Factors influencing efficiency of Islamic banks in GCC region: Evidence from Arab Spring period

Abstract

The main purpose of this research is to estimate efficiency and its factors of Islamic banks in GCC countries during the period 2005-2014. In this study, efficiency is measured using data envelopment analysis (DEA), which is divided into technical efficiency (TE), pure technical efficiency (PTE), and scale efficiency (SE). The statistical methods to find the determinants are generalized least squares (GLS), generalized method of moments (GMM) and Tobit regressions. The DEA measures show that the highest efficiency found to be in Islamic banks in Kuwait. The statistical results demonstrate that size of banks is highly important to efficiency as larger Islamic banks could reduce their costs (based on economies of scale approach) and they could provide more services (more outputs) than smaller banks. Focusing on capitalisation, the results suggest that better capitalised banks have better efficiency. The lending services increase the efficiency significantly, which encourage Islamic banks in GCC region to focus more in providing loans. Furthermore, achieving profits is significantly and positively support the efficiency of Islamic banks. In contrast, foreign and local ownerships decreased efficiencies significantly. Additionally, banks in lower rates of economic growth operated more efficiently. Finally, the global financial crisis and Arab spring impacted the efficiency of Islamic banks in GCC countries dangerously. The strength point is that the efficiency of Islamic banks in GCC countries has not been affected by inflation (based on insignificant correlation between efficiency scores and inflation). These results actually help bankers and policy maker to evaluate the financial performance in banking sector. Moreover, identifying the positive and negative determinants allow banks to apply strategies to enhance efficiency.