What are the drivers of inefficiency in the Gulf Cooperation Council banking industry? A comparison between conventional and Islamic banks

Abstract

This paper analyses the efficiency and productivity of the Gulf Cooperation Council (GCC) banks using an innovative nonparametric methodology that not only considers undesirable outputs but also determines the contribution of individual input and output variables in total inefficiency. We investigate the impact of incorporating non-performing loans (NPLs) on the performance of banks in our sample. We also adopt the innovative Malmquist-Luenburger productivity index to analyse the changes in productivity based on the weighted Russell directional distance model (WRDDM). The results show that the main source of inefficiency is securities followed by NPLs and fixed assets, respectively. In addition, this paper investigates the differences and sources of inefficiency between Islamic and non-Islamic banks. Our results show that during the global financial crisis in 2008–2009 GCC banks experienced productivity decline. We also show that the difference in inefficiency between Islamic and commercial banks has significantly narrowed and that Islamic banks have been able to catch up and lessen the gap with commercial banks over the study period.