What Drives Efficiency Of Islamic Banks Among Regions?

Abstract

Our study tries to determine what drives the efficiency of Islamic banks. To this purpose, we use the stochastic frontier analysis in one step. This allows us to take into account in the frontier function, explanatory variables which influence efficiency. We find that market power and profitability have a positive impact on Islamic banks efficiency, while it is the contrary for their size. Besides, Islamic banks display an average efficiency score of 92%, with Islamic banks settled down in Asia displaying the highest score (96%). Indeed, countries like Malaysia and Pakistan undertake reforms in order to allow banks to better cope with the existing financial system. On the contrary, Islamic banks operating in countries with Islamic banking as government legislation are not the most efficient ones.