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Publication date: 4 May 2018

Anwar Puteh, Muhammad Rasyidin and Nurul Mawaddah

Purpose – The purpose of the research is to analyze the efficiency of Islamic banks in Indonesia. The data used in this research are panel data observed from 2012 until…

Abstract

Purpose – The purpose of the research is to analyze the efficiency of Islamic banks in Indonesia. The data used in this research are panel data observed from 2012 until 2016. The sampling of this research is conducted on five Sharia banks in Indonesia, that is, Bank Muamalat, Bank SyariahMandiri, BukopinSyariah, BRI Syariah, and Bank Mega Syariah.

Design/Methodology/Approach – The study uses a quantitative method to analyze the efficiency of Sharia banking with formulation of comparison of operating expenses to operating revenues (BOPO).

Finding – The result of this research concludes that Sharia banking in Indonesia has not been efficient during the last five years, that is, 2012–2016. This can be seen from the range of banking efficiency ratio. The average level of Islamic banking efficiency ranges between 89.73% and 94.16%. Bank Muamalat whose range is 94.16% shows the highest average efficiency ratio compared to other Sharia banks. Meanwhile, Bank Mega Syariah maintains the lowest average efficiency ratio that is 89.37%. The five Sharia banks have a high efficiency ratio of over 80%. This shows that Sharia banking in Indonesia is inefficient

Originality/Value – The bank should be able to balance between cost (cost) and revenue. Sharia banks must also be able to create good product innovation in order to increase the collection of funds from the community, such as for competitive outcomes, prizes, or other programs that raise public interest to use the services of Sharia banking.

Research Limitations/Implications – This inefficiency is due to the high bank operating costs compared to the bank’s operating income.

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Proceedings of MICoMS 2017
Type: Book
ISBN:

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Article
Publication date: 14 September 2021

Salah U-Din and David Tripe

The study aims to analyze the changes in banking market structure and their impact on the bank efficiency.

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55

Abstract

Purpose

The study aims to analyze the changes in banking market structure and their impact on the bank efficiency.

Design/methodology/approach

This study uses a one-stage stochastic frontier analysis (SFA) to compare the impact of the market structure and the GFC on the economic efficiency of the major banks in both countries.

Findings

A significant negative impact of the GFC is observed on bank efficiency. Overall, Canadian banks posted better efficiency scores than their American counterparts. Additionally, cost-efficient banks are found to be more resilient to crises and more profit-efficient in the post-GFC period. The authors found that market power had a positive impact on the cost and profit efficiency of banks. Higher levels of equity, market power and concentration helped banks be more cost-efficient.

Research limitations/implications

Only large banks are selected for study although it represents the majority stake of both banking sectors.

Practical implications

Banking regulators should include more measures to assess the banking market structure and performance.

Originality/value

As per the best knowledge of the authors, it is the first study to assess the change in banking market structure and efficiency of the US and Canadian banking sectors in the post-GFC period.

Details

Journal of Economic Studies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 8 October 2021

Yong Tan, Vincent Charles, Doha Belimam and Shabbir Dastgir

This study investigates the interrelationships between efficiency, competition and risk in the Chinese banking industry.

Abstract

Purpose

This study investigates the interrelationships between efficiency, competition and risk in the Chinese banking industry.

Design/methodology/approach

Parametric stochastic frontier analysis is used to estimate bank efficiency; the Lerner index is used as the competition indicator; accounting ratios and a translog function are used to measure different types of risk and finally, the three-stage least square estimator is used to investigate the interrelationships.

Findings

The results of this study show that the impact of competition on different types of risk is significant and positive, while there is a significant and positive impact of credit risk, liquidity risk and capital risk on bank competition. In addition, the findings demonstrate that the interrelationships between efficiency and competition are significant and negative. The authors do not find any robust interrelationships between different types of risk and different types of efficiency; the authors find that diversification and higher levels of profitability reduce bank credit risk. The results suggest that a higher developed banking sector reduces the level of bank competition in China.

Originality/value

This is the first piece of research that comprehensively investigates the interrelationships between different types of risk, competition and different efficiencies in China.

