A Study on the Efficiency and Stability of Different Categories of Banks in Malaysia


  • Zunaidah Sulong Universiti Sultan Zainal Abidin
  • Mohamed Hisham Yahya Universiti Putra Malaysia
  • Zanariah Salleh Principal Asset Management Berhad




Bank efficiency, Bank stability, Data envelopment analysis, Panel data


This paper aims to gain new insights on efficiency and stability in a dual banking system. It evaluates the efficiency level and stability performance of two types of bank operating in Malaysia, i.e. conventional and Islamic, between 2012 to 2017. The data was extracted from Central Bank of Malaysia (BNM) and annual reports of individual banks. Z-score and data envelopment analysis (DEA) were employed to evaluate bank efficiency and stability, respectively. T-test and panel data regression were used in determining the disparity in stability performance. Interestingly, the results reveal different impacts of efficiency and stability on both types of banking system. It is found that conventional banks are less likely to experience bankruptcy and have better financial health. The Islamic banks, however, are found to be inefficient and more unstable compared to conventional banks. The results suggest that Islamic banks need to capitalize the effect of leverage, cost and production efficiency and economies of scale.


Ada, A. & Dalkilic, N. (2014). Efficiency Analysis in Islamic Banks: A Study for Malaysia and Turkey. Journal of BRSA Banking & Financial Markets, 8(1), 9-33.

Ahmad, S. & Rahim Abdul Rahman, A. (2012). The Efficiency of Islamic and Conventional Commercial Banks in Malaysia. International Journal of Islamic and Middle Eastern Finance and Management, 5(3), 241-263. DOI: 10.1108/17538391211255223.

Alam, N. (2013). Impact of Banking Regulation on Risk and Efficiency in Islamic Banking. Journal of Financial Reporting and Accounting, 11(1), 29-50. DOI: 10.1108/JFRA-03-2013-0010.

Apriadi, I., Sembel, R., Santosa, P. W. & Firdaus, M. (2016). Banking Fragility in Indonesia: A Panel Vector Auto-Rehression Approach. International Journal of Applied Business and Economics Research, 14(14), 10493-10524.

Beck, T., Demirgç-Kunt, A. & Merrouche, O. (2013). Islamic vs. Conventional Banking: Business Model, Efficiency and Stability. Journal of Banking & Finance, 37, 433-447. DOI: 10.1016/j.jbankfin.2012.09.016.

Berger, A. N. & DeYoung, R. (1997). Problem Loans and Cost Efficiency in Commercial Banks. Journal of Banking & Finance, 21(6), 849-870. DOI: 10.1016/S0378-4266(97)00003-4.

Bourkhis, K. & Nabi, M. S. (2013). Islamic and Conventional Banks' Soundness during the 2007–2008 Financial Crisis. Review of Financial Economics, 22(2), 68-77. DOI: 10.1016/j.rfe.2013.01.001.

Brooks, C. (2008). Introductory Econometrics for Finance. Cambridge University Press.

Cernohorsky, J. & Cernohorska, L. (2014). The Criticism of BASEL II Based on Credit Risk Modelling. Conference Proceedings International Multidisciplinary Scientific Conference on Social Sciences and Arts (SGEM2014). Book 2, Vol. 2, 721-728. DOI: 10.5593/sgemsocial2014/ B22/S6.091.

Clough, S. B. (1953). The American Way: The Economic Basis of our Civilization. Journal of Economic History, 13(3), 348-351.

Crockett, A. D. (1997). Why is Financial Stability a Goal of Public Policy? Economic Review, 82(Q IV), 5-22.

El-Gamal, M. A. (2006). Islamic Finance: Law, Economics, and Practice. Cambridge University Press.

El Tiby, A. M. (2011). Islamic Banking: How to Manage Risk and Improve Profitability. John Wiley & Sons, Inc.

Gishkori, M. A. & Ullah, N. (2013). Technical Efficiency of Islamic and Commercial Banks: Evidence from Pakistan using DEA Model (2007-2011). IOSR Journal of Business and Management, 7(4), 68-76. DOI: 10.9790/487X-0746876.

