Estimation of Cost Efficiency to Evaluate Islamic Bank's Ability to Compete with Conventional Bank

After fifty years from establishment of first islamic bank, nowadays islamic banking growth and its successful competition with conventional banks is clearly observed. In our paper, we measure the cost efficiency of islamic and conventional banks. Our sample contains 7 countries: Jordan, United Arab Emirates, Indonesia, Bahrain, Saudi Arabia, Turkey and Qatar, because they have both types of banking and data for both types of banks in selective country is accessible. By using Stochastic Frontier Approach over the period of 1999-2006, this study shows that, on average, the efficiency of an islamic bank (0.902) is higher than that of conventional bank (0.849). This fact can be the reason of growing islamic banking sector and the cause of other countries’ incentive to establish islamic banks.The comparisons between countries show that in United Arab Emirates, Indonesia, Bahrain and Saudi Arabia, the efficiency of islamic banks is higher than that of conventional ones but in Jordan, Turkey and Qatar, conventional banks are more efficient.