Efficiency in Islamic Banking During a Financial Crisis-An Empirical Analysis of Forty-Seven Banks (original) (raw)
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Efficiency in Islamic banking: an empirical analysis of 18 banks
Department of Economics, Loughborough University, 2004
Do Islamic banks perform efficiently? Although the phenomenon of Islamic banking and finance has developed significantly in recent years, only very few studies have tackled this central question. This paper provides new evidence on the performance of 18 Islamic Islamic banks over the period 1997-2000. Unlike previous studies, this paper is based on efficiency measurement in which the non-parametric approach, Data Envelopment Analysis, is utilised to analyse the technical and scale efficiencies of Islamic banking. In specifying input-output variables of Islamic banks, the intermediation approach is selected as it is in line with the principle of Islamic financial system. Overall, the results suggest that Islamic banks suffer slight inefficiencies during the global crisis 1998-9. Efficiency differences across the sample data appear to be mainly determined by country specific factors.
EFFICIENCY IN ISLAMIC BANKING: A NON-PARAMETRIC APPROACH
A b s t r a c t This paper investigates whether the productive efficiency of Islamic banks in the Middle East and South East Asia has improved from 2000 to 2004 by applying the Data Envelopment Analysis, which capable to analyze how well an individual bank uses its inputs to produce its outputs. The next session will discuss the theory and the methodology will be presented on chapter 3, while the result will be discussed in chapter 4. The last chapter will present the result and suggestions for further research.
The world economy is still suffering from the severe global financial crisis that caused the failure of several banks. This has encouraged economists worldwide to consider alternative financial solutions and attention has been focused on Islamic banking and finance as an alternative model. Hence, this study examines the efficiency level of Islamic banks during the financial crisis specifically in Middle Eastern and Asian countries from 2007 to 2010. Moreover, bank-specific and risk factors were examined to understand the determinants of efficiency. The efficiency of Islamic banks is measured using data envelopment analysis by adopting the intermediation approach. The financial information is extracted from BankScope database for a four year period (2007–2010) which includes 79 Islamic banks across a number of countries. The study also critically analyses pure technical efficiency and scale efficiency of the Islamic banks in Middle Eastern and Asian countries and estimates their return to scale. The findings explain that Islamic banks were able to sustain operations through the crisis. However, the study also shows that the majority of these Islamic banks were scale inefficient. Most of the scale inefficient banks were operating at decreasing returns to scale. This study also found that both profitability and capitalisation were the main determinants of Islamic banking efficiency. Hence, the findings of this study have policy implications and make a contribution to policy-making by providing empirical evidence on the performance of the Islamic banks and their efficiency levels.
International Journal of Economics and Financial Issues, 2013
The present paper measured overall technical efficiency of Islamic banks operating in the MENA region during the financial crisis of 2007-2009 to address the question what are the levels of overall, pure technical and scale efficiency of Islamic banks operating in the MENA region and how they evolved during the financial crisis. This paper addresses this question technical, pure technical, and scale efficiency measures are analyzed by employing on-parametric technique, Data Envelopment Analysis (DEA). The study results suggested that Islamic banks in other MENA countries and North Africa on an average are relatively technically inefficient. This might be due to the underdeveloped banking system in those countries. In addition, the decomposition of technical efficiency into pure technical and scale efficiency shows that on average, the Islamic banks in North Africa counties and other MENA counties are having problems in the allocation of resources between their inputs and outputs mix compare to Islamic banks in GCC.
AFRICAN JOURNAL OF BUSINESS MANAGEMENT, 2012
The purpose of this study is to compare the efficiency of Islamic banks and conventional banks under loan base approach and income base approach. Also, it aims to investigate the economies of scales for both banking streams. Further, we investigated the effect of banks specific factors on efficiency, like size of banks, total liabilities of banks, total profit of banks, total markup revenue, total non-markup revenue, total markup expenses and total non-markup expenses. The data for this study was taken from banking statistics of Pakistan for the year 2001 to 2008. For the measurement of efficiency, data envelopment analysis (DEA) was used. For the effect of banks specific factors on efficiency Tobit regression model was used. The finding suggested that, the Islamic banks overall technical efficiency was better than conventional banks under loan base approach. Further, the result showed that Islamic banks had pure technical inefficiency than conventional banks but Islamic banks has high scale efficiency than conventional banks. Under income base approach conventional banks are efficient than Islamic banks. Islamic banks inefficiency was due to pure technical inefficiency. On the other hand only total markup expenses, total liability and ownership has significant impact on overall technical efficiency score under loan base approach. And total liability, total profit and ownership have significant impact on the overall technical efficiency under income base approach. This study is different from other studies in respect that it compares the efficiency of Islamic banks with conventional banks with these variables and under these two different approaches.
