IDEAS home Printed from https://ideas.repec.org/a/eco/journ1/2018-06-4.html
   My bibliography  Save this article

The Determinants of Profit Efficiency of Islamic Banks Using Stochastic Frontier Analysis Approach

Author

Listed:
  • Zouhaier Hadhek

    (Higher Institut of Management of Gab s, Tunisia,)

  • Manel Frifita

    (Higher Institut of Management of Gab s, Tunisia,)

  • Mosbah Lafi

    (ISG Gab s, Tunisia)

Abstract

In this article, we estimate the determinants of the profit efficiency of Islamic banks using the Stochastic Frontier Analysis (SFA) stochastic frontier approach. We use 37 Islamic banks in fifteen countries between 2005 and 2014. We compare efficiency between Islamic banks. In addition, we examine internal (bank-specific) and external variables that can explain sources of inefficiency and those that allow us to reduce profit efficiency scores on a specific number of variables (GDP per capita, average annual inflation rate, population density, size, capital adequacy ratio, financial profitability ratio, credit risk, operational costs). Thus, only credit risk is not a determinant of the efficiency-profit of Islamic banks.

Suggested Citation

  • Zouhaier Hadhek & Manel Frifita & Mosbah Lafi, 2018. "The Determinants of Profit Efficiency of Islamic Banks Using Stochastic Frontier Analysis Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 8(6), pages 20-29.
    • Handle: RePEc:eco:journ1:2018-06-4
    as

