EFFICIENCY MEASUREMENT OF ISLAMIC AND CONVENTIONAL BANKS IN SAUDI ARABIA: AN EMPIRICAL AND COMPARATIVE ANALYSIS

Abstract

Saudi Arabia, beside Malaysia and many other Muslim countries, is
one of those countries where Islamic and conventional banking
operate in parallel. Over the last decade, the country’s banking
industry is growing at rapid pace that accounts for the largest share
in GCC. The present study measures and compares the performance
of Saudi conventional and Islamic banking industry and identifies the
areas where the strategic measures are required to improve the
banking performance. It applies non-parametric Data Envelopment
Analysis (DEA) for the data from 2008-2016 of Saudi banking
industry and provides comprehensive empirical results at individual
bank vis-a-vis industry levels. The empirical results demonstrate a
mix trend among the banks in achieving technical, pure technical and
scale efficiency. It is observed that with the common pledge to
expanding market share and performance, both conventional and
Islamic banks have been successful in improving their levels of
efficiency. At individual bank level, Al-Rajhi is the only bank that has
achieved the highest score in terms of technical, pure technical and
scale efficiency, while in the conventional banking group, both Saudi
Hollandi and National Commercial banks are found on the top
position. Despite the growth of incomes and deposits of entire
banking industry in Saudi Arabia, this study particularly
recommends for the Islamic banks to redirect their short term and
long-term marketing strategies and to focus on improving their
management skills at the branch level.