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Abstract

Islamic banking activities are limited within the scope of shari’ah which is within the scope of socially responsible and ethical banking activities, different from that based on interest-based banking. This paper attempts to measure the input data required by shari’ah-compliant-banking in comparison with conventional banking to estimate their relative efficiencies and economies of and returns to scale. Cost and output distance functions are estimated a sample of banks in 10 countries which operate both types of banking. The results show that shari’ah-compliant banking has higher input requirements relative to interest-based banking, but exhibit superior average efficiency only in Malaysia but inferior average efficiency in cross-country analysis. There is little evidence of differences in economies/returns to scale between shari’ah and conventional banks.

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