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The Determinants of Efficiency of Islamic Banks

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  • Mohamad Akbar Noor
  • Nor Hayati Bt Ahmad

Abstract

The paper investigates the efficiency of the Islamic banking sector in 25 countries during the period 1992-2009 using data for 78 Islamic banks. The efficiency estimates of individual banks are evaluated using the nonparametric Data Envelopment Analysis (DEA) method. The empirical findings seem to suggest that the World Islamic banks have exhibited high pure technical efficiency. During the period of study, pure technical inefficiency was found to have greater influence in determining the total technical inefficiency. Secondly, it is suggested that further analysis of the World Islamic banking sector’s efficiency should consider specific factors relating to high-income countries’ leading the efficiency over the years compared to banks operating in middle and low-income countries. The results show a positive relationship between bank efficiency and size and profitability, while a negative relationship between bank efficiency and loans intensity and capitalization. A multivariate analysis based on the Tobit model reinforces these findings specifically for profitability. The return on equity has a positive but statistically insignificant relationship with bank efficiency. The finding implies that the higher the return on equity, the higher the bank productivity growth will be.

Suggested Citation

  • Mohamad Akbar Noor & Nor Hayati Bt Ahmad, 2012. "The Determinants of Efficiency of Islamic Banks," The IUP Journal of Bank Management, IUP Publications, vol. 0(2), pages 32-61, May.
    • Handle: RePEc:icf:icfjbm:v:11:y:2012:i:2:p:32-61
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    Cited by:

    1. Abdus Samad, 2021. "Analysis of Comparative Efficiencies of Islamic Banks Across Nine South and Southeast Asian Countries," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 10(1), pages 71-85, January.
    2. Abdus Samad & Mohammad Ashraful Ferdous Chowdhury, 2019. "Comparative Bootstrap DEA Technical Efficiencies and Determinant Factors: Evidence From the Islamic Banks of Bahrain and United Arab Emirates," Research in World Economy, Research in World Economy, Sciedu Press, vol. 10(3), pages 291-308, December.
    3. Mohammad Abdelkarim Almumani, 2013. "The Relative Efficiency of Saudi Banks: Data Envelopment Analysis Models," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(3), pages 152-161, July.
    4. Kamalpreet Kaur & Mandeep Kaur, 2020. "Determinants of Diffusion and Adoption of ATM cum Debit Cards in Indian Banking Sector," Global Business Review, International Management Institute, vol. 21(5), pages 1263-1278, October.

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