Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
Efficiency of Islamic Banks-A Comparative Study on South-East
Asia and South Asian Region
Jesmin Islam 1, Md. Azizur Rahman2 and Mohammad Hasibul Hasan3
This study involves a comparison of the efficiency of Islamic banks of South-East region
(SER) and South Asian region (SAR). Data Envelopment Analysis (DEA) is used to
explore the contributions of technical and efficiency changes to the growth of productivity
in the Islamic Banking by using inferential statistics and efficiency (CRS&VRS) applying
the generalized output-oriented Malmquist index for the years 2009-2011. The outputinput data consists of a panel of 15 non foreign Islamic Bank from two important regions
of Asia for Islamic Banks. This study considers three inputs, namely deposits, overhead
cost, total assets and three outputs, explicitly investment and advances, ROI, ROA
respectively. In the DEA technique, efficiency is measured by the Malmquist index. This
study found that total efficiency of SAR Islamic Banks is better than SER Islamic Banks
because of higher scale efficiency which occurred during the study periods. It is found
that, in terms of geometric mean, the TFP of SER Islamic Banks is better than SAR
Islamic Banks due to positive significant technical changes. Our finding indicates that in
the Islamic Banks of SAR, the smaller the size of the banks, the higher the probability for
the banks to be more efficient in utilizing their inputs to generate more outputs. However,
it is just opposite in the case of SER Banks. This study will be beneficial for researchers
as well as practitioners for a better understanding of the efficiency of Asian Islamic
Banking Industry.
Keywords: Islamic Bank, Malmquist Index; Efficiency; Technical Efficiency; Total Factor
Productivity.
Jel Classification Codes: C14, C67, D57 G22
I Introduction:
Malaysia and Indonesia (South-East Asia), Bangladesh and Pakistan (South Asian) are As
Muslim majority countries and have been largely affected by the Islamic finance resurgence that
has taken place in the Middle East and rest of the world during the last three decades. However,
the stability and development of an economy is dependent upon the performance of Financial
Sector of that country (Zaidi, 2005). Banking System is a vital part of a country‟s financial Sector,
and thus for sound economic development, banking sector‟s performance is crucial. Measuring
the efficiencies of banks can give a practical insight into the banking system and the potential of
economic development of that country. Thus it is very crucial to highlight the most technically
efficient banking system operating under the study regions (Sample area). The two distinctive
Banking systems that are prevalent in the each sample country are Islamic Banking system that
follows the ―Shari‟ah law and the Commercial Banking system based on interest. Islamic
banking System is based on profit-loss sharing (Without Riba or interest). Moreover, different
factors can affect the banks financial performance such as size, profits and interest expense etc
(Hussain, 2004). In 1992, Berger and Humphrey found that efficiency variables vary from region
____________________________________________________________________________________________
1
Dr. Jesmin Islam , Assistant Professor, Discipline of Accounting, Banking & Finance, Faculty of Business &
Government, University of Canberra, Australia.
2
Md. Azizur Rahman , Assistant Professor of Finance, Department of Business Administration, International Islamic
University Chittagong, Bangladesh, E-mail: aziz_fin_2004@yahoo.com,
3
Mohammad Hasibul Hasan , Research Fellow, International Islamic University Chittagong, Bangladesh.
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
to region and by the type of method employed such as parametric, nonparametric and ratios. In
this paper we will be using non parametric DEA analysis and compare them and analyze the
factors affecting the technical efficiency of the Islamic banking systems in South-East and South
Asian counties.
Islamic banking performs the same intermediary function but does not receive a predetermine
interest from borrowers and does not pay a predetermined interest to the depositors; the amount
of profits is based on the profit sharing agreements with the depositors and also with the
borrowers. In addition, there are fee-based banking services that are similar to the conventional
banks as long as there is no predetermined interest payment/receipt in the transaction. Thus,
Islamic banking is considered as a different banking stream as it prohibits interest and replaces
with (a) profit share and (b) the profit share depends on the extent of the risk participation of the
parties. The absence of pre-determined rewards is based on Quranic commands and as
interpreted using Shari’ah principles (Ariff, 2006).