Details

Asian Review of Accounting, vol. 29 no. 4
Type: Research Article
ISSN: 1321-7348

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Article
Publication date: 17 July 2020

David Adeabah and Charles Andoh

The study examines the relationship between the consequential social cost of market power (i.e. welfare performance of banks) and cost efficiency using data covering the…

Abstract

Purpose

The study examines the relationship between the consequential social cost of market power (i.e. welfare performance of banks) and cost efficiency using data covering the period 2009 to 2017 from the Ghanaian banking industry.

Design/methodology/approach

The study adopts the ordinary least squares (OLS), fixed effect (FE) panel regression and the quantile regression (QR) approaches to control for heterogeneity and provide increased room for policy relevance. The two-stage least squares instrumental variables (2SLS-IV) regression is used to ensure the robustness of the findings against the problem of possible reverse causality.

Findings

The results indicate a positive relationship between banks' welfare performance and cost efficiency, which suggests that greater cost efficiency hedges welfare losses. In other words, welfare gains and cost-efficient banks are not mutually exclusive. Also, the results show evidence that the sensitivity of welfare gain to cost efficiency depends on the knowledge of local market dynamics. Further, the findings from the QR estimation suggest that, but for welfare loss at low (Q.25) to the median (Q.50) quantiles, cost efficiency is a necessary and sufficient condition to hedge the welfare losses.

Practical implications

The results demonstrate that financial consumer protection cannot be achieved without cost efficiency in the presence of both foreign banks and high market knowledge. Therefore, our paper suggests an integrated cost efficiency policy approach that has the complementary effect of a robust information sharing mechanism and incentives to hedge against welfare losses in the banking sector of emerging economies. Moreover, if welfare gain is synonymous with cost-efficient banks, then the presence of a quiet life is typical of financial consumer protection.

Originality/value

This study provides insight into the importance of cost efficiency to the public policy of financial consumer protection in an era of foreign banks' dominance. From the review of prior literature, this paper is the first to apply the QR estimation technique to examine the effect of cost efficiency throughout the conditional distribution of bank welfare performance rather than just the conditional mean effect of cost efficiency.

Details

International Journal of Managerial Finance, vol. 16 no. 5
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 13 February 2009

Ana Lozano‐Vivas

The paper attempts to analyze vertical product differentiation as a strategy pursued by European banks seeking greater market power and higher reputation for quality, and…

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1886

Abstract

Purpose

The paper attempts to analyze vertical product differentiation as a strategy pursued by European banks seeking greater market power and higher reputation for quality, and to examine whether this entails losses in banking efficiency.

Design/methodology/approach

First, the empirical analysis seeks to demonstrate whether borrowers at banks in Europe are willing to pay a premium to operate with banks that attempt to increase their reputation for quality in the market, i.e. whether banks use quality to vertically differentiate and so soften competition. To test such hypothesis requires us to define an empirical model with variables that describe certain characteristics of banking quality as explanatory variables of the loan interest to the market interest rate margin. This model is estimated by two stage least squares. Second, the paper seeks to test whether the market power derived from vertical product differentiation (quality reputation) prevents banks from operating efficiently. To test this hypothesis first we estimated cost efficiency taking into account bank risk preferences and then we define an empirical model that relates the results on efficiency with the margin of interest loan rate over the market interest rate.

Findings

The results show that less competition, deriving from a bank's ability to differentiate its services from those of its rivals through quality, is positive because it helps to provide a more stable banking system. Moreover, the banking market power generated by investing in quality does not prevent banks from operating efficiently from a production point of view.

Research limitations/implications

The findings are consistent with the view that European banks soften competition by being more stable, and this does not prevent cost efficiency. So it seems that the regulatory authorities should improve their solvency measures since borrowers’ preferences are to maintain relationships with non‐fragile banks, and on the other hand banks’ risk preferences seem to be to look for sound borrowers.

Practical implications

Frontier cost efficiency scores that account for bank's risk preference are able to be related with customer preferences based on the model of the industrial organization (10) based on vertical product differentiation in banking.

Originality/value

This is the first paper that relates vertical product differentiation with the results obtained from the literature on x‐efficiency. It is also the first paper that studies the impact of banking market power jointly with cost efficiency in social efficiency when market power comes as result of investing in reputation for banking quality.

