Revenue Efficiency and Returns to Scale in Islamic Banks: Empirical Evidence from Malaysia

Abstract

The paper provides new empirical evidence on the revenue efficiency and returns to scale in the Malaysian Islamic banking sector. The sample comprised of 17 domestic and foreign Islamic banks during the period of 2006 to 2010. We employ the Data Envelopment Analysis (DEA) method to compute the revenue efficiency levels. The results indicate that the domestic Islamic banks have exhibited lower revenue efficiency levels compared to their foreign bank peers. In essence, revenue efficiency seems to be the main factor influencing domestic and foreign Islamic banks’ profit efficiency levels. The empirical findings indicate that the large domestic Islamic banks tend to operate at constant returns to scale (CRS) or decreasing returns to scale (DRS). On the other hand, the small foreign Islamic banks tend to operate at CRS or increasing returns to scale (IRS).

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