In this respect, Berger, Hunter, and Timme (1993) noted that if banks are efficient, then we might
expect improved profitability, greater amounts of funds intermediated, better prices and service
quality for consumers, and greater safety and soundness if some of the efficiency savings are
applied towards improving capital buffers that absorb risk. However, the opposite applies to
inefficient intermediaries, with the additional danger of taxpayer-financed industry bailouts if
substantial losses are sustained. Consequently, efficiency of banks improves the overall
economy which affects the welfare of the society as a whole. The efficiency of banks is
influenced by different factors in the environment in which production takes place e.g. size, age,
region, competition, input and output quality, network characteristics, ownership form,
regulations and changes in regulation, and management characteristics.
This cross-country comparison of bank efficiency in developing countries is relatively lacking in
the literature and there hasn‟t been any intensive work being done on cross-country efficiency
comparisons for banks in the developing countries. This paper aims to analyse the technical
efficiency of the 15 South-East and South Asian Banks through a non parametric linear
programming method called Data Envelopment Analysis (DEA) and compares the relative
efficiency of banks across countries. These banks are from 4 different countries.
The rest of the paper is organized as follows Section-2 reviews the relevant literature; Section-3
discusses the methodology of DEA and Malmquist Index; Section-4 presents the results and
analysis, and finally Section-5 presents conclusion with some recommendations.
II Literature Review
There are adequate studies on measuring performances of financial efficiency in various sectors
specially in banking sector but few for Islamic banks especially when the country faces several
challenges like political unrest, rate of inflation (in dual digit), rising competition, problem in
solvency and devaluation of local currencies. Despite these challenges there still remains an
incredible opportunity for increasing market penetration in the core markets of leading Muslim
countries in Asia, Africa and some non Muslim countries with significant Muslim populations.
Previous studies utilising cross border efficiency among countries generally differ in terms of
approach, methodology, the type of efficiency measured and the variables used. The common
two approach discussed in most banking literature is the production approach and the
intermediation approaches. In the production approach, banking activities are described as the
production of services to depositors and borrowers. While the intermediation approach, which is
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
a complementary to the production approach, describes the banking activities as transforming
the money borrowed from depositors into the money lent to borrowers (Berger and Mester,
1997). The common methods are DEA, stochastic production frontier, the stochastic cost frontier
and regression analysis. The various types of efficiency measures are the technical efficiency,
cost efficiency, x-efficiency and scale efficiency. However most of these studies focused on
more developed countries and hardly any reference was made of developing nations. Using the
DEA technique, Berg et al. (1993) studied bank technical efficiency in Norway, Sweden, and
Finland followed with the productivity differences across banks in the Nordic region. Results
show that larger Swedish banks were being the most efficient, and were in the best position to
expand in a future Common Nordic banking market. Using the same approach, Pastor, Perez,
and Quesada (1997) analysed the productivity, efficiency, and differences in technology of
different European and U.S. banking systems. They used loans, deposits, and both short-term
and equity investments as outputs and non-interest expenses, other than personnel expenses,
as inputs. The findings suggested that France, Spain, and Belgium have the most efficient
banking systems, whereas the United Kingdom, Austria, and Germany have the least efficient
banking system.
On the other hand, Fecher and Pestieu (1993) applied a stochastic production frontier method to
evaluate technical efficiency of the financial services sectors of eleven OECD (Organization for
Economic Co-operation and Development) countries. Employing aggregate value-added, net of
indirect taxes, as a measure of a country's financial services sector output, employment in the
financial services sector and capital (estimated by the perpetual inventory model) as inputs, they
found that Japan has the most efficient financial services, while Denmark has been the least
efficient.
