Journal of Islamic Finance and Business Research 2 (1)

 

EFFICIENCY MEASUREMENT AND DETERMINANTS OF MALAYSIAN ISLAMIC BANKING OPERATIONS

 BH Kamaruddin, R Mohd, S Kazemian

Abstract  

This study used the Data Envelopment Analysis (DEA) technique to estimate the cost efficiency of Islamic banks and Islamic window banks in Malaysia during 1998-2004. We chose to analyse up to 2004 as from 2005 onwards, the Islamic window operations would be upgraded to Islamic subsidiaries. The average cost efficiency (CE) score of 0.695 was lower than CE of banks in bank-dominant economies such as Spain, but almost comparable to a local study investigated at around the same time of 0.69 (conventional) and 0.72 (full-fledged Islamic banks). In addition, we also found that bank characteristics such as size of operation and asset quality have significant, positive effects on banks’ cost efficiency. This shows bank size has promoted scale economies in production, and prevention measures or prudent management may involve higher expenses but they promote cost efficiency in the long run. Meanwhile, corporate social responsibility (CSR) does not promote cost efficiency reflecting CSR as emphasizing wealth purification over materialism in Islam. The findings of this study have contributed to the literature and body of knowledge in terms of fresh findings of Islamic window bank performance, CSR, size and scale economies, and asset quality of Islamic banking business – areas which are associated with uniqueness of Islamic banking business as compared to the conventional.