The Determinants of Islamic Banks’ Efficiency Changes: Empirical Evidence from the World Banking Sectors

Abstract

The article investigates the efficiency of the Islamic banking sectors in 25 countries during the period 1992–2009 consisting of 78 Islamic banks. The efficiency estimates of individual banks are evaluated using the non-parametric Data Envelopment Analysis (DEA) method. The empirical findings seem to suggest that the World Islamic banks have exhibited high pure technical efficiency. During the period of study we find that pure technical inefficiency has greater influence in determining the total technical inefficiency of the World Islamic banking sectors. Second, further analysis into the investigation of the World Islamic banking sector efficiency is suggested to consider specific factors that contribute to high-income countries leading efficiency over the years compared to banks operated in medium- and low-income countries. Based on Table 3, it is consistently stated that most of the efficient banks over the years were from high-income countries. We find a positive relationship between bank efficiency and loan intensity, size, capitalization and profitability. Empirical results show that technically more efficient banks are those that have higher market share and a low non-performing loan ratio. A multivariate analysis based on the Tobit model reinforces these findings.