    Download full text from publisher

    File URL: https://www.econjournals.com/index.php/ijefi/article/download/6996/pdf
    Download Restriction: no
    File URL: https://www.econjournals.com/index.php/ijefi/article/view/6996/pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Pratomo, Wahyu Ario & Ismail, Abdul Ghafar, 2006. "Islamic Bank Performance And Capital Structure," MPRA Paper 6012, University Library of Munich, Germany.
    2. Maudos, Joaquin & Pastor, Jose M. & Perez, Francisco & Quesada, Javier, 2002. "Cost and profit efficiency in European banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(1), pages 33-58, February.
    3. Mester, Loretta J., 1996. "A study of bank efficiency taking into account risk-preferences," Journal of Banking & Finance, Elsevier, vol. 20(6), pages 1025-1045, July.
    4. Lozano-Vivas, Ana & Pasiouras, Fotios, 2010. "The impact of non-traditional activities on the estimation of bank efficiency: International evidence," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1436-1449, July.
    5. Berger, Allen N. & Mester, Loretta J., 1997. "Inside the black box: What explains differences in the efficiencies of financial institutions?," Journal of Banking & Finance, Elsevier, vol. 21(7), pages 895-947, July.
    6. Mohamed Chaffai, 1998. "Estimation des inefficiences techniques et allocatives des banques de dépôts tunisiennes : une frontière de coût fictif," Économie et Prévision, Programme National Persée, vol. 136(5), pages 117-129.
    7. George E. Battese & Greg S. Corra, 1977. "Estimation Of A Production Frontier Model: With Application To The Pastoral Zone Of Eastern Australia," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 21(3), pages 169-179, December.
    8. Olson, Dennis & Zoubi, Taisier A., 2008. "Using accounting ratios to distinguish between Islamic and conventional banks in the GCC region," The International Journal of Accounting, Elsevier, vol. 43(1), pages 45-65, March.
    9. Hassan, M. Kabir, 2006. "The X-Efficiency In Islamic Banks," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 13, pages 50-78.
    10. Adnan Kasman & Canan Yildirim, 2006. "Cost and profit efficiencies in transition banking: the case of new EU members," Applied Economics, Taylor & Francis Journals, vol. 38(9), pages 1079-1090.
    11. Sufian, Fadzlan, 2009. "Determinants of bank efficiency during unstable macroeconomic environment: Empirical evidence from Malaysia," Research in International Business and Finance, Elsevier, vol. 23(1), pages 54-77, January.
    12. Bashir, Abdel-Hameed M., 2003. "Determinants Of Profitability In Islamic Banks: Some Evidence From The Middle East," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 11, pages 32-57.
    13. Rime, Bertrand & Stiroh, Kevin J., 2003. "The performance of universal banks: Evidence from Switzerland," Journal of Banking & Finance, Elsevier, vol. 27(11), pages 2121-2150, November.
    14. H. Semih Yildirim & George Philippatos, 2007. "Efficiency of Banks: Recent Evidence from the Transition Economies of Europe, 1993-2000," The European Journal of Finance, Taylor & Francis Journals, vol. 13(2), pages 123-143.
    15. Carvallo, Oscar & Kasman, Adnan, 2005. "Cost efficiency in the Latin American and Caribbean banking systems," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(1), pages 55-72, January.
    16. Laura Cavallo & Stefania Rossi, 2002. "Do environmental variables affect the performance and technical efficiency of the European banking systems? A parametric analysis using the stochastic frontier approach," The European Journal of Finance, Taylor & Francis Journals, vol. 8(1), pages 123-146.
    17. Bashir, Abdel-Hameed M., 1999. "Risk And Profitability Measures In Islamic Banks: The Case Of Two Sudanese Banks," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 6, pages 1-24.
    18. Battese, George E. & Corra, Greg S., 1977. "Estimation Of A Production Frontier Model: With Application To The Pastoral Zone Of Eastern Australia," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 21(3), pages 1-11, December.
    19. Kamaruddin, Badrul Hisham & Safa, Mohammad Samaun & Mohd, Rohani, 2008. "Assessing production efficiency of Islamic banks and conventional bank Islamic windows in Malaysia," MPRA Paper 10670, University Library of Munich, Germany, revised 10 May 2008.
    20. Samir Srairi, 2010. "Cost and profit efficiency of conventional and Islamic banks in GCC countries," Journal of Productivity Analysis, Springer, vol. 34(1), pages 45-62, August.
    21. Pasiouras, Fotios & Tanna, Sailesh & Zopounidis, Constantin, 2009. "The impact of banking regulations on banks' cost and profit efficiency: Cross-country evidence," International Review of Financial Analysis, Elsevier, vol. 18(5), pages 294-302, December.
    22. Odeck, James & Bråthen, Svein, 2012. "A meta-analysis of DEA and SFA studies of the technical efficiency of seaports: A comparison of fixed and random-effects regression models," Transportation Research Part A: Policy and Practice, Elsevier, vol. 46(10), pages 1574-1585.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Salah Mohammed Abdulahi & Mekonnen Kumlachew Yitayaw & Habtamu Legese Feyisa & Wondmagegn Biru Mamo, 2023. "Factor affecting technical efficiency of the banking sector: Evidence from Ethiopia," Cogent Economics & Finance, Taylor & Francis Journals, vol. 11(1), pages 2186039-218, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Md. Asif Nawaz, 2021. "Impact of Specialization, Ownership Structure, and Size on Cost and Profit Efficiency of US Commercial and Savings Banks," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 11(3), pages 1-4.
    2. Asma Mghaieth & Imen Khanchel El Mehdi, 2014. "The determinants of cost/profit efficiency of Islamic banks before, during and after the crisis of 2007," Working Papers 2014-107, Department of Research, Ipag Business School.
    3. José Luis Gallizo & Jordi Moreno & Manuel Salvador, 2015. "European banking integration: is foreign ownership affecting banking efficiency?," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 16(2), pages 340-368, April.
    4. Francesco Aiello & Graziella Bonanno, 2018. "On The Sources Of Heterogeneity In Banking Efficiency Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 32(1), pages 194-225, February.
    5. Francesco Aiello & Graziella Bonanno, 2016. "Efficiency in banking: a meta-regression analysis," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(1), pages 112-149, January.
    6. Kalyvas, Antonios Nikolaos & Mamatzakis, Emmanuel, 2014. "Does business regulation matter for banks in the European Union?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 278-324.
    7. Saeed, Momna & Izzeldin, Marwan & Hassan, M. Kabir & Pappas, Vasileios, 2020. "The inter-temporal relationship between risk, capital and efficiency: The case of Islamic and conventional banks," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    8. Anastasia I. Koutsomanoli‐Filippaki & Emmanuel C. Mamatzakis, 2011. "Efficiency under quantile regression: What is the relationship with risk in the EU banking industry?," Review of Financial Economics, John Wiley & Sons, vol. 20(2), pages 84-95, May.
    9. Gaganis, Chrysovalantis & Pasiouras, Fotios, 2013. "Financial supervision regimes and bank efficiency: International evidence," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5463-5475.
    10. Lozano-Vivas, Ana & Pasiouras, Fotios, 2010. "The impact of non-traditional activities on the estimation of bank efficiency: International evidence," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1436-1449, July.
    11. Saeed, Momna & Izzeldin, Marwan, 2016. "Examining the relationship between default risk and efficiency in Islamic and conventional banks," Journal of Economic Behavior & Organization, Elsevier, vol. 132(S), pages 127-154.
    12. Manlagnit, Maria Chelo V., 2015. "Basel regulations and banks’ efficiency: The case of the Philippines," Journal of Asian Economics, Elsevier, vol. 39(C), pages 72-85.
    13. Arbelo-Pérez, Marta & Arbelo, Antonio & Pérez-Gómez, Pilar, 2017. "Impact of quality on estimations of hotel efficiency," Tourism Management, Elsevier, vol. 61(C), pages 200-208.
    14. Benjamin M. Tabak & Dimas M. Fazio & Daniel O. Cajueiro, 2011. "Profit, Cost and Scale Efficiency for Latin American Banks: Concentration-Performance Relationship," Working Papers Series 244, Central Bank of Brazil, Research Department.
    15. Othman, Norfaizah & Abdul-Majid, Mariani & Abdul-Rahman, Aisyah, 2017. "Partnership financing and bank efficiency," Pacific-Basin Finance Journal, Elsevier, vol. 46(PA), pages 1-13.
    16. Andrieş, Alin Marius & Căpraru, Bogdan, 2014. "The nexus between competition and efficiency: The European banking industries experience," International Business Review, Elsevier, vol. 23(3), pages 566-579.
    17. Mulindi, Hillary, 2021. "Cost-benefit analysis of bank regulation: Does size matter?," KBA Centre for Research on Financial Markets and Policy Working Paper Series 51, Kenya Bankers Association (KBA).
    18. Anwar Al-Gasaymeh, 2020. "Economic Freedom, Country Risk and Cost Efficiency in Jordan and the GCC Countries," Global Business Review, International Management Institute, vol. 21(1), pages 1-17, February.
    19. González, Luis Otero & Razia, Alaa & Búa, Milagros Vivel & Sestayo, Rubén Lado, 2019. "Market structure, performance, and efficiency: Evidence from the MENA banking sector," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 84-101.
    20. Luo, Yun & Tanna, Sailesh & De Vita, Glauco, 2016. "Financial openness, risk and bank efficiency: Cross-country evidence," Journal of Financial Stability, Elsevier, vol. 24(C), pages 132-148.

    More about this item

    Keywords

    Islamic banks; Stochastic Frontier Analysis; Profit efficiency; Determinants of profit efficiency.;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eco:journ1:2018-06-4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ilhan Ozturk (email available below). General contact details of provider: http://www.econjournals.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.