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The X-Efficiency Of The Sudanese Islamic Banks

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  • Abd elrhman Elzahi Saaid,Saiful Azhar Rosly,Mansor H. Ibrahim,and Naziruddin Abdullah

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Abstract

Important changes have taken place in the Sudanese banking industry since 1989. The transformation of the banking industry to conform to the Islamic principles has put the spotlight on the performance of the Islamic banks in Sudan. This study investigates the X-efficiency (technical and allocative) of these banks. The study used the basic Stochastic Frontier Approach (SFA). This is accomplished by decomposing the error term into two components, namely random noise (vi) and possible inefficiency (ui). The empirical results tend to suggest that banks in the sample had low levels of X-efficiency. This implied that the Sudanese Islamic banks were not optimizing their inputs usage. However, the results also showed that the inefficiency in the Sudanese Islamic banks could be more associated with inputs wasting (technical inefficiency) rather than choosing the incorrect input combinations (allocative inefficiency). The study has several important policy implications to offer, one of which is that it could be taken as a guideline for the Sudanese government to chart a policy on banking deregulation and mergers. Moreover, the study provides some information and identifies the source of X-inefficiency, which could, in turn, be used to assist banks’ managements to overcome the problems of inefficiency.

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Bibliographic Info

Article provided by IIUM Journal of Economis and Management in its journal IIUM Journal of Economics and Management.

Volume (Year): 11 (2003)
Issue (Month): 2 (December)
Pages: 123-141

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Handle: RePEc:ije:journl:v:11:y:2003:i:2:p:123=-141

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Keywords: X-inefficiency; Islamic banks; Stochastic Frontier Approach;

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  1. Shaffer, Sherrill, 1993. "Can megamergers improve bank efficiency?," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 423-436, April.
  2. Esho, Neil, 2001. "The determinants of cost efficiency in cooperative financial institutions: Australian evidence," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 941-964, May.
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  5. Clark, Jeffrey A, 1996. "Economic Cost, Scale Efficiency, and Competitive Viability in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 342-64, August.
  6. English, M. & Grosskopf, S. & Hayes, K. & Yaisawarng, S., 1993. "Output allocative and technical efficiency of banks," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 349-366, April.
  7. SIMAR, Léopold, . "Estimating efficiencies from frontier models with panel data: a comparison of parametric, non-parametric and semi-parametric metods with bootstrapping," CORE Discussion Papers RP -995, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Edwards, Franklin R & Heggestad, Arnold A, 1973. "Uncertainty, Market Structure, and Performance in Banking: The Galbraith-Caves Hypothesis and Managerial Motives in Banking," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 455-73, August.
  9. Kaparakis, Emmanuel I & Miller, Stephen M & Noulas, Athanasios G, 1994. "Short-Run Cost Inefficiency of Commercial Banks: A Flexible Stochastic Frontier Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 875-93, November.
  10. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August.
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Cited by:
  1. 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.
  2. Asma Mghaieth & Imen Khanchel El Mehdi, 2014. "The determinants of cost/profit efficiency of Islamic banks before, during and after the crisis of 2007-2008 using SFA approach," Working Papers 2014-107, Department of Research, Ipag Business School.

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