Moderating effects of economic uncertainty on country governance, globalisation, and bank efficiency in Islamic and conventional banks

Banks are essential to the economy as they facilitate the financial needs of individuals and businesses, create wealth through lending and deposit-taking, and foster economic growth. The complexity of financial markets has made bank efficiency a crucial factor in assessing the efficiency of banking operations. As a result, enhancing bank efficiency has become a prominent area of academic research. Country governance (CG) also acts as a crucial framework, which constitutes banks' operational and regulatory environments that impact their overall performance and strategic choices. In addition, globalisation also makes financial markets more interconnected, leading to opportunities and challenges that have an immediate effect on the effectiveness and operations of banks. Economic policy uncertainty (EPU) also causes government policy to fluctuate, which impacts banks' risk management plans and decision-making procedures, ultimately undermining their performance and stability. This study analyses the impact of CG and globalisation on the efficiency of conventional banks (CBs) and Islamic banks (IBs) as well as the moderating effect of EPU on the above nexus in three main Islamic hubs for the period of 2005-2021. The study includes data from 110 IBs and 353 CBs across 15 countries in the three regions. The empirical analysis consists of two stages. The first stage utilised data envelopment analysis to gauge the efficiency levels of both CBs and IBs. Following that, panel regression analysis through pooled ordinary least square, fixed effect model, and random effect model was conducted. The instrumental variables two-stage least squares method was also employed as a robustness check to address the issue of endogeneity. The study's findings indicate that CG and globalisation were important determinants of bank efficiency. This study also revealed that EPU had a significant moderating effect on the impact of CG and globalisation on banks’ efficiency. The study adds to the corpus of empirical and practical knowledge already in existence. Firstly, this research contributes to expanding the existing literature on the factors influencing bank efficiency in the three main Islamic hubs. Secondly, the study emphasises the moderating role of EPU in the nexus between CG, globalisation, and bank efficiency. By examining the moderating effects, this research further enhances the understanding of the complex interactions between these variables. Finally, the findings suggest that policymakers and bank managers should pay closer attention to governance systems, the evolving global economic environment, and EPU, as these factors can significantly influence bank efficiency and overall operational performance.

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