Should a Conventional Bank Open an Islamic Branch? The Financial Efficiency Analysis

Abstract

In recent years, a notable trend of conventional banks establishing Islamic branches has been observed. The primary driver behind this rise in Islamic branch openings appears to be the public's growing interest in halal business practices and transactions. Additionally, the State Bank's shift towards promoting Islamic finance has further incentivized conventional banks to expand their Islamic banking offerings. However, the senior management of these dual banking institutions is primarily concerned with maximizing their financial benefits and profits. As such, they are focused on determining which type of branch, Islamic or conventional, is more conducive to the profitability and efficiency of their organization. The present study aims to investigate the factors that make Islamic branches more beneficial compared to their conventional counterparts. To this end, the researchers will analyze secondary data from both banking sectors and apply regression analysis to examine the differences in the drivers of profitability and efficiency between Islamic and conventional branches.