Efficiency Analysis of Islamic Banks in the Middle East and North Africa Region: A Bootstrap DEA Approach

Raéf Bahrini

doi:10.3390/ijfs5010007

Abstract

This paper measures and analyzes the technical efficiency of Islamic banks in the Middle East and North Africa (MENA) region during the period 2007–2012. To do this, the bootstrap Data Envelopment Analysis (DEA) approach was employed in order to provide a robust estimation of the overall technical efficiency and its components: pure technical efficiency and scale efficiency in the case of MENA Islamic banks. The main results show that over the period of study, pure technical inefficiency was the main source of overall technical inefficiency instead of scale inefficiency. This finding was confirmed for all MENA Islamic banks as well as for the two subsamples: Gulf Cooperation Council (GCC) and non-GCC Islamic banks. Furthermore, our results show that GCC Islamic banks had stable efficiency scores during the global financial crisis (2007–2008) and in the early post-crisis period (2009–2010). However, a decline in overall technical efficiency of all panels of MENA Islamic banks was recorded in the last two years of the study period (2011–2012). Thus, we recommend that MENA Islamic bank managers focus more on improving their management practices rather than increasing their sizes. We also recommend that financial authorities in MENA countries implement several regulatory and financial measures in order to ensure the development of MENA Islamic banking.

Highlights

In the last years, global Islamic banking assets grew at an average annual rate of more than 17% between 2009 and 2013 to reach US$1.7 trillion in 2013 [1]
We discuss the results found by applying the bootstrap Data Envelopment Analysis (DEA) approach on the three selected panels of Middle East and North Africa (MENA) Islamic banks (Panels A, B and C) over the period 2007–2012
By considering all banks in the sample (Panel A), our results show that, over the period of study, overall technical inefficiency of MENA Islamic banks is mainly caused by pure technical inefficiency rather than scale inefficiency

Summary

Introduction

Global Islamic banking assets grew at an average annual rate of more than 17% between 2009 and 2013 to reach US$1.7 trillion in 2013 [1]. It is important here to note that the most important growth rates of Islamic banking assets have been recorded in the Middle East and North Africa (MENA) region, in the Gulf Cooperation Council (GCC) countries. These countries are considered as the largest domicile for Islamic banking assets, accounting for more than one-third of all Islamic banking assets worldwide [2]. The exponential and rapid growth of the Islamic banking industry in the MENA region in recent years was mainly explained by the increasing wealth of oil-reach Muslim countries, especially from the Gulf region due to the increasing global dependence on oil and higher oil prices which boosted the demand for Islamic banking products

Methods

Results

Conclusion