Efficiency of Conventional versus Islamic Banks: International Evidence using the Stochastic Frontier Approach (SFA) Shamsher Mohamad 1 Taufiq Hassan 2 Mohamed Khaled I. Bader 3 Abstract This paper measures and compares the cost and profit efficiency of 80 banks in 21 of Organisation of Islamic Conference (OIC) countries: comprising of 37 conventional banks and 43 Islamic banks, using the Stochastic Frontier Approach (SFA). In addition, it assesses the efficiency of those banks based on their size, age, and region. The findings suggest that there are no significant differences between the overall efficiency results of conventional versus Islamic banks. However, there is substantial room for improvement in cost minimisation and profit maximisation in both banking systems. Furthermore, the findings show no significance difference in average efficiency scores between big versus small and new versus old banks in both banking streams. This implies that size and age did not affect the performance of banks in both streams. Overall, the results are in favour of the more recent Islamic banking system. JEL Classification: G21, C14 Key words: Conventional Banks, Islamic banks, Efficiency, Data Envelopment Analysis (DEA). 1. Introduction The most well-known approaches to explain banking function process are the production and intermediation approaches. In the production approach, banking activities are described as the production of services to depositors and borrowers. Traditional production factors, land, labour and capital, are used as inputs to produce desired outputs. The production approach views banks as producers of loan and deposit services using capital and labour. However, majority of the recent empirical research of banking efficiency are based on the intermediation approach. The intermediation approach was suggested by Sealey and Lindley (1977), in fact 1 Professor in Finance, Graduate School of Management, University Putra Malaysia. Email: shamsher57@yahoo.com 2 Associate Professor in Finance, Faculty of Economics and Business, University Putra Malaysia. Email: taufiq@econ.upm.edu.my / tauufik@yahoo.com 3 Lecturer at the AL-QUDS University in Jerusalam, E-mail: mk.bader@yahoo.com