Efficiency and competition of Islamic banking in Malaysia

Purpose In an attempt to enrich the literature of the efficiency of Islamic banks, this study aims to empirically investigate the efficiency of the fully fledged Islamic banks as well as Islamic windows in Malaysia. Design/methodology/approach This study measures the technical and cost‐efficiencies of these banks using the non‐parametric frontier method, data envelopment analysis (DEA). Findings The findings show that, on average, the efficiency of the overall Islamic banking industry has increased during the period of study. The study also revealed that, although the fully fledged Islamic banks were more efficient than the Islamic windows, they were still less efficient than the conventional banks. Finally, Islamic windows of the foreign banks were found to be more efficient than Islamic windows of the domestic banks. Originality/value The findings of this study will provide some empirical insights as to how these two modes of Islamic banks had fared in the competitive environment from 1997 to 2003.