Analysing Islamic Bank Efficiency in Malaysia Using the Standard and Alternative Approaches to Data Envelopment Analysis

Izah Mohd Tahir,Sudin Haron

doi:10.22610/jebs.v5i11.453

Izah Mohd Tahir, Sudin Haron

Open Access

https://doi.org/10.22610/jebs.v5i11.453

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Abstract

The purpose of this paper is to analyse the efficiency of Islamic banks in Malaysia using both the standard approach and the alternative approach to Data Envelopment Analysis (DEA). The standard approach relies on linear averages of outputs and inputs to measure efficiency whereas the alternative approach uses nonlinear averages. Both approaches are tested on 14 Islamic banks in Malaysia for the three-year period, 2008 to 2010. Our overall results for the three years suggest that, the inefficiency level among these banks using the standard approach (SDEA) is much higher than using the alternative approach (ADEA). Implications and future research are also discussed.

Highlights

Islamic banking today has become a practical reality and accepted worldwide
This paper aims to compare the standard approach and the alternative approaches to DEA using sample data from Islamic banks in Malaysia for the period 2008 to 2010.The aim of this paper is analyse the efficiency of Islamic banks in Malaysia using both the conventional and the alternative approach to Data Envelopment Analysis (DEA)
Alternative DEA: To compare with the new approach or the alternative approach of DEA (ADEA), we present the results in Tables 4 to 6

Summary

Introduction

The industry has transformed from an infant industry in the 1970s to one of the most viable and efficient alternative models of financial intermediation. It has consistently grown into double-digit with a presence in more than 100 countries. The success of Islamic banking brings forth new challenges to the industry These include lack of standard financial contracts and products, illiquidity issues, risks mitigation in the operational aspects and financing portfolios, and co-operation among the players within the industry. These successes and challenges facing Islamic financial institutions have been widely documented. Among the major areas that need in-depth study are productivity, efficiency and performance measurement

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Conclusion