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Predicting efficiency in Islamic banks: An integrated multicriteria decision making (MCDM) approach

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  • Wanke, Peter
  • Azad, Md. Abul Kalam
  • Barros, Carlos Pestana
  • Hassan, M. Kabir

Abstract

This paper presents an efficiency assessment of the 114 Islamic banks from 24 countries using the Technique for Order Preference by Similarity to the Ideal Solution (TOPSIS). TOPSIS is a multicriteria decision making technique similar to Data Envelopment Analysis (DEA), which ranks a finite set of units based on the minimization of distance from an ideal point and the maximization of distance from an anti-ideal point. In this research, TOPSIS is used first in a two-stage approach to assess the relative efficiency of Islamic banks using the most frequent indicators adopted by the literature. Then, in the second stage, neural networks are combined with TOPSIS results as part of an attempt to produce a model for banking performance with effective predictive ability. The results reveal that variables related to both country origin and cost structure have a prominent impact on efficiency. Findings also indicate that the Islamic banking market would benefit from higher level of competition between institutions.

Suggested Citation

  • Wanke, Peter & Azad, Md. Abul Kalam & Barros, Carlos Pestana & Hassan, M. Kabir, 2016. "Predicting efficiency in Islamic banks: An integrated multicriteria decision making (MCDM) approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 45(C), pages 126-141.
  • Handle: RePEc:eee:intfin:v:45:y:2016:i:c:p:126-141
    DOI: 10.1016/j.intfin.2016.07.004
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    References listed on IDEAS

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    1. 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.
    2. Hassan, M. Kabir, 2006. "The X-Efficiency In Islamic Banks," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 13, pages 50-78.
    3. Berger, Allen N. & Clarke, George R.G. & Cull, Robert & Klapper, Leora & Udell, Gregory F., 2005. "Corporate governance and bank performance: A joint analysis of the static, selection, and dynamic effects of domestic, foreign, and state ownership," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 2179-2221, August.
    4. Wanke, Peter & Azad, M.D. Abul Kalam & Barros, C.P., 2016. "Predicting efficiency in Malaysian Islamic banks: A two-stage TOPSIS and neural networks approach," Research in International Business and Finance, Elsevier, vol. 36(C), pages 485-498.
    5. Peter Wanke & Carlos Barros & Nkanga Pedro João Macanda, 2016. "Predicting Efficiency in Angolan Banks: A Two-Stage TOPSIS and Neural Networks Approach," South African Journal of Economics, Economic Society of South Africa, vol. 84(3), pages 461-483, September.
    6. Léopold Simar & Paul Wilson, 2011. "Two-stage DEA: caveat emptor," Journal of Productivity Analysis, Springer, vol. 36(2), pages 205-218, October.
    7. 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.
    8. Hayfield, Tristen & Racine, Jeffrey S., 2008. "Nonparametric Econometrics: The np Package," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 27(i05).
    9. Kumru, Cagri S. & Sarntisart, Saran, 2016. "Banking for those unwilling to bank: Implications of Islamic banking systems," Economic Modelling, Elsevier, vol. 54(C), pages 1-12.
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    Cited by:

    1. Degl’Innocenti, Marta & Matousek, Roman & Sevic, Zeljko & Tzeremes, Nickolaos G., 2017. "Bank efficiency and financial centres: Does geographical location matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 46(C), pages 188-198.
    2. repec:eee:eneeco:v:77:y:2019:i:c:p:46-53 is not listed on IDEAS
    3. repec:eee:riibaf:v:47:y:2019:i:c:p:195-219 is not listed on IDEAS
    4. repec:eee:glofin:v:35:y:2018:i:c:p:58-71 is not listed on IDEAS
    5. repec:eee:pacfin:v:46:y:2017:i:pa:p:1-13 is not listed on IDEAS
    6. Degl'Innocenti, Marta & Kourtzidis, Stavros A. & Sevic, Zeljko & Tzeremes, Nickolaos G., 2017. "Bank productivity growth and convergence in the European Union during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 184-199.
    7. repec:eee:finsta:v:34:y:2018:i:c:p:12-43 is not listed on IDEAS
    8. repec:eee:appene:v:242:y:2019:i:c:p:612-623 is not listed on IDEAS
    9. repec:eee:pacfin:v:53:y:2019:i:c:p:484-496 is not listed on IDEAS

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