A Conceptual Model of Measuring Performance Efficiency of Islamic Banks: Objectives of Islamic Law (Maqasid Al-Shariah) Approach

Abstract

This paper conceptualizes the model of measuring the performance of Islamic Banks in the light of the objectives of Islamic law (Maqasid al-shariah). It reviewed the various performance measures used to compare the performances of Islamic and conventional banks. It further highlights the objectives of Islamic banks from objectives of Islamic law (maqasid al-shariah) perspective which give basis for the need to have an alternative model to measure their (Islamic banks) performance uniquely in order to actually see their performance. The paper believed that measuring Islamic banks performance using conventional models including Data Envelopment Approach (DEA), Econometric Frontier Approach (EFA), and Stochastic Frontier Approach (SFA) has lead to consistent miserable performances of the Islamic banks year in year out despite the rapid growth of the industry (Islamic Finance) of 15-20 % annually. The paper argues that, measuring the performance of Islamic and conventional banks using such models is misplaced since the very objectives of these financial institutions are different, especially in principles and in some practices. Therefore this paper proposes Islamic bank performance should be measured using models that tally with their objectives and a model developed from the works of Sekaran (2000) and Mustafa (2006) that conforms with the objectives of Islamic law (maqasid al-shariah) is hereby proposed.