Efficiency of Islamic Banks: an Empirical Analysis of 18 Banks

Do Islamic banks perform efficiently? Although the phenomenon of Islamic banking and finance has developed significantly in recent years, only very few studies have tackled this central question. This paper provides new evidence on the performance of 18 Islamic banks over the period 1997-2000. Unlike previous studies, this paper is based on efficiency measurement in which the non-parametric approach, Data Envelopment Analysis, is utilized to analyze the technical and scale efficiencies of Islamic banking. In specifying input-output variables of Islamic banks, the intermediation approach is selected as it is in line with the principle of Islamic financial system. Overall, the results suggest that Islamic banks suffer slight inefficiencies during the global crisis 1998-9. Efficiency differences across the sample data appear to be mainly determined by country specific factors.