )ro/ide si&nificant insi&hts to mana&ement and )olic5-ma1ers ,ith re&ard to o)timal utili8ation of ca)acities and allocation of scarcee resources in /arious %an1s( 9%dul Ca55um !2007" in/esti&ate the 5earl5 efficienc5 scores of 20 %an1s for )eriod of !1 12005"( 2e used non-)arametric )ro&rammin& techniKue ' Bata En/elo)ment 9nal5sis !BE9" model to estimate efficienc5 of 20 0an1s for )eriod !1 1-2005"( :he results indicates that efficienc5 score of %an1in& im)ro/es from =5M in 1 1 to 87(=M in 2005(9s a result of ,hich %an1s are a%le to e?)and their core %usiness acti/ities ' the5 stren&thened their ca)ital %ase' im)ro/ed asset Kualit5 and )rofiti%ilat5 durin& the 5ear 2005(:hese de/elo)ments clearl5 reflect the increased com)etition amon& %an1s and im)ro/ement in efficienc5 of %an1in& sector(

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Elana 3ou1oiano/a !2008" in/esti&ate efficienc5 and )rofita%ilit5 of Ja)anese %an1s from !2000-200="(She used non-)arametric )ro&rammin& techniKue 'Bata En/elo)ment 9nal5sis !BE9" model to estimate efficienc5 and )rofita%ilit5 of cit5 0an1s' :rust 0an1s' Re&ional 0an1s and :ier II re&ional %an1s of Ja)enease 0an1s for !2000-200="(:he results indicates %oth &rou)s of re&ional %an1s a))ear to %e inefficient %oth in terms of cost and re/enue relati/e to the cit5 and trust %an1s( Loreo/er 'total factor )roducti/it5 of %oth &rou)s of re&ional %an1s has %een flat o/er the last si? 5ears(:rust %an1s demonstrates hi&hest )rofita%ilit5 in terms of return on assets and eKuit5( Ehile %oth &rou)s of re&ional %an1s )erform ,orse than cit5 and trust %an1s( 0ut on the ,hole Ja)anese %an1s ha/e steadil5 im)ro/ed since 2001( 3aurent Eeill !2008" in/esti&ate the con/er&ence in %an1in& efficienc5 for Euro)ean 4nion countries( 3aurent a))lied stochastic frontier a))roach on %an1in& efficienc5 measures for the )eriod of !1 4-2005"( :he results indicates that si&nificant reduction of the &a) %et,een the least and the most efficient %an1in& sector %et,een 1 4 and 2005( For e?am)le' in 1 1 efficienc5 means ran&e from =1M in $ortu&al to 78( 0M in France ' ,hile the5 ran&e from 80(<2M in S)ain u) to 0(88M in 3u?em%our& in 2005(:hus &enerali8ed results su&&ests that o/erall im)ro/ement in %an1in& efficienc5 for all in/esti&ated E4 countries and thus im)act a )ositi/e ima&e on %an1in& efficienc5( Aamaruddin et al !2008" in/esti&ates ne, )ers)ecti/es on )erformance e/aluation of Islamic 0an1in& o)erations in Lala5sia %5 measurin& %oth cost and )rofit efficienc5 of full-fled&ed Islamic %an1s and Islamic ,indo,s o)erations of domestic and forei&n %an1s( :he5 used non-)arametric )ro&rammin& techniKue 'Bata En/elo)ment 9nal5sis !BE9" model to estimate %oth cost and )rofit efficienc5 of 2 Islamic %an1s and 12 Islamic Eindo,s Bi/isions for the )eriod of !1 8-2004"(:he results indicates that o/erall cost efficienc5 estimate is 0(= 5 ' ,hich is ,ithin ran&e of scores found in other o/erseas studies' such as 55M in 4A' it is far from satisfactor5 le/el since it su&&ests that an Islamic %an1 ,astes around <0(5Mof its in)uts relati/e to %est -)ractice %an1( 2o,e/er' this efficienc5 score is relati/el5 lo, in com)arison to 0an1-dominant economies such as S)ain !( 0 "' !( 05" in France' and Lala5sian con/entional %an1s !0( 42" ( 0ut on the )ositi/e side this score is /er5 much com)ara%le to another Lala5sian stud5 of Islamic %an1s !(= 8" and !(72" for con/entional %an1s o/er !1 <-2000"( Ehich means Islamic %an1s in Lala5sia did not im)ro/e much in their cost efficienc5 since 2004( Sufian et al !2008" in/esti&ates the efficienc5 of the Islamic %an1in& sectors in 1= LEN9 and 9sian countries durin& the )eriod of !2001-200=" ( :he5 used non-)arametric )ro&rammin& techniKue 'Bata En/elo)ment 9nal5sis !BE9" model to estimate efficiencies of <7 indi/idual Islamic %an1s of 1= LEN9 and 9sian countries for the )eriod of !2001-200="(:he results indicates that Islamic %an1s mean technical efficienc5 has %een on declinin& trend durin& the 5ears 2001 to 200< 'increased durin& 5ear 2004 '%efore declinin& a&ain in 5ears 2005 and 200=(Lean technical efficienc5 of selected Islamic %an1s durin& sam)le 5ears ,ere =5(4M ,hich indirectl5 means the5 could sa/e <4(=M of the in)uts to )roduce same amount of out)uts that the5 )roduced( I/erall the results im)l5 that durin& )eriod of stud5 ' althou&h Islamic %an1s ha/e %een o)eratin& at a relati/el5 o)timal scale of o)erations ' the5 ,ere mana&eriall5 inefficient to e?)loit their resources to fullest( Bemet .9N9A.I !200 " In/esti&ates the effect of %an1in& crises on )erformance of 0an1in& efficienc5 throu&h testin& on :ur1ish e?)erience %efore and after crises( 2e used Ratio anal5sis and non-)arametric )ro&rammin& techniKue 'Bata En/elo)ment 9nal5sis !BE9" model to estimate the effect of %an1in& crises on )erformance of 0an1in& efficienc5 throu&h testin& on :ur1ish e?)erience %efore and after crises for the )eriod of !1 1-200=" ,hich is di/ided in to t,o sections i(e' !)re-crises" ,hich holds the 5ears !1 1'1 2 and 1 <" for 1 4 crises and )ost-crises )eriod of !1 5'1 = and 1 7"(Similarl5 for 2000-2001 crises )re-crises )eriod ,as !1 7'1 8 and 1 " and )ost-crises )eriod ,as !2004'2005 and 200="(:he results indicates the efficienc5 chan&es durin& 1 4 and 20002001 crises measured different results for RI9 and RIE durin& )ost and )re crises sessions( 2o,e/er ' results of ratio anal5sis re&ardin& measurin& ratios other than )rofita%ilit5 !costs and ris1" seem to %e not si&nificantl5 different in )ost -crises )eriod in 1 4( :his could %e attri%uted to difference in handlin& 1 4 and 2000-2001in terms of %an1in& sector( :he results of BE9 model also su&&ests that

