Measuring efficiency convergence in Islamic and conventional banks: Cross-country evidence

This paper compares efficiency dynamics (steady state and convergence) between Islamic and conventional banks using parametric (stochastic frontier analysis) and non-parametric (classification trees) methods. Analysis is based on an unbalanced panel of Islamic and conventional banks from 23 countries over the period 1999 to 2014. We specify a β-convergence model with bank type shift (steady state efficiency) and slope dummies (efficiency convergence). Speed of convergence and steady state efficiency of the two types of banks are found to be similar in the initial parametric analysis. A classification trees framework is adopted to identify banking ‘clubs’ with respect to estimated efficiency steady states and convergence rates. This reveals variations between countries in terms of the convergence and steady states of the two types of banks: in some countries the two banking sectors have distinct models, while in others they do not.