Comparative analysis of the financial efficiencies of Islamic and conventional banks: The case of Turkey and the world

Since the 1970s, the increase in oil prices led to the accumulation of petrodollars in Gulf countries, which played a significant role in the emergence of Islamic banking. In Turkey, however, these banks began to be established in the 1980s, and in 2005, they were named "participation banking". This thesis aims to analyze the financial performance of Islamic/participation and conventional banks in the global financial system, with a particular focus on Turkey, comparatively between 2017 and 2021. The study evaluates the financial efficiency of 14 Islamic/participation banks and 25 conventional banks during the specified period. Firstly, the financial efficiency of 5 participation and 16 conventional banks operating in Turkey during 2017-2021 is assessed using the Data Envelopment Analysis (DEA) method. Secondly, the financial efficiency of 9 Islamic and 9 conventional banks, which ranked among the top 10 in terms of asset size according to "The Banker" magazine's "Top 1000 Banks in the World" report, is analyzed using DEA for the same period. Subsequently, the banks identified as efficient in both analyses are compared among themselves. The input-oriented Variable Returns to Scale (VRS) model is used to measure technical efficiency (DEA-BCC-I). The findings of the research reveal that, in general, Kuveyt Türk Participation Bank Inc., Vakıf Participation Bank Inc., and Ziraat Participation Bank Inc. were efficient throughout all the years, while only Türkiye Vakıflar Bankası T.A.O., Fibabanka Inc., and Türkiye Garanti Bankası A.Ş. were found efficient among conventional banks during the analyzed period. It is determined that Islamic banks in Turkey are more efficient and productive compared to conventional banks. Secondly, in the analysis of efficient banks in Turkey, the 3 Islamic banks remained efficient throughout the years, whereas most of the global Islamic banks were only efficient in 2019 and 2021. These results indicate that Turkish participation banks are more efficient compared to other banks in the global financial system. Lastly, it is determined that inefficient banks are ineffective due to resource wastage, and they could become more efficient in the sector by adjusting their inputs to the reference banks operating at the production frontier and reducing resource use or utilizing resources more effectively. Keywords: Islamic Banking, Participation Bank, Conventional Bank, Data Envelopment Analysis, Efficiency