Banking Efficiency in Bahrain: Islamic vs Conventional Banks

In this paper we examine the performance of Bahrain as a leading financial center in the Gulf region. We estimate how close Bahrain banks are from their potential profits that a best-practice bank can earn and compare the profit efficiency of Islamic vs conventional banks. We employ the Fourier-flexible functional model to estimate the profit efficiency index._x000D_ _x000D_ Our findings show that the profit efficiency of Bahrain banks is relatively stable and in line with the OECD banks. In general, there is no much difference in profit efficiency between Islamic and conventional investment banks, despite the fact that many Islamic banks are small and act as venture capital. In contrast, the only Islamic commercial bank in the sample outperforms the conventional counterparts. This was due to lack of competition whereby the Islamic commercial bank was able to reduce inputs costs and charge higher mark-up._x000D_ _x000D_ In order to sustain Bahrain’s position as a leading Islamic financial center and me