Comparing the Change in Efficiency of the Western and Islamic Banking Systems

The purpose of this quantitative nonexperimental study, grounded in conventional economic efficiency theory, was to compare the change in efficiency of different banks, specifically Islamic and Western, that occurred during the 2007 to 2009 economic downturn, using 2006 as baseline. Relative assets size and bank classification were used to compare the change in banks' efficiency. The research questions addressed whether efficiency changes during the financial crisis of 2007-2009 were different between Western and Islamic banks. Data for small and large Western commercial banks were collected from the Federal Deposit Insurance Corporation (FDIC) website; for Islamic banks, data were collected from the Islamic Banks and Financial Institutions Information (IBIS) website. Data envelopment analysis (DEA) was used to calculate the efficiency of these banks, and independent samples t test was used to test the hypotheses. The results indicated that the impact of the financial crisis was different depending upon the bank type. The financial crisis had the greatest impact on the efficiency of small commercial Western banks compared to Islamic banks and large Western banks