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International Research Journal of Finance and Economics - Issue 4 !2010"

)ost crises )eriod has resulted in hi&her o/erall mean efficienc5 of :ur1ish commercial %an1s( Ee found e/idence that %usiness c5cle theor5 holds in :ur1ish crises e?)erience( :he efficienc5 increase ,as Kuite si&nificant in case of 2000-2001 crises %ecause after 1 4 crises there ,ere not restructin& efforts for the %an1in& sector( No%u5oshi et al !2010" in/esti&ates the technical efficienc5 of Ja)enease trust %an1s(:he5 used stochastic distance function a))roach ' ,hich is suita%le for anal58in& com)le? trust %an1s %ut ,as ne/er a))lied for Ja)enease trust %an1s(:he sam)le in this stud5 com)romises traditional domestic trust %an1s' forei&n-o,ned trust %an1s ' trust su%sidiries an a fe,er financial institutions %ut it e?cludes the commercial %an1s for the )eriod of !1 4-2005"( :he em)irical results sho,s that tradional domestic trust %an1s ha/e e?)erienced su)erior technical efficienc5 as com)ared ,ith forei&n-o,ned trust %an1s and trust su%sidieries (2o,e/er' mean efficienc5 /alue of traditional domestic trust %an1s also tends to descrease after consolidation (9s a result of stud5 9uthors dre, that entr5 %arriers in the Ja)eanease trust %an1in& has had no si&nificant effect on the technical efficienc5 of ne, entrants( :his can %e )ossi%l5 attri%uted to the ineKualit5 in the conditions of com)etition' such as the )ermitted ran&e of trust %an1in& %usiness ',hich has %enefitted the incum%ent traditional domestic trust %an1s( In other ,ords ' althou&h entr5 %arriers ,ere &raduall5 rela?ed ' the com)lete li%erali8ation of %usiness areas ,as not necessaril5 im)lemented(

