Estimating Islamic banks’ technical and allocative inefficiencies: A shadow cost approach

Mohamed Nejib Ouertani; Hanen Hamdani; Mohamed Sharif Bashir

doi:10.33102/jmifr.v17i1.257

Authors

Mohamed Nejib Ouertani College of Economics and Administrative Sciences, Al-Imam Muhammad Ibn Saud Islamic University, P.O. Box 5701 Othman Ibn Affan St, Riyadh 11432, Saudi Arabia
Hanen Hamdani Faculty of Economic Sciences and Management, University of Sfax. Airport road Km 0.5 BP 1169 .3029, Sfax, Tunisia
Mohamed Sharif Bashir Department of Economics, College of Continuing Education and Community Service, Al-Imam Muhammad Ibn Saud Islamic University, P.O. Box 5701 Othman Ibn Affan St, Riyadh 11432, Saudi Arabia

DOI:

https://doi.org/10.33102/jmifr.v17i1.257

Keywords:

Islamic banking, Shadow cost frontier, Cost efficiency, Technical inefficiency, Allocative inefficiency

Abstract

The main objective of the present paper is to empirically analyze the efficiency of 26 selected Islamic banks from different countries, namely: Bahrain, Jordan, Kuwait, Malaysia, Pakistan, Qatar, Saudi Arabia and UAE. The data used covers the period of 2012‒2016. To measure the banks’ efficiency, we used the frontier-based efficiency methodology, which was especially developed in the presence of panel data. In this respect, the panel data provided us with a fruitful framework for analyzing the efficiency. Therefore, the method employed was the shadow cost frontier based on the estimation of parametric cost inefficiency and its decomposition into both technical and allocative inefficiencies. The findings showed that the Islamic banks are costinefficient. With regard to the allocative inefficiency, it can be explained by excessive use of capital relative to labor, accompanied by an overuse of financial resources in terms of labor. The present study also revealed that the financial factor is overused, relative to the physical capital. Furthermore, technical inefficiency appears to be the second source of cost inefficiency as far as the Islamic banks are concerned. Overall, the findings indicate that the Islamic banks must improve their use of resources by about 43.7 percent for achieving efficiency.

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Author Biographies

Mohamed Nejib Ouertani, College of Economics and Administrative Sciences, Al-Imam Muhammad Ibn Saud Islamic University, P.O. Box 5701 Othman Ibn Affan St, Riyadh 11432, Saudi Arabia

Hanen Hamdani, Faculty of Economic Sciences and Management, University of Sfax. Airport road Km 0.5 BP 1169 .3029, Sfax, Tunisia

Mohamed Sharif Bashir, Department of Economics, College of Continuing Education and Community Service, Al-Imam Muhammad Ibn Saud Islamic University, P.O. Box 5701 Othman Ibn Affan St, Riyadh 11432, Saudi Arabia

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