Typically, studies on Islamic bank efficiency have focused on theoretical issues and the empirical work
has relied mainly on the analysis of descriptive statistics rather than rigorous statistical estimation (El-
Gamal and Inanoglu, 2004). However, this is gradually changing as a number of recent studies
have sought to apply the approaches outlined above to estimate bank efficiency using various
frontier techniques. El-Gamal and Inanoglu (2004) used the stochastic frontier approach to
estimate the cost efficiency of Turkish banks over the period 1990-2000. The study compared
the cost efficiencies of 49 conventional banks with four Islamic special finance houses (SFHs).
The Islamic firms comprised around 3% of the Turkish banking market. Overall, they found that
the Islamic financial institutions to be the most efficient and this was explained by their emphasis
on Islamic asset-based financing which led to lower non-performing loans ratios. It is worth
mentioning that the SFH achieved high levels of efficiency despite being subjected to branching
and other self-imposed constraints such as the inability to hold government bonds. El-Gamal
and Inanoglu (2005) substantially extend their earlier study by providing an alternative method
for evaluating bank efficiency scores and the cost efficiency of Turkish banks throughout the
1990s. They distinguish between groups of banks that have different production technologies.
They find that the Islamic financial firms have the same production technology as conventional
banks (mainly domestic banks) and using standard stochastic cost frontier estimates, they show
that the Islamic firms are among the most efficient.
Hussein (2003) provides an analysis of the cost efficiency features of Islamic banks in Sudan
between 1990 and 2000. Using the stochastic cost frontier approach, he estimates cost
efficiency for a sample of 17 banks over the period. The interesting contribution of this paper is
that specific definitions of Islamic financial products are used as outputs. In addition, the analysis
is also novel as Sudan has a banking system based entirely on Islamic banking principles. The
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
results show large variations in the cost efficiency of Sudanese banks with the foreign owned
banks being the most efficient. State owned banks are the most cost inefficient. The analysis is
extended to examine the determinants of bank efficiency. Here, he finds that smaller banks are
more efficient that their larger counterparts. In addition, banks that have higher proportion of
musharakah and mudarabah finance relative to total assets also have efficiency advantages.
Overall, the substantial variability in efficiency estimates is put down to various factors, not least
the highly volatile economic environment under which Sudanese banks have had to operate
over the last few decades.
While the above outlines the literature that uses advanced modeling techniques to evaluate bank
efficiency, one should also note that there is also a growing body of literature that covers the
general performance features of Islamic banks. Such studies include those by Hassan and
Bashir (2003) who look at the determinants of Islamic bank performance and show Islamic
banks to be just as efficient as conventional banks if one uses standard accounting measure
such as cost to income ratios. Other studies that take a similar approach are those by Sarker
(1999) who looks at the performance and operational efficiency of Bangladeshi Islamic banks,
while Bashir (1999) examines the risk and profitability of two Sudanese banks. Overall, the
general finding from this literature is that Islamic banks are at least as efficient as their
conventional bank counterparts and in most cases are more efficient.
According to Ghayad (2008), the contribution of Shari‟ah board in banks governorship impose an
important constraints on Islamic banks‟ operations. Consequently, the investment account holder
(IAH) didn‟t contribute to the management of their funds. In other words, the corporate
governance of Islamic banks does not give to the IAH any power to appoint the management or
the external auditor. This situation raises interest conflict between IAH and the Islamic bankers:
it is the same conflict which exists between “principal–agent” relationships in conventional firms.
In this analysis, Ghayad (2008) show that in addition to quantitative international variables such
as the financial ratios, the performance of an Islamic bank is affected also by the internal
qualitative variables such as managerial variables and found that the members of Shari‟ah board
represent a serious handicap for the directors of the Islamic banks. Directors and members of
Shari‟ah board did not speak the same language. The members of the Shari‟ah board were not
very specialized in the fields other than Sheri‟ah and contrary the directors in Shari‟ah.
