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The proposal and application of a 2-Dimensional Fuzzy Monte Carlo Frontier analysis for estimating Islamic bank efficiency

Author

Listed:
  • Yong Tan

    (University of Bradford)

  • Md Abul Kalam Azad

    (Islamic University of Technology)

  • Antônio Mamede Araújo de Medeiros

    (EBAPE, Fundação Getúlio Vargas)

  • Peter Fernandes Wanke

    (Federal University of Rio de Janeiro)

Abstract

The current study proposes a novel 2-Dimensional Fuzzy Monte-Carlo Frontier Analysis to estimate and compare the level of efficiency for a sample of 49 Islamic Banks across 25 countries worldwide over the period 2013–2021. Additionally, in the second stage, we propose a bootstrapped robust regression approach to comprehensively examine the determinants of efficiency. Our results show that there is heterogeneity in the level of efficiency within the Islamic banking sector. Furthermore, we find that the Islamic banks in the sample experienced an improvement in efficiency over the examined period. Finally, we find that bank size, bank liquidity (measured by the ratio between net loans and gross loans), and bank risk (proxied by the ratio between loan loss reserves and gross loans) have a significant and positive impact on Islamic bank efficiency. Policy implications based on our findings are provided.

Suggested Citation

  • Yong Tan & Md Abul Kalam Azad & Antônio Mamede Araújo de Medeiros & Peter Fernandes Wanke, 2025. "The proposal and application of a 2-Dimensional Fuzzy Monte Carlo Frontier analysis for estimating Islamic bank efficiency," Review of Quantitative Finance and Accounting, Springer, vol. 64(4), pages 1543-1566, May.
    • Handle: RePEc:kap:rqfnac:v:64:y:2025:i:4:d:10.1007_s11156-024-01340-x
    DOI: 10.1007/s11156-024-01340-x
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    Keywords

    Efficiency analysis; Islamic banking; Monte-Carlo analysis; 2-dimenstional; Robust regression;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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