Modeling Islamic banks' efficiency: a non‐parametric frontier approach

Abstract

Purpose

The purpose of this paper is to measure the relative efficiency of the top 100 Islamic banks. The sensitivity of the results is also investigated.

Design/methodology/approach

Data envelopment analysis (DEA) method was applied to evaluate the relative efficiency of Islamic banks using cross‐sectional data for the year 2009. The use of DEA to measure Islamic banks' efficiency appears especially appropriate since this method does not require the specification of particular production or cost functions.

Findings

The results indicate that the performance of several banks is sub‐optimal, suggesting the potential for significant improvements. Separate benchmarks were derived for possible reductions in resources used, and significant savings are possible on this account.

Originality/value

From a policy perspective, the paper highlights the importance of encouraging increased efficiency throughout the Islamic banking industry.

Citation

Mostafa, M.M. (2011), "Modeling Islamic banks' efficiency: a non‐parametric frontier approach", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 4 No. 1, pp. 7-29. https://doi.org/10.1108/17538391111122186