Kamaruddin et al. (2008) investigates for the first time, both cost and profit efficiency of fullfledged Islamic banks and Islamic window operations of domestic and foreign banks in case of
Malaysia. He adopts the DEA approach to estimate different measures of efficiency. The main
finding of this paper consist on proving that Islamic banking operators are relatively more
efficient at controlling costs than at generating profits. The main contributor for cost efficiency of
domestic and foreign banks comes from resource management and economies of scale
respectively. These findings have implications on the reform process carried out in the aftermath
of Asian financial crisis, particularly the Financial Sector Master Plan (FSMP). Ftiti Zied et al
(2013) investigate the efficiency of the Islamic bank in GCC countries around the subprime crisis
of 2008 and showed that the Islamic bank remains efficient under subprime crisis.
To recapitulate, after reviewing the brief literature on Islamic banking and efficiency
measurement techniques, a fundamental question arises. Do Islamic banks perform efficiently?
Although the phenomenon of Islamic banking and finance has developed significantly in recent
years, only very few studies have examined this central question. This paper provides evidence
on the performance of 15 Islamic banks over the period 2009-2011. Unlike previous studies, this
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
paper is based on efficiency measurement in which the nonparametric approach, Data
Envelopment Analysis, is utilized to analyze the technical, scale efficiency and Mulquist
productivity of Islamic banking in specifying input-output variables of Islamic banks. Overall, the
results suggest that Islamic banks suffered slight inefficiencies during the study period.
III. Methodology:
3.1 Data Collection and Sampling: this study is fully based on secondary sources of data.
However, the data collected for the study was obtained from the annual reports and released by
respective banks of the sample areas from period 2009 to 2011. The data consisted of
unbalanced panel data to 15 non foreign Islamic Bank from two important regions of Asia for
Islamic Banks. The Efficiency of the banks was measured by DEA analysis. In this study we use
DEA model (non parametric) because it forms a frontier by benchmarking the highest efficiency
performance of banks and then compare the rest with the benchmark hence giving us a
panoramic view of the complete banking sector.
3.2 DEA (Data Envelope Analysis): DEA (Data Envelope Analysis) is a nonparametric, a linear
programming model. It does not assume a fixed structural model, thus used in operational
research, by determining a benchmark frontier in analysis. Charnes, Cooper and Rhodes (1978),
introduced it primarily for assessing the "Productive Efficiency", it is a new and simpler method
of measuring and evaluating the performance. DEA is a multiple input program, taking different
types of variables and analyzing them together by benchmarking them on a frontier formed by
the most efficient data and then comparing it with the whole, thus it gives a multiple output result.
Measurement of inputs and outputs in a DEA model are the result of an underlying Data
Generating Process (DGP). The DEA model assumes an efficiency benchmark of 100% of any
firm being evaluated.
3.3 Technical Efficiency: In 1957, Farell introduced the idea of efficiency of a unit of
production, by using the concept of ―input oriented measure‖. It is a linear programming model,
which assumes no random mistakes, and is used to measure technical efficiency. Technical
efficiency is the measure of effectiveness in which a given set of inputs to produce outputs. A
DMU is technically efficient only when is uses minimum level of inputs to produce maximum
outputs. Or it may use reduction in input levels while giving up the same amount output.
3.4 DATA AND MODEL SPECIFICATION
To examine the contributions of technical and efficiency change to the growth of productivity of
Islamic Bank, the generalized output-oriented Malmquist index, developed by Fare et al. (1989)
is adopted in this study. The Malmquist indexes are constructed using the Data Envelopment
Approach (DEA) and estimated using Coelli‟s (1996) DEAP version 2.1. Malmquist index was
chosen as there are a number of desirable features for this particular study. The DEA does not
only require input prices or output prices in their construction, which make the method
particularly useful in situations in which prices are not available publicly or non-existent, but it
also does not require a behavioral assumption such as cost minimization or profit maximization
in the case where the producers‟ objectives differ, unknown or achieved. This was first
demonstrated by Fare et al. (1989) using the geometric mean formulation of the Malmquist
index. Following this, Forsund (1991) derived the decomposition of the simple version of the
Malmquist productivity index into technical change and efficiency change. Following Fare et al.