Details

Managerial Finance, vol. 35 no. 3
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 3 October 2016

Rossazana Ab-Rahim and Sheen Nie Chiang

The main purpose of this paper is to examine the relationship between the market structure and financial performance of Malaysian commercial banks over the period of 2000…

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2626

Abstract

Purpose

The main purpose of this paper is to examine the relationship between the market structure and financial performance of Malaysian commercial banks over the period of 2000 to 2011 by testing the structure-conduct-performance (SCP) and efficient-structure (ESH) hypotheses.

Design/methodology/approach

Data envelopment analysis (DEA) is employed to measure the efficiency of banks, while concentration ratio is used to assess the market structure of Malaysian banks. Next, utilizing the least squares method, both variables – market structure and efficiency of banks – among other explanatory variables (market share, operating expenses, loans ratio and size of banks) are regressed upon the dependent variable, namely financial performance of banks represented by return on asset (ROA), return on equity (ROE) and net interest margin (NIMTA).

Findings

The concentration of Malaysian banking industry is at a declining trend; structurally speaking, Malaysian banks are more competitive due to less market concentration. In terms of efficiency, the DEA results reveal that Malaysian banks are operating below their capacity at 40 per cent of efficiency. Thus, Malaysian banks could reduce their utilization of inputs by 60 per cent to operate on the efficient frontier. Next, the results offer support to ESH, which implies that market concentration and banking efficiency determines the profitability performance of Malaysian commercial banks.

Originality/value

Past studies on Malaysian banking sector had tended to focus either on measuring the performance or assessing the market structure of banks. Thus, this study attempts to fill the gap in the literature by testing the nexus between the market structure and the performance of banks.

Details

Journal of Financial Reporting and Accounting, vol. 14 no. 2
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 1 March 2011

Fadzlan Sufian

The purpose of this paper is to critically examine the sources of inefficiency in the Korean banking sector. The present study focuses on three different approaches…

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2594

Abstract

Purpose

The purpose of this paper is to critically examine the sources of inefficiency in the Korean banking sector. The present study focuses on three different approaches: intermediation approach, value‐added approach, and operating approach, to differentiate how efficiency scores vary with changes in inputs and outputs.

Design/methodology/approach

The paper utilizes the non‐parametric data envelopment analysis methodology to measure the efficiency of banks operating in the Korean banking sector. The method allows for the decomposition of technical efficiency (TE) into its mutually exhaustive components of pure technical and scale efficiencies.

Findings

The empirical findings suggest that estimates of TE are consistently higher under an operating approach vis‐à‐vis the intermediation and value‐added approaches. On the other hand, banks are characterized by a relatively low level of TE under the intermediation approach.

Research limitations/implications

Further analysis on the performance of the Korean banking sector performance will examine the efficiency changes over time by employing the parametric stochastic frontier analysis method. Investigations into productivity changes over time, as a result of a technical change or technological progress or regression by employing the Malmquist productivity index could yet be another extension to the paper.

Practical implications

The findings from this study are essential not only for the managers of the banks, but for numerous stakeholders such as the central banks, bankers associations, governments, and other financial authorities. Knowledge of these factors would also be helpful to the regulatory authorities and bank managers who formulate going forward policies for improved efficiency of the Korean banking sector.

Originality/value

Unlike the previous studies on the efficiency of the Korean banking sector, the paper focuses on three different approaches: intermediation approach, value‐added approach, and operating approach to differentiate how efficiency scores vary with changes in inputs and outputs.

Details

Benchmarking: An International Journal, vol. 18 no. 1
Type: Research Article
ISSN: 1463-5771

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Article
Publication date: 5 December 2016

Salma Louati, Awatef Louhichi and Younes Boujelbene

Based on a matched sample of 34 Islamic banks and 89 conventional ones, the purpose of this paper is to analyze and compare the risk-capital-efficiency interconnection.

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1290

Abstract

Purpose

Based on a matched sample of 34 Islamic banks and 89 conventional ones, the purpose of this paper is to analyze and compare the risk-capital-efficiency interconnection.

