Islamic bank vs conventional bank: intermediation, fee based service activity and efficiency

Abstract

Purpose

The aim of this research is to compare the differences of intermediation, fee-based service activity and efficiency of conventional banks vs Islamic banks in Indonesia for the 2011-2013 period. Moreover, this study also includes some control variables to find their effect on the dependent variables.

Design/methodology/approach

This research uses two methods, namely, stochastic frontier approach and panel data regression.

Findings

The result indicates that Islamic banks have a higher intermediation ratio, have higher proportion on fee income-to-total operating income and are less efficient. The control variable that has a positively significant effect on intermediation ratio is size; meanwhile, inefficiency and non–loan-earning asset are negatively affecting the intermediation ratio. The control variable that show a positively significant effect on the proportion of fee income-to-total operating income is size; meanwhile, the credit risk variable has no significant effect on the proportion of fee income-to-total operating income. Size and credit risk are the control variables that have a negative relation to efficiency.

Originality/value

This study has significantly contributed to Indonesian Islamic banking based on which the Islamic banking manager should recognize that the intermediation level, fee-based service activity and efficiency are crucially important in establishing competition and maintaining sustainable Islamic banking.

Citation

Hardianto, D.S. and Wulandari, P. (2016), "Islamic bank vs conventional bank: intermediation, fee based service activity and efficiency", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 9 No. 2, pp. 296-311. https://doi.org/10.1108/IMEFM-01-2015-0003