<( Lethodolo&5 and Lodel S)ecification

<(1( Efficienc5 Leasurement :here are numerous ,a5s of measurin& efficienc5 of %an1s( 0er&er and 2um)hre5 !1 7" )ro/ide an Oe?tensi/e account of 1<0 studies that used different frontier efficienc5 anal5sis for 21 countries( :he tradional method of a))roachin& the efficienc5 measurement issue is the financial ratio anal5sis( 0ut there is a lac1 of a&reement on the relati/e im)ortance of /arious t5)es of in)ut or out)ut under this method (Loreo/er this method also doesnHt consider the /alue of mana&ement actions and in/estment decisions that ,ill effect future as o))osed to current )erformance( It is a thus a short run measure and ma5 %e ina))ro)riate for descri%in& the actual efficienc5 of a %an1 for a lon& run( In addition to that' there are )arametric and non-)arametric frontier anal5sis used in measurin& ?-efficienc5 of financial sector firms(:he )arametric a))roach includes stochastic frontier anal5sis' the free dis)osal hull' ,hile the non)arametric is the data en/elo)ment anal5sis !BE9"( <(2( Bata En/elo)ment 9nal5sis !BE9 Lodel" :he !BE9" a))roach refers to the a%ilit5 of %an1s to control cost and &enerate re/enues and ,as de/elo)ed %5 .harnes' .oo)er and Rhoades !1 78"(:he !BE9" is a linear )ro&rammin& %ased techniKue for measurin& relati/e efficienc5 and mana&ement )erformance of firms ,here )resence of multi)le in)uts and out)uts ma1es com)arison difficult (It uses o%ser/ed /alues of in)uts and out)uts and attem)ts to find ,hich of the firms in the &i/en sam)le determine an en/elo)ment anal5sis( In !BE9" most efficient %an1 !,ith the score of 1" doesnHt necessaril5 &enerate ma?imum out)ut le/el %ut it does indicate that it has tendenc5 of &eneratin& %est )ractice out)uts amon& the rest of firms in the &i/en sam)le( Firms l5in& on the surface of are deemed to %e the efficient and recei/e /alue of unit5 ,hereas> firms fallin& %elo, surface le/el are deemed as inefficient and ca)ture the /alue less than unit5( 2ence' all de/iations from the estimated frontier re)resent inefficienc5( :he !BE9" measure com)ares each of firm in the sam)le ,ith the %est )ractice ones 1no,n as )eers or role model( BE9 ser/es as an alterati/e a))roach to re&ression techniKue( Since re&ression is %ased on central tendencies' ,hile BE9 is %ased on e?treme o%ser/ations( Loreo/er' the merit ,ith the BE9 is that unli1e re&ression anal5sis' it doesnHt reKuire a )rior assum)tion a%out the anal5tical form of the )roduction function' instead it deri/es the %est )roduction function solel5 on the %asis of o%ser/ed /alues ma1in& it im)ossi%le to miss)ecif5 the )roduction techniKue(

International Research Journal of Finance and Economics - Issue 4 !2010"