Gorton, G. & Winton, A. (1998). Banking in Transition Economies: Does Efficiency Require Instability? Journal of Money, Credit and Banking, 30(3), 621-650. DOI: 10.2307/2601261.

Hamdi, B., Abdouli, M., Ferhi, A., Aloui, M. & Hammami, S. (2019). The Stability of Islamic and Conventional Banks in the MENA Region Countries during the 2007–2012 Financial Crisis. Journal of the Knowledge Economy, 10, 365-379. DOI: 10.1007/s13132-017-0456-2.

Ismail, F., Majid, S. A. & Rahim, R. (2013). Efficiency of Islamic and Conventional Banks in Malaysia. Journal of Financial Reporting and Accounting, 11(1), 92-107. DOI: 10.1108/JFRA-03-2013-0011.

Kamarudin, F., Nordin, B. A. A., Muhammad, J. & Hamid, M. A. A. (2014). Cost, Revenue and Profit Efficiency of Islamic and Conventional Banking Sector: Empirical Evidence from Gulf Cooperative Council Countries. Global Business Review, 15(1), 1-24. DOI: 10.1177/0972150913515579.

Kassim, S. H., Abd. Majid, M. S. & Mohd Yusof, R. (2009). Impact of Monetary Policy Shocks on the Conventional and Islamic Banks in Dual Banking System: Evidence from Malaysia. Journal of Economic Cooperation and Development, 30(1), 41-58.

Kayed, R. N. & Hassan, M. K. (2011). The Global Financial Crisis and Islamic Finance. Thunderbird International Business Review, 53(5), 551-564. DOI: 10.1002/tie.20434.

Korbi, F. & Bougatef, K. (2017). Regulatory Capital and Stability of Islamic and Conventional Banks. International Journal of Islamic and Middle Eastern Finance and Management, 10(3), 312-330. DOI: 10.1108/IMEFM-06-2016-0079.

Laldin, M. & Furqani, H. (2018). Islamic Financial Services Act (IFSA) 2013 and the Shariah-Compliance Requirement of the Islamic Finance Industry in Malaysia. ISRA International Journal of Islamic Finance, 10(1), 94-101. DOI: 10.1108/IJIF-12-2017-0052.

Martinez-Miera, D. & Repullo, R. (2010). Does Competition Reduce the Risk of Bank Failure? The Review of Financial Studies, 23(10), 3638-3664. DOI: 10.1093/rfs/hhq057.

Miah, M. D. & Uddin, H. (2017). Efficiency and Stability: A Comparative Study between Islamic and Conventional Banks in GCC Countries. Future Business Journal, 3(2), 172-185. DOI: 10.1016/j.fbj.2017.11.001.

Mohd Zamil, N. A. (2007). Efficiency of Islamic and Conventional Commercial Banks in Malaysia (2000-2004): A Data Envelopment Analysis (DEA) Study (Unpublished Master Thesis). International Islamic University Malaysia, Kuala Lumpur.

Prima Sakti, M. R. & Mohamad, A. (2018). Efficiency, Stability and Asset Quality of Islamic vis-à-vis Conventional Banks: Evidence from Indonesia. Journal of Islamic Accounting and Business Research, 9(3), 378-400. DOI: 10.1108/JIABR-07-2015-0031.

Qureshi, M. A. & Shaikh, M. (2012). Efficiency of Islamic and Conventional Banks in Pakistan: A Non-Parametric Approach. International Journal of Business and Management, 7(7), 40-50. DOI: 10.5539/ijbm.v7n7p40.

Rahim, S. R. M. & Zakaria, R. H. (2013). Comparison on Stability between Islamic and Conventional Banks in Malaysia. Journal of Islamic Economics, Banking and Finance, 9(3), 131-149. DOI: 10.12816/0001618.

Rashid, A., Yousaf, S. & Khaleequzzaman, M. (2017). Does Islamic Banking Really Strengthen Financial Stability? Empirical Evidence from Pakistan. International Journal of Islamic and Middle Eastern Finance and Management, 10(2), 130-148. DOI: 10.1108/IMEFM-11-2015-0137.

Rosman, R., Wahab, N. A. & Zainol, Z. (2014). Efficiency of Islamic Banks during the Financial Crisis: An Analysis of Middle Eastern and Asian Countries. Pacific-Basin Finance Journal, 28, 76-90. DOI: 10.1016/j.pacfin.2013.11.001.

