Efficiency and Stock Market Performance of Islamic Banks in GCC Countries

Abstract

Using Data envelopment analysis, this paper estimates the efficiency of 25 Islamic banks operating in Gulf Cooperation Council (GCC) countries during the period 2003-2009. The results suggest that efficiency measures, particularly technical and pure technical efficiency, have increased over the period of study but remain low as compared to conventional banks. The inefficiency of Islamic banks can be attributed to pure technical inefficiency rather than to scale inefficiency. We also find that large and small banks are more efficient than medium banks in terms of overall technical efficiency. Further, we also examine the relationship between the efficiency of Islamic banks and the performance of their stock. The empirical findings show that both technical and pure technical efficiency changes are positively related to share returns, while changes in scale efficiency have no impact on stock performance. Finally, the regression also indicates a significant and positive association between market return and the book-to-market equity ratio with share prices. JEL classification: C14, C23, G21.