Business and Management Research, 2013
The main purpose of this paper is to examine the efficiency levels of Islamic Banks and Conventional Banks in the Middle East. Data Envelope Analysis (DEA) as a non parametric approach used to investigate the efficiency of both types of banks .Also, t-test used to examine whether there are significant differences of efficiency levels between Islamic Banks and Conventional Banks from 2001 till 2009.The results revealed that there is no significant differences in overall cost efficiency and overall technical efficiency between Islamic banks and conventional banks over the period 2001-2009 under both CRS, and VRS Models.
Measuring Efficiency of Islamic and Conventional Banks in MENA Region
International Journal of Sustainable Economies Management, 2016
This study aims to measure the performance and efficiency of Islamic and conventional banks in the MENA region and its determinants. The authors use for this purpose the Data Envelopment Analysis (DEA) method and the analysis of the Stochastic Frontier Analysis (SFA) method for calculating the technical efficiency scores. The results reveal similar trends for both types of performance measurement. The banks category analysis revealed that conventional banks are more efficient than Islamic banks. Despite technological changes experienced by the banking system in the MENA region, the efficiency analysis shows that the technical inefficiency results from the pure technical inefficiency. Finally, the effectiveness of banks in the MENA region is sensitive to variables such as the crisis, deposits, capitalization and including especially variables related to business lines.
Evaluating the Productive Efficiency of Islamic Banking in GCC: A non Parametric Approach
International Research Journal of Finance and Economics
The purpose of this paper is to propose a method to evaluate the productive performance of Islamic banks operating in the GCC region, over the period 2005-2008. Thus, we evaluate the productive performance of Islamic banks with the technique of productive efficiency proposed by Farrell (1957). We use the method of data envelopment analysis (DEA) to decompose the productive efficiency into technical efficiency, allocative efficiency and cost efficiency. The application of this technique on a sample of 23 Islamic banks reveals that the technical inefficiency and allocative inefficiency increased bank costs, on average, by about 14% and 29% respectively. In addition, the results show that internal and external factors seem to contribute significantly to the evolution of efficiency scores of Islamic banks operating in the GCC region.
Journal of Applied Business Research (JABR), 2017
The purpose of this paper is to analyze the efficiency of Islamic banks operating in different countries, over the period 2006-2009.We applied a non-parametric approach, or a Data Envelopment Analysis (DEA), that utilizes both the constant returns to scale (CRS) and the variable returns to scale (VRS) assumptions to offer measures of the technical and scale efficiency. The outcomes reveal a considerable degree of dispersion of technical efficiency between banks within the sample of the year-to-year basis. To inspect the determinants of efficiency, we apply the panel regression analysis. In fact, we used panel regression analysis in order to explain the variation in the dependent variable (calculated efficiencies) by a set of independent variables, such as banks size, asset quality, management capability, liquidity, sensitivity to markets risks, and capitalization.We find that banks with higher liquidity and a good management capability are more likely to operate at higher levels of ...
This paper investigates the performance of Malaysian Islamic banking sector during the period of 2001-2005. Several efficiency estimates of individual banks are evaluated using non-parametric Data Envelopment Analysis (DEA). Two different approaches have been employed to differentiate how efficiency scores vary with changes in inputs and outputs. To examine the impact of risk factor on Islamic bank efficiency, we have incorporated problem loans as a non-discretionary input variable in our analysis. The findings suggest that during the period of study, scale inefficiency dominates pure technical inefficiency in the Malaysian Islamic banking sector. We found that foreign banks have exhibited higher technical efficiency compared to their domestic peers. The inclusion of risk factors has mixed impact on Malaysian Islamic banks' efficiency. The results seems to suggest that while potential economies of scale may be overestimated when risk factors are excluded, pure technical efficiency estimates on the other hand, tend to be much more sensitive to the exclusion of risk factors. The empirical results from the Spearman and Pearson tests reinforce these findings.