(1989), the Malmquist index of total factor productivity growth is written as follows:
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
Where,
, denoted the distance from the period t+1 observation to the period t technology. The first
part of the right hand side of equation (1) measures the change in firm‟s relative efficiency (i.e., distance between
the observed productions from maximum potential production) between year t and t+1. On the other hand, second
parts of this equation within the brackets (geometric mean of the two ratios) shows the firms‟ relative change in
t
t+1
technology (i.e., movements of the frontier function itself) between the two periods evaluated at x and x . Basically,
the change in relative efficiency measures how well the production process converts inputs into outputs (catching
up to the frontier) and the later reflects enhancement in technology. According to Fare et al. (1994a), improvements
in productivity yield Malmquist index values greater than unity. Deterioration in performance over time is associated
with a Malmquist index less than unity. The same interpretation applies to the values taken by the components of
the overall TFP index. The positive change in the efficiency component yielded index values greater than one and is
considered to be evidence of catching up (to the frontier). Values of the technical change component greater than
one are considered to be evidence of technological progress. Following Fare et al. (1994), this study uses an
enhanced decomposition of the Malmquist index by decomposing the efficiency change component calculated
relative to the constant returns to scale technology into a pure efficiency component (calculated relative to the VRS
technology) and a scale efficiency change component which captures changes in the deviation between the VRS
and CRS technology. The subset of pure efficiency change measures the relative ability of operators to convert
inputs into outputs while scale efficiency measures to what extent the operators can take advantage of returns to
scale by altering its size toward optimal scale.
3.5 Inputs and Outputs and the Choice of Variables
The definition and measurement of inputs and outputs in the banking function remains a
contentious issue among researchers. Banks are typically multi-input and multi-output firms. As
a result, defining what constitutes „input‟ and „output‟ is fraught with difficulties, since many of the
financial services are jointly produced and prices are typically assigned to a bundle of financial
services. Additionally, banks may not be homogeneous with respect to the types of outputs
actually produced. To determine what constitutes inputs and outputs of banks, one should first
decide on the nature of banking technology. In the banking theory literature, there are two main
approaches competing with each other in this regard: the production and intermediation
approaches (Sealey and Lindley, 1977).
Under the production approach, a financial institution is defined as a producer of services for
account holders, that is, they perform transactions on deposit accounts and process documents
such as loans. Hence, according to this approach, the number of accounts or its related
transactions is the best measures for output, while the number of employees and physical
capital is considered as inputs. Previous studies that adopted this approach are by Sherman and
Gold (1985), Ferrier and Lovell (1990) and Fried et al. (1993). The intermediation approach on
the other hand assumes that financial firms act as an intermediary between savers and
borrowers and posits total loans and securities as outputs, whereas deposits along with labor
and physical capital are defined as inputs. Previous banking efficiency studies research that
adopted this approach are among others Charnes et al. (1990), Bhattacharyya et al. (1997) and
Sathye (2001). For the purpose of this study, a variation of the intermediation approach or asset
approach originally developed by Sealey and Lindley (1977) will be adopted in the definition of
inputs and outputs used4. According to Berger and Humphrey (1997), the production approach
might be more suitable for branch efficiency studies, as at most times bank branches basically
process customer documents and bank funding, while investment decisions are mostly not
under the control of branches.
The aim in the choice of variables for this study is to provide a parsimonious model and to avoid
the use of unnecessary variables that may reduce the degree of freedom. Data for the empirical
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
analysis is sourced from individual bank‟s Islamic Banking Scheme‟s (IBS) annual balance sheet
and income statements. All variables are measured in million of US$ in order to eliminate the
currency discrepancy. Given the sensitivity of efficiency estimates to the specification of outputs
and inputs, we have estimated two alternative models. In DEA Model, we model the Islamic
banks as multi-product firms, producing three outputs by employing one three input, namely, the
inputs are Deposit, Overhead Expense & Total Capital and the outputs are Investment and
advance, Return on Investment (ROI) & Return on Equity (ROE). As we are looking at relative
(in)-efficiency, it is important that the DMUs should be sufficiently similar, so that comparisons
are meaningful. This is particularly the case with DEA, where Dyson et al. (2001) have
developed what they describe as a series of homogeneity assumptions. The first of these is that
the DMUs the performance of which is being compared should be undertaking similar activities
and producing comparable products and services so that a common set of outputs can be
defined. The second homogeneity assumption is that a similar range of resources is available to
all the units and they operate in a similar environment. In the spirit of maintaining homogeneity,
only banks that offered Islamic banking services are included in the analysis. The annual
balance sheet and income statement used to construct the variables for the empirical analysis
were taken from published balance sheet and income statement information in annual reports of
each individual bank.
