Islamic Commercial Banking In Europe: A Cross-Country And Inter-Bank Analysis Of Efficiency Performance

Abstract

We examine the relative efficiency performance of the Islamic Bank of Britain (IBB), the first stand-alone full-fledged Islamic commercial bank in the Western world, against conventional banks in the UK, and also against Islamic banks from Muslim-majority countries. We also apply a two-stage Data Envelopment Analysis (DEA) model to determine the impact of internal and external factors on bank's efficiency. In order to investigate the association of the DEA-efficiency scores with the traditional accounting ratios, we estimate the correlation coefficients between the two variables. The efficiency-profitability matrix is used to enable the characterization of the banks' performance profile. Our analysis covers the period from 2005 to 2008.

Our results show that the IBB is technically inefficient. It also has relatively a poor financial performance. The bank‘s inefficiency stems from both scale (size) and management issues. IBB exhibits, however, an upward trend in efficiency and profitability, particularly in adverse market conditions. Thus, it has a great prospect to increase efficiency and strong potential for further growth in the UK. Additionally, results suggest that the technically more efficient banks are larger, have greater profitability and loans intensity, acquire less debt, and on average have a lower market share. IBB is relatively superior in terms of lending intensity and capital adequacy. Findings further illustrate that the DEA measures can be used separately or concurrently with standard accounting measures in determining Islamic banks performance.