Efficiency in Islamic Banking: A Detailed Study
First of all, we all should agree that Islamic banking is still in its first stages. There are issues, and experimental works have depended on descriptive statistics rather than accurate statistics. But this is changing recently because of recent studies.
Cost Efficiency of Sudanese Islamic Banks (1990-2000)
An analysis of the cost efficiency features of 17 Islamic banks in Sudan between 1990 and 2000 by Hussien. The results show large variations in the cost efficiency of Sudanese banks, with the foreign-owned banks being the most efficient ones. State-owned banks were found to be the most cost-inefficient ones. He found that smaller banks are more efficient than their larger counterparts. In addition, banks that have a higher proportion of Musharakah and Mudharabah finance relative to total assets also have efficiency advantages.
Cost Efficiency of Turkish Banks (1990-2000)
In 2004, El-Gamal and Inanoglu used the stochastic frontier approach to estimate the cost efficiency of Turkish banks over the period 1990-2000. The study compared the cost efficiencies of 49 conventional banks with four Islamic Special Finance Houses. The results was they discovered that Islamic financial institutions are the most efficient, and this was explained by their emphasis on Islamic asset-based financing, which led to lower non-performing loans ratios.
World Islamic Banking Industry Efficiency
Hassan (2005) examined the relative cost, profit, X-efficiency, and productivity of the world Islamic banking industry. He calculated five DEA efficiency measures: cost, allocative, technical, pure technical, and scale. He found that the Islamic banks are more profit-efficient. Also found that the main source of inefficiency is allocative rather than technical.
Malaysian Islamic Bank Performance
Samad investigated the relative performance of the full-fledged Malaysian Islamic bank compared to its conventional bank peers. He found that the managerial efficiency of the conventional banks was higher than that of the full-fledged Islamic bank.
Malaysian Islamic Banking Sector Efficiency (2001-2006)
Sofian examined the efficiency of the Malaysian Islamic banking sector during the period 2001-2006.
MENA vs. Asian Islamic Banks
They found that empirical findings seem to suggest that the Middle East and North African (MENA) countries’ Islamic banks have showed higher technical efficiency compared to their Asian counterparts.
Asian Islamic Banking Sectors Efficiency (2001-2006)
Recently, Ahmad et al. (2010) investigated the efficiency of the Islamic banking sectors of four Asian countries during the period 2001-2006. The results show that the Asian Islamic banks exhibited the highest mean TE of 86.5% during 2004, implying a mean input wastage of 13.5%. This means that the Islamic banks in the Asian countries could have produced the same amount of output by using only 86.5% of the amount of inputs they actually employed.
Returns to Scale in Islamic Banking
A bank can operate at Constant Returns to Scale (CRS) or Variable Returns to Scale (VRS), where CRS signifies that an increase in inputs results in a reasonable increase in outputs, and VRS implies a rise in inputs results in an unreasonable rise in outputs. A bank operating at VRS can be at Increasing Returns to Scale (IRS) or Decreasing Returns to Scale (DRS). Hence, IRS means that an increase in inputs results in a higher increase in outputs, while DRS indicates that an increase in inputs results in lesser output increases. During the study, Islamic banks of high-income countries seem to have dominated the highest efficiency frontier: Bahrain, UAE, and Qatar. Eight banks belonging to low- and middle-income countries have failed to appear at least once on the frontier.