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Efficiency of Islamic Banks: an Empirical Analysis of 18 Banks

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  • Donsyah Yudistira

    (Department of Economics, Loughborough University)

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    Abstract

    Do Islamic banks perform efficiently? Although the phenomenon of Islamic banking and finance has developed significantly in recent years, only very few studies have tackled this central question. This paper provides new evidence on the performance of 18 Islamic banks over the period 1997-2000. Unlike previous studies, this paper is based on efficiency measurement in which the non-parametric approach, Data Envelopment Analysis, is utilized to analyze the technical and scale efficiencies of Islamic banking. In specifying input-output variables of Islamic banks, the intermediation approach is selected as it is in line with the principle of Islamic financial system. Overall, the results suggest that Islamic banks suffer slight inefficiencies during the global crisis 1998-9. Efficiency differences across the sample data appear to be mainly determined by country specific factors.

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    File URL: http://128.118.178.162/eps/fin/papers/0406/0406007.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Finance with number 0406007.

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    Length: 17 pages
    Date of creation: 19 Jun 2004
    Date of revision:
    Handle: RePEc:wpa:wuwpfi:0406007

    Note: Type of Document - pdf; pages: 17
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    Web page: http://128.118.178.162

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    Keywords: Efficiency; Islamic Banks;

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    1. Chiuri, Maria Concetta & Ferri, Giovanni & Majnoni, Giovanni, 2001. "The macroeconomic impact of bank capital requirements in emerging economies - past evidence to assess the future," Policy Research Working Paper Series 2605, The World Bank.
    2. Leigh Drake, 2001. "Efficiency and productivity change in UK banking," Applied Financial Economics, Taylor & Francis Journals, vol. 11(5), pages 557-571.
    3. Rezvanian, Rasoul & Mehdian, Seyed, 2002. "An examination of cost structure and production performance of commercial banks in Singapore," Journal of Banking & Finance, Elsevier, vol. 26(1), pages 79-98, January.
    4. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    5. Allen N. Berger & Loretta J. Mester, 2001. "Explaining the Dramatic Changes in Performance of U.S. Banks: Technological Change, Deregulation and Dynamic Changes in Competition," Center for Financial Institutions Working Papers 01-22, Wharton School Center for Financial Institutions, University of Pennsylvania.
    6. Fukuyama, Hirofumi, 1996. "Returns to scale and efficiency of credit associations in Japan: A nonparametric frontier approach," Japan and the World Economy, Elsevier, vol. 8(3), pages 259-277, September.
    7. Barbara Casu & Philip Molyneux, 2003. "A comparative study of efficiency in European banking," Applied Economics, Taylor & Francis Journals, vol. 35(17), pages 1865-1876.
    8. Berger, Allen N. & Humphrey, David B., 1997. "Efficiency of financial institutions: International survey and directions for future research," European Journal of Operational Research, Elsevier, vol. 98(2), pages 175-212, April.
    9. Dadang Muljawan & Humayon Dar & Maximilian Hall, 2004. "A capital adequacy framework for Islamic banks: the need to reconcile depositors' risk aversion with managers' risk taking," Applied Financial Economics, Taylor & Francis Journals, vol. 14(6), pages 429-441.
    10. Miller, Stephen M. & Noulas, Athanasios G., 1996. "The technical efficiency of large bank production," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 495-509, April.
    11. Donsyah Yudistira, 2002. "The Impact of Bank Capital Requirements in Indonesia," Finance 0212002, EconWPA, revised 18 May 2003.
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