:he BE9 model allo,s for the treatment of constant as ,ell as /aria%le returns to scale( :he constant return to the scale !.RS" is ad/anta&eous as it allo,s for com)arison %et,een small and lar&er firms+%an1s in a situation ,here freKuenc5 distri%ution is s1e,ed due to the )resence of small and lar&e %an1s in the sam)le( In such case the use of /aria%le returns to the scale !DRS" raise the )ossi%ilit5 that lar&er %an1s ,ould a))ear as efficient n the sam)le for the sim)le reason that there are no trul5 efficient %an1s ! 0er& et al(' 1 1"( :his stud5 ,ill use %oth .RS and DRS for the anal5sis( <(<( Bata and Lodel S)ecification :he data source for the research is the F0an1in& Statistics of $a1istan 2004-2008 F)u%lished %5 the state %an1 of $a1istan( :his is an annual re)ort' ,hich )resents the ma-or information a%out all commercial and Islamic %an1s in $a1istan includin& )u%lic' )ri/ate and forei&n sector( Information reKuired for anal5sis of &i/en research consists of fi/e Islamic and fi/e .on/entional %ased commercial %an1s for the )eriod of !2004-2008"( 9ll the financial data used for anal5sis are in terms of $a1istani ru)ees !in thousands"( :he efficienc5 of the %an1s can %e measured either %5 usin& the o)eratin& a))roach or the intermediate a))roach( 4nder formal a))roach' the %an1 is )ercei/ed to %e the )roducer of ser/ices for its account holders and is 1no,n as the cost+re/enue mana&ement )ers)ecti/e( :he intermediate a))roach ho,e/er' consider %an1 as entities' ,hich con/ert and transfer financial assets %et,een sur)lus and deficient units actin& as an intermediar5 %etter called a mechanical )ers)ecti/e( :his stud5 uses the intermediation a))roach as it ena%les financial institute li1e %an1 to %e )rescri%ed as a manufacturin& units' con/ertin& in)uts into out)uts e(&( de)osits in to loans and in/estments( In)uts used in the stud5 are de)osits !B" and ca)ital !A" ,hile the out)uts re)resent )ortfolio in/estment !I" and 3oans P ad/ances !3"( :he choice of in)uts and out)uts ,as influenced %5 e?tant literature on BE9 a))lication in %an1in& industr5' data a/aila%ilit5 and theoretical considerations( Be)osits are the o/erall resources a/aila%le to the %an1s for carr5in& their acti/ities li1e lendin& and in/estments and are the one of the main in)uts in the stud5( .a)ital is an im)ortant factor of )roduction for a %an1 unli1e the other %usiness acti/ities and is )ro?ied %5 the %oo1 /alue of )remises and fi?ed assets' net of de)reciation( :he )rice of ca)ital !$1" ,as arri/ed %5 di/idin& the total e?)enditures on )remises and fi?ed assets %5 their total /alue( .ost of ser/icin& the de)osits is the interest )aid on de)osits( 2ence' in)ut )rice for de)osits !$2" ,as deri/ed from total sum of interest )aid on de)osits di/ided %5 total /alue of de)osits( :he out)uts chosen for this stud5 constitute one of ma-or acti/ities of %an1s that channel their funds into in/estments or lendin& for )rofita%ilit5 moti/es( 9s mentioned a%o/e' sam)le si8e for &i/en stud5 consists of fi/e Islamic %an1s o)erational as of no, and fi/e con/entional %ased commercial %an1s( 3ist of these financial institutes are as follo,s*
3ist Islamic 0an1s .on/entional 0an1s 1 0an1 Islamic $a1istan 3imited National 0an1 of $a1istan 2 Ba,ood Islamic 0an1 3imited 9llied 0an1 3imited < Bu%ai Islamic 0an1 $a1istan 3imited 2a%i% 0an1 3imited 4 Emirates @lo%al Islamic 0an1 3imited L.0 0an1 3imited 5 Lee8an 0an1 3imited 4nited 0an1 3imited In)uts 4sed Be)osits !B" .a)ital !A" $1!$rice of ca)ital" $2!$rice of de)osits" Iut)uts 4sed In/estments !I" 3oan P 9d/ances !3"

4( Results
In order to )ro/ide %aseline for com)arison of efficiencies of Islamic and .on/entional 0ased 0an1in& sector of $a1istan for the &i/en sam)le si8e' Ee first com)ute efficienc5 scores for 0oth Islamic and .on/entional 0ased %an1s from 2005 to 200 ( :he results are )resented in :a%le 1' 2' < and 4 !See 9nne?ure"( :he results sho,s that the a/era&e in)ut oriented :E' .E and 9E of Islamic and .on/entional 0an1s for 2005 are 50(0' 50(0' 51(0 and 8 (0' <=(0' <8(0 )ercent res)ecti/el5 usin& .RS a))roach' similarl5' :E' .E and 9E of Islamic and .on/entional 0ased 0an1s for 200= are 7 (0' 58(0' =2(0 and (0' 8<(0' 8<(0 )ercent res)ecti/el5( In 2007 :E' .E and 9E of Islamic and .on/entional 0ased 0an1s are 78(0' 55(0' ==(0 and 1(0' 5<(0' =2(0 )ercent res)ecti/el5( Similarl5' in 2008 :E' .E and 9E

