Abstract

The purpose of this paper is to analyze comparative efficiency of banking system in Pakistan comprising of Islamic
banks (IB), conventional banks with Islamic banking division (IBD) and conventional banks (CB). For this
purpose we use two methods: First, ratio analysis to analyze cost, revenue and profit efficiency; Second, data
envelopment analysis (DEA), for comparative analysis of banks’ technical, pure technical and scale efficiencies.
We use efficiency scores of DEA to analyze the impact of size on the efficiency. Finally, we compare and contrast
the efficiency estimates with the traditional measures of banks efficiency. We find that Islamic bank is more cost
efficient and less revenue efficient. Considering their growth rate which is rudiment to scale efficiency (SE) we
argue that Islamic banks should be encouraged to reach the efficient frontier in the banking industry by reducing
their wastes. We further observe that hybrid banking may not be feasible form for banking industry in Pakistan. In
view of the observed inverse relationship of size with scale efficiency we recommend reconsideration of the
regulators’ policy of increasing the capital base of the banks thus forcing them to increase their size.

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