EFFICIENCY OF ISLAMIC BANKING IN MALAYSIA: A STOCHASTIC FRONTIER APPROACH

Hamim Syahrum Ahmad Mokhtar · Naziruddin Abdullah · Syed Musa Alhabshi

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Islamic Finance and Banking Studies Banking stability, regulation, efficiency Efficiency Analysis Using DEA

Abstract

This study empirically investigates the efficiency of the full-fledged Islamic banks, Islamic windows and conventional banks in Malaysia. It finds that the Malaysian Islamic banking industry has, in terms of assets, deposits and financing base, grown very rapidly over the 1997-20 03 period. The study then measures the technical and cost efficiency of these banks using the Stochastic Frontier Approach. The findings show that, on avera ge, the efficiency of the overall Islamic banking industry has increased duri ng the period of study while that of conventional banks remained stable over tim e. However, the efficiency level of Islamic banking is still lower than that o f conventional banks. The study also reveals that full-fledged Islamic banks are more efficient than Islamic windows, while Islamic windows of foreign banks tend to be more efficient than those of domestic banks.

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References

1977Formulation and estimation of stochastic frontier production function models 2005An Introduction to Efficiency and Productivity Analysis 1977Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error 1997Efficiency of financial institutions: International survey and directions for future research 1997Inside the black box: What explains differences in the efficiencies of financial institutions?1997Problem loans and cost efficiency in commercial banks 1977INPUTS, OUTPUTS, AND A THEORY OF PRODUCTION AND COST AT DEPOSITORY FINANCIAL INSTITUTIONS 1990Measuring cost efficiency in banking

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