<0

International Research Journal of Finance and Economics - Issue 4 !2010"

of Islamic and .on/entional 0ased 0an1s are =8(0' =4(0' <(0 and 5(0' 47(0' 4 (0 )ercent res)ecti/el5 and in 200 :E' .E and 9E of Islamic and .on/entional 0ased 0an1s are 7 (0' 40(0' 4=(0 and 82(0' 48(0' 5=(0 )ercent res)ecti/el5( Similarl5' the results sho,s that the a/era&e in)ut oriented :E' .E and 9E of Islamic and .on/entional 0ased 0an1s for 2005 are 78(0' 51(0' 52(0 and 100(0' 50(0' 50(0 )ercent res)ecti/el5 usin& DRS a))roach( :E' .E and 9E of Islamic and .on/entional 0ased 0an1s for 200= are 1(0' = (0' 70(0 and 100(0' 85(0' 85(0 )ercent res)ecti/el5( In 2007 :E' .E and 9E of Islamic and .on/entional 0ased 0an1s are 7(0' ==(0' = (0 and 100(0' 80(0' 80(0 )ercent res)ecti/el5( Similarl5' in 2008 :E' .E and 9E of Islamic and .on/entional 0ased 0an1s are <(0' 85(0' 0(0 and 100(0' 4 (0' 4 (0 )ercent res)ecti/el5 and in 200 :E' .E and 9E of Islamic and .on/entional 0ased 0an1s are 2(0' =1(0' ==(0 and 8(0' 72(0' 7<(0 )ercent res)ecti/el5( Ee use t-statistics for the com)arison of mean efficiencies of Islamic and con/entional %an1s o/er the )eriod of 2005 to 200 at 10M le/el of si&nificance( :he )-/alues 0(07 for :E and 0(04 for 9E under the assum)tion of .RS a))roach sho,s a si&nificant difference in the means of Islamic and .on/entional %an1s efficiencies in 2008( In remainin& 5ears 2005' 200=' 2007 and 200 ' there is no si&nificant difference %et,een means of :E' 9E and .E of Islamic and .on/entional %an1s !see :a%le -<"( Similarl5' the )/alues 0(0 for :E and 0(04 for 9E and 0(07 for .E under the assum)tion of DRS a))roach sho,s a si&nificant difference in the means of Islamic and .on/entional %an1s efficiencies in 2008( In remainin& 5ears 2005' 200=' 2007 and 200 ' there is no si&nificant difference %et,een means of :E' 9E and .E of Islamic and .on/entional %an1s !see :a%le -4"( 9)art from test Statistics and Efficienc5 anal5sis' @ra)hical re)resentations for Efficienc5 le/els !:E'.E and 9E" are attached in 9nne?ure as ,ell( See 9nne?ure for details(

5( .onclusion
Financial Sector in $a1istan has &one throu&h a num%er of chan&es durin& last t,o decades( :hese include 1" li%erali8ation of %an1 o)enin& )olic5 ,hich resulted ,ith the reemer&ence of )ri/ate %an1in& sector in the econom5 2" stren&thenin& the role of controllin& authorities such as State %an1 of $a1istan and the Securit5 E?chan&e .ommission of $a1istan( Financial sector reforms ha/e also chan&ed the o,nershi) structure of %an1in& sector of $a1istan( :his is the /er5 reason of im)ro/ed efficienc5 le/els of .on/entional 0an1s( In this stud5 ,e test Efficienc5 le/els of .on/entional 0an1in& for the &i/en Sam)le for .RS and DRS modes of BE9 model' results sho,s that :E !:echnical Efficienc5" for .on/entional 0an1s for %oth modes is %etter than Islamic 0an1in&' Ine of the reasons of hi&h :E scores for con/entional 0ased 0an1in& is im)ro/in& technolo&5 ,ith the time and also %een in o)erations for more than four decades( In 5ear ,ise com)arison of efficiencies /alues for .on/entional and Islamic %an1s e?ce)t :E' Islamic %an1s sho, a health5 com)etition ,ith .on/entional %an1s for .E and 9E /alues( :his is one of the si&ns for econom5 that Islamic %an1s are on the hori8on of im)ro/in& trends e/er5 5ear 2o,e/er' one of the limitations of Islamic %an1s is short mar1et o)erations and lac1 of a,areness in &eneral )u%lic( In s)ite of the fact that Islamic 0an1in& is still in its earl5 a&es of o)erations in $a1istan' %ut its )remium %an1 Lee8an )erformed at )ar of .on/entional %an1s in term of efficiencies( :here is no dou%t in this fact that need of .on/entional and Islamic 0an1in& S5stem is necessaril5 for modern era' and Islamic 0an1in& is im)ro/in& da5 %5 da5 in /arious countries such as Lala5sia as one of the )rime Islamic 0an1s Foundation countries( Similarl5' $a1istan is also focusin& on im)ro/ements in Islamic 0an1in& sector and State 0an1 alread5 im)lemented Islamic Eindo, I)erations ,ithin e?istin& .on/entional %ased %an1in&( I/erall outcome of this stud5 is the efficiencies le/el of con/entional and Islamic %an1s are im)ro/ed o/er the )eriod of time( :he .on/entional %an1s )erform %etter than the Islamic %an1s in term of technical efficienc5 %ut in term of cost and allocati/e efficiencies Islamic %an1s &i/e tou&h time to con/entional %an1s( :he t-statistics results sho, there is no si&nificant difference in the mean efficienc5 scores of Islamic and .on/entional %an1s o/er the sam)le )eriod e?ce)t in 2008( :here are /arious other dimensions and as)ects needs to %e e?)lored' ,hich do include efficienc5 of %an1s as )roduction unit' economic efficienc5 of %an1s in $a1istan( :his reKuires a series of studies in the future(