Design/methodology/approach

Based on the triple square model (3SLS), two major risk measures have been accounted for, namely, the ratio of non-performing loans to total loans (credit risk) and the z-score indicator (risk insolvency). In addition, certain bank-specific factors as well as macroeconomic ones have also been considered in the model.

Findings

The reached results appear to reveal that the best capitalized Western banks turn out to be more engaged in an excessive risk-taking behavior, resulting in increased toxic-loan ratios and, simultaneously, a rather shaken stability. Concerning Islamic banks, cost efficiency has proven to have a negative and significant effect on NPLs. However, the capital, technical efficiency, competitiveness and macroeconomic factors turn out to have a significant and positive effect on Islamic banks’ insolvency risk, thus helping promote these banks’ stability.

Originality/value

In addition to the enrichment of literature regarding dual-banking systems, the authors hope the present work would provide a modest contribution to the regulators belonging to the MENA region and Asia with useful results. In particular, the authors recommend developing some management and monitoring tools whereby the risk-taking behavior of highly capitalized conventional banks could be moderated. As a matter of fact, special attention should be paid to the agency problems prevalent within Islamic financial institutions, particularly the best capitalized ones.

Details

Managerial Finance, vol. 42 no. 12
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 3 April 2017

Abdul-Hamid Abdul-Wahab and Razali Haron

The purpose of this paper is to examine the efficiency of the banking sector in Qatar. The paper utilizes 15 banks comprising Islamic, conventional and foreign banks for…

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1190

Abstract

Purpose

The purpose of this paper is to examine the efficiency of the banking sector in Qatar. The paper utilizes 15 banks comprising Islamic, conventional and foreign banks for the duration of 2007 to 2011.

Design/methodology/approach

Data envelopment analysis (DEA) technique is applied to compute technical efficiency, pure technical efficiency and scale efficiency. Also, Malmquist productivity index (MPI) is used to identify the sources of productive efficiencies of the banks.

Findings

The results suggest that Qatari banks are operating below optimum performance and thus there is still room for improvement. While conventional banks are the most efficient in Qatar in terms of technical and pure technical efficiencies, Islamic banks are most efficient in terms of scale efficiency. Besides, pure technical inefficiency dominated scale inefficiency in the Qatari banking sector. Moreover, as compared to the Islamic banks, conventional and foreign banks recorded a reduction in average technical efficiency during the duration of the 2008/2009 global financial crisis. In terms of productivity progress, all the Qatari banks were experiencing a decline in productivity mainly attributed to less technological innovation in the banking sector of Qatar.

Research limitations/implications

Most of the banks in Qatar do not have published data before 2007 and after 2011.

Practical implications

There is less technological innovation in the banking sector of Qatar. Hence, bank managers in Qatar should focus on educating customers about modern banking technologies and other innovative banking services in Qatar.

Originality/value

This study is a pioneering effort in the application of DEA and MPI to study about the banking sector in Qatar.

Details

International Journal of Bank Marketing, vol. 35 no. 2
Type: Research Article
ISSN: 0265-2323

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Article
Publication date: 1 January 2005

Guan H. Lim and Dipinder S. Randhawa

Hong Kong and Singapore are economically similar and rival international financial centers. Banks in both Hong Kong and Singapore operate in very similar environments…

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2369

Abstract

Hong Kong and Singapore are economically similar and rival international financial centers. Banks in both Hong Kong and Singapore operate in very similar environments: internationally oriented with protected domestic banking market and firm regulators. With liberalization under the Financial Services Accord of the World Trade Organization (WTO), comes more competition and the growing importance for banks to ensure that they are X‐efficient so as to compete successfully or risk being marginalized. This paper uses data envelopment analysis (DEA) to assess X‐efficiency of banks in Hong Kong and Singapore via a two‐stage (combining both the intermediation and production stages) banking model. Changes in X‐efficiency over time are computed to determine if policy initiatives have facilitated improvements in efficiency. Our results on X‐efficiency of banks demarcated by size and ownership provide valuable insights into the issues of scale economies and the impact of family ownership on X‐efficiency.

Details

Managerial Finance, vol. 31 no. 1
Type: Research Article
ISSN: 0307-4358

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