Risk Sharing Vs Risk Bearing and Shifting: Evidence from Conventional and Islamic Banks of MENA Region Using Metafrontier Directional Distance Functions

A large empirical literature has been developed, in the two last decades, to compare performance of Islamic and conventional banks. This paper contributes to this literature using a new methodology allowing a better comparative performance evaluation between Islamic banking and conventional banking in MENA region over the period 2000-2012 and applies a new method based on the Metafrontier Directional Distance function. By adopting this technique, it was possible to consider a multioutput production process with Non-Performing Loans as undesirable output and to assume that bank groups are operating under different technologies. The objective is to assess empirically the effect of Risk-Sharing claimed theoretically by Islamic Finance literature on banking efficiency. It was found that conventional banks in the MENA region seem to be more efficient than Islamic banks even if Non Performing Loans are introduced as a penalizing undesirable output. It was found that there is no significant difference between the two groups of banks in terms of their gap between their own technology and the leading technology among the whole region.