International Research Journal of Finance and Economics - Issue 4 !2010"

<1

References
Q1R 9na .anhoto' and Jean Bermine !2000"'S 9 Non-$arametric E/aluation of 0an1in& Efficienc5 in $ortu&al' Ne, /s( Ild 0an1sH' Social Science Research Net,or1 !SSRN-id2211=8"( Q2R 9%dul Ca55um !2007"'S Financial Sector Reforms and the Efficienc5 of 0an1in& in $a1istanH' South 9sian Net,or1 of Economic research Institutes !S9NEI" htt)*++,,,(saneinet,or1(net Q<R .a/det 9( Beni8er and Lustafa Binc ' and Lurat :arimcilar !2000"'S Leasurin& 0an1in& Efficienc5 in the $re- and $ost-3i%erali8ation En/ironment*E/idence from the :ur1ish 0an1in& S5stemH' Social Science Research Net,or1 !SSRN-id=<254="( Q4R Baniel sta/are1 !200<"'S 0an1in& Efficienc5 in Dise&rad .ountries 0efore Joinin& the Euro)ean 4nionH' Social Science Research Net,or1 !SSRN-id=71=44"( Q5R Bons5ah Nudistira !200<"'S Efficienc5 in Islamic 0an1in&* an Em)irical 9nal5sis of 18 0an1sH' Social Science Research Net,or1 !SSRN-id040=007"( Q=R Bemet .9N9A.I !200 "'S 9 case Stud5 on 0usiness .5cle' 0an1 Efficienc5 and 0an1in& .risesH' Social Science Research Net,or1 !SSRN-id1285001"( Q7R Elana 3ou1oiano/a !2008" 'S 9nal5sis of the Efficienc5 and $rofita%ilit5 of the Ja)anese 0an1in& S5stemH' Social Science Research Net,or1 !SSRN-id1112205"( Q8R 2amim S( 9hmed Lo1htar' Na8iruddin 9%dullah' S5ed L(9l- 2a%shi !200="' SEfficienc5 of Islamic 0an1in& in Lala5sian* 9 Stochastic Frontier 9))roachH' Journal of Islamic .or)oration' 27 !2"' <7-70( Q R Ifte1har 2asan - Aatherin Larton !2000"' SBe/elo)ment and Efficienc5 of the 0an1in& Sector in a :ransitional Econom5* 2un&arian E?)erienceH' 0ofit Biscussion $a)ers !7+2000"( Q10R Aamaruddin '0adrul 2isham' Safa ' Lohammad Samaun and Lohd ' and Rohani !2008" ' S9ssessin& )roduction efficienc5 of Islamic %an1s and con/entional %an1 Islamic ,indo,s in Lala5siaH' International Journal of 0usiness and Lana&ement'1 !1"' <1-48( Q11R 3aurent Eeill !2008" 'S .on/er&ence in 0an1in& Efficienc5 across Euro)ean H' Social Science Research Net,or1 !SSRN-id1222501"( Q12R No%u5oshi Namori and Ao8o 2arima5a !2010"'S Efficienc5 in the Ja)anese trust %an1in& industr5* 9 stochastic distance function a))roachH' Social Science Research Net,or1 !SSRNid1570445"( Q1<R Sufian ' Fad8lan ' Lohammad ' 9(L Noor and Lohammed-Jul1hi%ri'9%dul La-id !2008"' S:he Efficienc5 of Islamic 0an1s* Em)irical E/idence from the LEN9 and 9sian .ountries Islamic 0an1in& SectorsH' Lunich Re)ec $ersonal 9rchi/e !LR$9-$a)er No* 1 072"( Q14R 0an1in& Statistics of $a1istan' State 0an1 of $a1istan !2004-2008" Q15R 9nnual Re)orts !200 " Q1=R 9llied 0an1 $a1istan 3imited !200 "' 9nnual Re)ort Q17R 0an1 Islamic $a1istan 3imited !200 "' 9nnual Re)ort Q18R Ba,ood Islamic 0an1 $a1istan 3imited !200 "' 9nnual Re)ort Q1 R Bu%ai Islamic 0an1 $a1istan 3imited !200 "' 9nnual Re)ort Q20R 2a%i% 0an1 3imited !200 "' 9nnual Re)ort Q21R Emirates @lo%al 0an1 $a1istan 3imited !200 "' 9nnual Re)ort Q22R Lee8an 0an1 3imited !200 "' 9nnual Re)ort Q2<R Luslim .ommercial 0an1 3imited !200 "' 9nnual Re)ort Q24R National 0an1 $a1istan 3imited !200 "' 9nnual Re)ort Q25R 4nited 0an1 $a1istan 3imited !200 "' 9nnual Re)ort Q2=R .om)arison of Efficiencies of Islamic 0an1in& and .on/entional 0an1in& of $a1istan

