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Efficiency of Islamic Banks Using Two Stage Approach of Data Envelopment Analysis

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  • Muhammad Faza Firdaus
  • Muhamad Nadratuzzaman Hosen

Abstract

The aim of this study is to measure the efficiency of Islamic Bank in Indonesia, to analyze the factors that affect the level of efficiency which is known as Two-Stage Data Envelopment Analysis method and to propose measurement of Bank Soundness with modified CAMELS. The objects of this study are 10 (ten) Islamic Bank (BUS) in Indonesia which analyzes from the second Quarter of 2010 until the fourth Quarter of 2012. There are 2 (two) methods which are used in this study, namely non-parametric method of Data Envelopment Analysis (DEA) on the first stage and Tobit model on the second stage. In addition, this study will illustrate the formulation of the financial factors of CAELS instead of CAMEL by integrating the results of efficiency level measurement using DEA in CAELS formulation. Overall, the results, show that the efficiency level of Islamic banks in Indonesia during the time period in this study, have not yet reach the optimum level of efficiency. In addition, modification of CAELS for the bank performance level method by integrating the result of DEA shows that the modification of CAELS could be more accurate in describing the bank performance level, particularly for Islamic Bank in Indonesia.

Suggested Citation

  • Muhammad Faza Firdaus & Muhamad Nadratuzzaman Hosen, 2013. "Efficiency of Islamic Banks Using Two Stage Approach of Data Envelopment Analysis," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 16(2), pages 1-22, October.
    • Handle: RePEc:idn:journl:v:16:y:2013:i:2h:p:1-22
    DOI: https://doi.org/10.21098/bemp.v16i2.442
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    Citations

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    Cited by:

    1. Shinta Amalina Hazrati Havidz & Chandra Setiawan, 2015. "Bank Efficiency and Non-Performing Financing (NPF) in the Indonesian Islamic Banks," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 3(3), pages 61-79, September.
    2. Salisu, Afees A. & Ndako, Umar B. & Adediran, Idris A. & Swaray, Raymond, 2020. "A fractional cointegration VAR analysis of Islamic stocks: A global perspective," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).

    More about this item

    Keywords

    Efficiency; Data Envelopment Analysis (DEA); Tobit Model; CAELS + DEA;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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