Efficiency of Islamic banks: case of North African Arab countries

Abstract

PurposeThe purpose of this paper is twofold. The first and the most important is to examine the efficiency of Islamic banks relative to conventional banks operating in North African Arab countries, in terms of cost and revenue efficiency. The second objective is to assess more evidence regarding the banking system efficiency trend and dynamics in each single country, and to compare such trends among countries included in the study.Design/methodology/approachThe non‐parametric data envelopment analysis (DEA) was used to estimate cost and revenue efficiency scores assuming variable returns to scale (VRS). The sample consists of nine Islamic banks and 11 conventional banks.FindingsThe results indicated that Islamic banks achieved higher average revenue efficiency scores over conventional banks in this region, while the growth rate of revenue efficiency score of Islamic bank was less than conventional banks. In terms of cost efficiency, the results varied from country to another. The results also showed that both groups of banks were close to each other, with an advantage to conventional banks, which suffer less cost efficiency loss over time compared to Islamic banks.Research limitations/implicationsThe very limited data sources (banks' web sites) was was the main limitation faced during preparing for this research. Another limitation was the non‐regularity of annual reports.Practical implicationsIslamic banks are highly challenged in finding investment opportunities/avenues that comply with Islamic regulations, unlike conventional banks that can invest in fixed income securities. There is a serious need for some countries to deregulate their banking systems more, in order to enhance the compatibility and the efficiency of their banking, such as the case of Sudan.Originality/valueGiven the previously mentioned difficulties, decent data set were collected. The value of this paper is the use of nonparametric DEA to analyse cost and revenue efficiences in the countries of this region.