| Abstract: |
This paper aims to study the similarities between Islamic and conventional
banks in the Gulf Cooperation Council (GCC) countries by assigning them to
different clusters. We perform such clustering by employing the k-means
algorithm with dynamic time warping barycenter averaging. More specifically,
the series of average efficiency scores are used in this clustering. In this
regard, for each Islamic or conventional bank, we calculated its series of
efficiency scores using the stochastic frontier production functions of
Battese and Coelli (1995). Our empirical study covered 44 Islamic banks and 46
conventional banks in GCC countries during 2006-2015. The results show that
Islamic and conventional banks are included in the same cluster for Qatar,
Bahrain, and Oman. In contrast, Islamic and conventional banks do not share
the same cluster for the Kingdom of Saudi Arabia, Kuwait, and the United Arab
Emirates. This is due to setting the interest or profit rate below the social
discount rate (a measure of an optimal profit rate for Islamic Banks). In this
case, banks are incentivized to take more risks to compensate for
interest/profit losses, which increases efficiency and allocates Islamic and
conventional banks to different clusters. Accordingly, there is no absolute
discrimination due to the initial status between Islamic and conventional
banks. However, the overall banks, either Islamic or conventional, are
discriminated through the distance of the banking applied interest/profit rate
and the social discount rate. |