Does issuing islamic bonds through banks increase banking efficiency?

Abstract

This study investigates the impact of issuing sukuk (Islamic bonds) on the issuing banks’ efficiency, in selected GCC countries by applying stochastic frontier approach with translog cost function. The empirical application covers 13 Islamic banks and conventional banks providing Islamic windows, from Saudi Arabia, UAE, and Qatar, using quarterly data from Q3 2009 to Q2 2019. The results show that issuing Islamic bonds (sukuk) increases bank efficiency, through increasing financial leverage and liquidity. The results of the cost frontier analysis suggest that higher input prices bring more funds that increase bank efficiency. The results of output variables indicate that higher output leads to higher total cost. However, the higher order terms of output variables have a negative relationship with cost, suggesting that doubling bank output could diminish total cost.