Technical efficiency of Islamic and conventional banks with undesirable output: Evidence from a stochastic meta-frontier directional distance function

We examine technical efficiency of Islamic and conventional banks. We contribute to the literature by applying a stochastic meta-frontier directional distance function model with undesirable output, which helps to overcome misestimating technical efficiency. For a sample of banks from 28 countries, we find that a typical Islamic bank is less technically efficient compared to its conventional counterpart. This is due to Islamic banks using less advanced technology compared to conventional banks rather than group-specific technical inefficiency. The findings are robust across six geographical regions of the world. •Examine the technical efficiency of Islamic and conventional banks using a SMF-DDF approach.•Investigate the difference in technical efficiency estimation with and without undesirable output.•Examine the difference in technical efficiency estimation with and without meta-frontier.•Evaluate the difference in technical efficiency of Islamic and conventional banks across six geographical regions.