Efficiency and Productivity of Islamic Banking Industry by Using DEA Method: A Literature Review

Abstract

Efficient and smooth performance of the banking sector is very important for the functioning of the financial system of an economy as it affects economic stability and growth. Along with conventional banking systems, Islamic banks are playing an increasingly important role and have become an essential part of the financial structure of many Muslim and non-Muslim countries. Accordingly, efficiency and productivity measurement of Islamic banks has a great importance in scientific research. Based on the literature review, this paper analyzes two concepts of performance evaluation—efficiency and productivity of Islamic banking sector using Data Envelopment Analysis method. As a nonparametric scientific method, DEA together with Malmquist total factor productivity index has become one of the most widely used methods to evaluate the relative efficiency and productivity of various financial institutions, including Islamic banks. The purpose of this paper is to present the most important studies on performance management of banking sector in Islamic countries. We have conducted a comprehensive literature review on the methodology and studies on measuring bank performance with emphasis on DEA method. The results of the efficiency and productivity assessment of the Islamic banking sector show a range of inputs and outputs used in DEA models, their relative efficiency results and productivity changes. This paper provides the basis for further empirical research of the relative efficiency or productivity growth of the Islamic banking sector.