<2

International Research Journal of Finance and Economics - Issue 4 !2010"

9nne?ure
:a%le -1* .RS Lodel
No( of 0an1s 0an1 :5)e 2 < 5 5 5 I/erall Lean 5 5 5 5 5 I/erall Lean 2005 200= 2007 2008 200 2005 200= 2007 2008 200 Nears Lean 0(5 0(7 0(78 0(=8 0(7 0(71 0(8 0( 0( 1 0( 5 0(82 0( 1 :(E St(Be/ 0(71 0(<= 0(2 0(<< 0(2< 0(<8 0(22 0(01 0(12 0(11 0(17 0(1< Lean 0(5 0(58 0(55 0(=4 0(4 0(54 0(<= 0(8< 0(5< 0(47 0(48 0(5< .(E St(Be/ 0(71 0(48 0(41 0(<5 0(<= 0(4= 0(42 0(<= 0(< 0(<7 0(<8 0(<7 Lean 0(51 0(=2 0(== 0( < 0(4= 0(=4 0(<8 0(8< 0(=2 0(4 0(5= 0(58 9(E St(Be/ 0(7 0(42 0(<< 0(08 0(<4 0(<7 0(41 0(<= 0(<7 0(<= 0(4 0(<8

Islamic 0an1s

.on/entional 0an1s

:a%le-2* DRS Lodel

No( of 0an1s 0an1 :5)e 2 < 5 5 5 I/erall Lean 5 5 5 5 5 I/erall Lean 2005 200= 2007 2008 200 2005 200= 2007 2008 200 Nears Lean 0(78 0( 1 0( 7 0( < 0( 2 0( 1 1 1 1 0( 8 0( = :(E St(Be/ 0(<1 0(1= 0(08 0(1 0(15 0(1= 0 0 0 0 0(04 0(01 Lean 0(51 0(= 0(== 0(85 0(=1 0(== 0(5 0(85 0(8 0(4 0(72 0(=7 .(E St(Be/ 0(= 0(5< 0(<8 0(22 0(4 0(45 0(47 0(<4 0(44 0(4 0(44 0(42 Lean 0(52 0(7 0(= 0( 0(== 0(= 0(5 0(85 0(8 0(4 0(7< 0(=8 9(E St(Be/ 0(=8 0(51 0(<8 0(15 0(< 0(4< 0(47 0(<4 0(44 0(4 0(4< 0(42

Islamic 0an1s

.on/entional 0an1s

:a%le-<* :est Statistics- .om)arison of Leans 0et,een Islamic and .on/entional 0an1 !.RS"
:E 0(2 0(22 200= 2007 0(21 0(07TT 2008 200 0(4 TT sho,s the si&nificant ) /alues at 10M le/el of si&nificanceNears 2005 9E 0(4< 0(25 0(44 0(04TT 0(<5 .E 0(42 0(5 0(47 0(25 0(<

