To be Efficient, Islamic Banks Should Either be Funds Managers or Duplicate Conventional Financial Products

Abstract

This paper measures and compares the cost and profit efficiencies of 51 Islamic banks: comprising of 10 operating in Malaysia and 41 operating in the GCC countries, using the Stochastic Frontier Approach (SFA). We document high profit and cost efficiencies scores within overall the sample. In addition, to look for the Islamic banks’ efficiency determinants, the paper compares the different practices of each set of banks. The findings argue that the Malaysian Islamic banks draw efficiency from insuring safety to depositors and from developing large range of shariaa compliant financial products. Especially, they often circumvent Islamic principles to duplicate conventional financial products. While the GCC Islamic banks seem to draw efficiency from the real estate and securities investing. Especially, the GCC Islamic banks seem to be rather funds managers whose major concern is maximizing depositors’ earnings.

Keywords: Islamic Banks’ Efficiency, Islamic Banks’ Practices, Stochastic Frontier Approach (SFA).

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