Abstract
The Islamic banking sector has become a crucial part of the global banking industry. Despite the Islamic banking industry’s encouraging growth in the Southeast Asia (SEA) region, prior studies mostly focused on Islamic banks’ efficiency in the individual country. To fill the literature gap, this study aims to measure the efficiency and productivity growth of Islamic banks in the SEA region. This study adopted the DEA technique and the Malmquist productivity index to evaluate 31 Islamic banks’ performance in SEA from 2014 to 2019. The results evidenced an improvement in efficiency and progress in productivity for the banks in the region. The findings documented better efficiency and gradual progress in productivity for Islamic banks in Indonesia, consistent efficiency for Malaysia, a significant improvement for Brunei; hence, both Thailand and the Philippines Islamic bank depicted a drop-in efficiency for 2019. The findings trigger bank managers to acknowledge the inefficiencies and their sources. Investors and policymakers may find the findings useful in observing the banks’ performance; thus, taking effective mechanism and policies to promote competent and sustainable SEA Islamic banks in the long run.
Highlights
The banking sector is one of the key players in the global financial sector; not leaving the Islamic banking behind which becomes a crucial part [76]
The score of technical efficiency, pure technical efficiency, and scale efficiency is yielded in Data Envelopment Analysis (DEA) estimates
The results display a mixed result of technical efficiency (TE) for Southeast Asia (SEA) Islamic banks throughout the study period
Summary
The banking sector is one of the key players in the global financial sector; not leaving the Islamic banking behind which becomes a crucial part [76]. According to the Islamic Finance Development Report (2020), an increase of 14% in global Islamic finance assets was depicted, with a total amount of $2.88 trillion, while Southeast Asia (SEA) reached $685 billion in 2019 [35]. 69% of the total assets was constituted by Islamic banking ($2 trillion). Islamic banking is a banking system based on Shariah principles [44, 59] and these principles include the prohibition of interest and the practice of profit and loss sharing (PLS) contracts [21, 43, 44, 59]. The Islamic banks and conventional banks, being profit-oriented entities, share similar objectives to increase shareholders’ wealth by maximising profit [56]. Islamic banks need to strive for efficiency to remain competitive in the market by efficiently utilising resources [40, 42]
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