1. Introduction

The economic conditions of GCC countries are very similar, particularly in terms of oil exporting, which reflects a high earning level and consequent contribution to the Gross Domestic Product (GDP) in these countries. Four of these countries (Saudi Arabia, UAE, Qatar, and Kuwait) play crucial roles in the Organization of Petroleum Exporting Countries (OPEC) as OPEC members. (Bahrain, whose finances rely heavily on sectors other than oil and whose oil exports are not sufficient to consider it a member of OPEC, is excluded here.) (EIU Country Report, March 2012.) Vicissitudes in oil price, whether to the up- or downside, have an influence on government budget and financial sectors. Nevertheless, the authorities in GCC countries such as Saudi Arabia and UAE have made substantial efforts to support local and foreign investments and to enhance the GDP growth rate of non-oil sectors, but the oil sector is undoubtedly essential to those economies (EIU Country Report, May 2007; EIU Country Report, May 2005).

The banking sector, as an intermediary among other sectors, has a significant impact on the financial systems and economies of GCC countries, and GCC countries’ financial sectors have responded positively to global developments and trends in the Islamic finance industry. Large economies within the Arab world, the GCC economies offer great potential for the development of the industry. Over the years, a number of full-fledged Islamic banks have been operating in these countries, but a substantial number of conventional banks have also opened Islamic windows to offer different levels of Islamic financial services to the Islamic population.

Hence, this paper aims to investigate empirically the efficiency and technology gap ratio (TGR) of commercial banks within the GCC countries. To illustrate this further, as all banks in these countries operate under different technologies and different bank groups, the research is a comparative research in two levels: between each country in an individual frontier (except Oman); and also between three bank groups which are Islamic banks, conventional banks providing Islamic windows, and conventional banks, by utilizing DEA, under Variable Return to Scale (VRS) assumption, with metafrontier approach. In addition, this study also measures the total factor productivity growth through MPI to investigate the catch-up term, which measures how country or bank group frontiers do perform in terms of production points and productivity growth towards the meta-frontier from period t to period t+1. The second step of this study attempts to investigate the high potential influence of banks’ characteristics, financial structures, and rule-of-law variables on TE scores that are obtained from the DEA meta-frontier method by applying a two-stage approach in different models including panel random effect, Tobit and bootstrap, of panel data set.