Sakarya, B. (2016). Financial Stability of Islamic (Participation) Banks in Turkey. MPRA Working Paper. Retrieved from: https://mpra.ub.uni-muenchen.de/70634/.

Samuelson, P. A. (1958). An Exact Consumption-Loan Model of Interest with or Without the Social Contrivance of Money. Journal of Political Economy, 66(6), 467-482. DOI: 10.1086/258100.

Santos, J. A. C. (2000). Bank Capital Regulation in Contemporary Banking Theory: A Review of the Literature. BIS Working Papers 90, Bank for International Settlements. Retrieved from https://www.bis.org/publ/work90.pdf.

Sathye, M. (2005). The Impact of Internet Banking on Performance and Risk Profile: Evidence from Australian Credit Unions. Journal of Banking Regulation, 6(2), 163-174. DOI: 10.1057/palgrave.jbr.2340189.

Schaeck, K. & Cihák, M. (2014). Competition, Efficiency, and Stability in Banking. Financial Management, 43(1), 215-241. DOI: 10.1111/fima.12010.

Shinasi, G. J. (2004). Defining Financial Stability. Working Paper No. 04/18. Retrieved from: https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Defining-Financial-Stability-17740.

Schwartz, A. J. (1995). Why Financial Stability Depends on Price Stability? Economic Affairs, 15(4), 21-25. DOI: 10.1111/j.1468-0270.1995.tb00493.x.

Serdarevic, G. & Teply, P. (2011). The Efficiency of EU Merger Control during the Period 1990-2008. Czech Journal of Economics and Finance (Finance a Uver), 61(3), 252-276.

Shahid, H., Rehman, R. U., Niazi, G. S. K. & Raoof, A. (2010). Efficiencies Comparison of Islamic and Conventional Banks of Pakistan. International Research Journal of Finance and Economics, 49, 1450-2887.

Trad, N., Rachdi, H., Hakimi, A. & Guesmi, K. (2017). Banking Stability in the MENA Region during the Global Financial Crisis and the European Sovereign Debt Debacle. The Journal of Risk Finance, 18(4), 381-397. DOI: 10.1108/JRF-10-2016-0134.

Wahid, M. A. (2016). Comparing the Efficiency of Islamic and Conventional Banks Based on the Evidence from Malaysia. Journal of Muamalat and Islamic Finance Research, 13(1), 35-66.

Wahid, M. A. & Dar, H. (2016). Stability of Islamic versus Conventional Banks: A Malaysian Case. Jurnal Ekonomi Malaysia, 50(1), 111-132. DOI: 10.17576/JEM-2016-5001-09.

Wheelock, D. & Wilson, P. (1995). Explaining Bank Failures: Deposit Insurance, Regulation, and Efficiency. The Review of Economics and Statistics, 77(4), 689-700. DOI: 10.2307/2109816.

Yahya, M. H., Muhammad, J, Abdullah, A. & Nassir, A. M. (2013). Chinks in the Capitalism System – The Pertinence of Islamic Finance. Journal of International Business and Cultural Studies, 7, 193-207.

Yahya, M. H., Muhammad, J. & Razak, A. H. (2012). A Comparative Study on the Level of Efficiency between Islamic and Conventional Banking Systems in Malaysia. International Journal of Islamic and Middle Eastern Finance and Management, 5(1), 48-62. DOI: 10.1108/17538391211216820.

Yudistira, D. (2004). Efficiency in Islamic Banking: An Empirical Analysis of Eighteen Banks. Islamic Economic Studies, 12(1), 1-19.

Zhu, X. (2016). Data Envelopment Analysis: A Handbook of Empirical Studies and Applications. Springer: New York. DOI: 10.1007/978-1-4899-7684-0.



How to Cite

Sulong, Z., Yahya, M. H., & Salleh, Z. (2020). A Study on the Efficiency and Stability of Different Categories of Banks in Malaysia. The Journal of Muamalat and Islamic Finance Research, 17(1), 1-13. https://doi.org/10.33102/jmifr.v17i1.256



Regular Issues