Relationship Between Capital, Risk and Efficiency: A Comparative Study Between Islamic and Conventional Banks in Bangladesh

Does inefficient bank assume more risk? Is there any major difference between Islamic and conventional banks in terms of efficiency and risk taking propensity? The paper aims to answer these questions in the context of Bangladesh. Although few studies are available in the existing literature that compare the performance between Islamic and conventional banks, almost no such study that examine the relationship between capital, risk and efficiency of banks in Bangladesh exists. The paper aims to fill this gap. In so doing, the study collects various bank level data from the audited financial statements of Islamic and conventional banks during 2002 to 2011. Data are then analyzed using Stochastic Frontier Analysis (SFA) for efficiency estimation and Seemingly Unrelated Regression (SUR) approach for assessing the relationship between capital, risk, and efficiency. Results show that conventional banks are more efficient in managing cost than Islamic banks. Moreover, the SUR results show tha