Note*

:a%le-4* :est Statistics- .om)arison of Leans 0et,een Islamic and .on/entional 0an1 !DRS"
Nears :E 2005 0(25 200= 0(21 2007 0(1 2008 0(0 TT 200 0(21 TT sho,s the si&nificant ) /alues at 10M le/el of si&nificance9E 0(4 0(<4 0(<< 0(04TT 0(<8 .E 0(5 0(<4 0(< 0(07TT 0(<4

Note*

International Research Journal of Finance and Economics - Issue 4 !2010" <<

.RS Lodel BE9 9nal5sis @ra)hs

2005 !:E"

1.20 1.00 0.80 0.60 0.40 0.20 1 2 3 4 5 Islamic Banks Conventional Banks

2005 !9E"

1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 Islamic Banks Conventional Banks

2005 !.E"

1.2 1 0.8 0.6 0.4 0.2 0 1 2 3

Islamic Banks Conventional Banks

<4

International Research Journal of Finance and Economics - Issue 4 !2010" 200= !:E"

1.20 1.00 0.80 0.60 0.40 0.20 1 2 3 4

200= !9E"

Islamic Banks Conventional Banks 5

1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 Islamic Banks Conventional Banks

200= !.E"

1.20 1.00 0.80 0.60 0.40 0.20 1 2 3 4 5 Islamic Banks Conventional Banks

International Research Journal of Finance and Economics - Issue 4 !2010" 2007 !:E"

<5

1.20 1.00 0.80 0.60 0.40 0.20 1 2 3 4

2007 !9E"

Islamic Banks Conventional Banks

1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 Islamic Banks Conventional Banks

2007 !.E"

1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 Islamic Banks Conventional Banks

<=

International Research Journal of Finance and Economics - Issue 4 !2010" 2008 !:E"

1.20 1.00 0.80 0.60 0.40 0.20 1 2 3 4 5 Islamic Banks Conventional Banks

2008 !9E"

1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 Islamic Banks Conventional Banks

2008 !.E"

1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 Islamic Banks Conventional Banks

International Research Journal of Finance and Economics - Issue 4 !2010" 200 !:E"
1.20 1.00 0.80 0.60 0.40 0.20 1 2 3 4 5 Islamic Banks Conventional Banks

<7

200 !9E"
1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 Islamic Banks Conventional Banks

200 !.E"
1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 Islamic Banks Conventional Banks

<8

International Research Journal of Finance and Economics - Issue 4 !2010"

DRS Lode BE9 9nal5sis @ra)hs

2005 !:E"

1.20 1.00 0.80 0.60 0.40 0.20 1 2 3 4 5 Islamic Banks Conventional Banks

2005 !9E" 1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 Islamic Banks Conventional Banks

2005 !.E" 1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 Islamic Banks Conventional Banks

International Research Journal of Finance and Economics - Issue 4 !2010" 200= !:E"

<

1.20 1.00 0.80 0.60 0.40 0.20 1 2 3 4

200= !9E"

Islamic Banks Conventional Banks 5

1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 Islamic Banks Conventional Banks

200= !.E"

1.20 1.00 0.80 0.60 0.40 0.20 1 2 3 4 5 Islamic Banks Conventional Banks

40

International Research Journal of Finance and Economics - Issue 4 !2010" 2007 !:E"

1.20 1.00 0.80 0.60 0.40 0.20 1 2 3 4

2007 !9E" 1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 Islamic Banks Conventional Banks

Islamic Banks Conventional Banks

2007 !.E" 1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 Islamic Banks Conventional Banks

International Research Journal of Finance and Economics - Issue 4 !2010" 2008 !:E"

41

1.20 1.00 0.80 0.60 0.40 0.20 1 2 3 4 5

Islamic Banks Conve ntiona l Banks

2008 !9E"

1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 Islamic Banks Conventional Banks

2008 !.E"

1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 Islamic Banks Conventional Banks

42

International Research Journal of Finance and Economics - Issue 4 !2010" 200 !:E"
1.20 1.00 0.80 Islamic 0.60 0.40 0.20 1 2 3 4 5 Banks Conventional Banks

200 !9E"
1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 Conventional Banks Islamic Banks

200 !.E"
1.2 1 0.8

0.6 0.4 0.2 0 1 2 3 4 5

Islamic Banks Conventional Banks