The input requirements of conventional and shariah-compliant banking

Abstract

Islamic banking activities are limited within the scope of shari 'ah which is within the scope of socially responsible and ethical banking activities. Hence, the Islamic banking mechanism is different from that based on interest-based banking. This paper attempts to measure the level of input required by shari 'ah-compliant-banking relative to the conventional banking, their relative efficiencies and economies/returns of scale. Cost and output distance functions are estimated a sample of banks in 10 countries which operate both types of banking. The results show that shari 'ah-compliant banking has higher input requirements relative to interest-based banking, but exhibit superior average efficiency only in Malaysia but inferior average efficiency in cross-country analysis. There is little evidence of differences in economies/returns to scale between shariah and conventional banks.