Efficiency of conventional and Islamic banks: parametric and nonparametric approaches

Abstract

This study presents measures on efficiency of conventional and Islamic banks in Indonesia using parametric approach stochastic frontier approach as well as distribution free approaches. The results show that efficiency of conventional and Islamic banks has been improving and is converging. The DF A results show that conventional banks are only slightly more efficient than Islamic banks; conventional public bank is the most efficient, while Islamic regional bank is the least efficient. But results from non-parametric DEA show that Islamic banks are slightly more efficient than conventional banks. Deposit is improving in conventional banks, while it is worsening in Islamic banks. Financing has been a problem in conventional banks,while it is always high in Islamic banks. Therefore, Islamic banks should redirect their marketing and communication strategies to focus more on targeting floating customers, while the shortage in human resource should be given serious attention with short term and long term strategies.