FINDINGS AND ITS ANALYSIS:
3.1 Measures of some Descriptive Statistics
Some descriptive statistics such as mean, median, standard deviation, minimum and maximum have been used in
order to analyze the data we run data envelopment analysis. Table-1 reveals the descriptive statistics of the
outputs and inputs of all the Islamic Banks during the period of study. In case of total inputs and outputs during the
period of analysis, Burj Bank Ltd. and Export Import Bank of Bangladesh Ltd. have occupied the highest and lowest
rank respectively. The average Investment and Advance, Return on Investment and Return on Equity $5617.50,
$3.29 and $10.45 in million of US$ respectively. Meanwhile, the average Deposit, Overhead Expense/Personal
Expense and Total Capital are $7217.32, $1045.95 and $6360.06 in millions US$ accordingly during study period
2009-2011.
Table 1: Descriptive Statistics, 2009-2011
Statistical
Tools
Mean
Median
Standard
Deviation
Min
Max
Investment/
Advance
5617.50
978.05
15856.51
28.00
94821.36
Return
on Return on Deposit
Investment
Equity
3.29
10.45
7217.32
1.44
11.51
1069.00
7.38
10.29
17862.87
-16.38
26.03
-12.55
30.71
15.24
94821.36
Overhead
Expense
1045.95
20.20
2767.18
Total
Capital
6360.06
224.15
15791.54
0.59
11575.86
14.79
56254.00
Source: Annual Reports of respective Islamic Banks
3.2 Production Frontier and Efficiency
To outline a number of commonly used efficiency measures and discuss how they are calculated
relative to an efficient technology is the primary purpose of this section, which is generally
signified by some form of frontier function. However, table-2, portrayed efficiency change for all
the Islamic Banks from 2009-2011 under constant returns to scale (CRS) and variable returns to
scale (VRS), since the basic component of the Malmquist productivity index is related to
measures of efficiency. For the values of unity, the firm is implied to be on the banks frontier in
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
the related year, while the values that are less than unity imply that the firm is below the frontier
or technically inefficient. Thus, the lower the values from unity, the firm is said to be more
inefficient compared to the values closer to one. For the years reported in tables-2, all the
Islamic Banks are consistently efficient, both under constant returns to scale (CRS) and variable
returns to scale (VRS) except IBBL, EXIM bank and SIBL of South Asia region. Meanwhile, IBBL
and SIBL are consistently efficient under VRS but not under CRS during the study period.
Moreover, the EXIMBBL is the least efficient firm for both CRS and VRS versions respectively.
On the other hand, most of sample Islamic banks of South East Asia were unable to maintain
consistent efficiency except CIMB Islamic Bank Bhd. and Bank Syariah Bukopin during the study
period.
Table 2: Efficiency of the Islamic Banks, 2009-2011 (CRS and VRS)
Countr
y
Region
CRS
Name of the Islamic Banks
VRS
Bangladesh
South Asia
Pakista
n
Malaysia
Indonesi
a
South East Asia
2009
2010
2011
2009
2010
2011
Islami Bank Bangladesh Ltd.
Shahjalal Islami Bank Ltd.
Al-Arafa Islami Bank Ltd.
First Security Islami Bank Ltd.
EXIM Bank of Bangladesh Ltd.
Social Islami Bank Ltd.
0.948
0.955
0.947
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
0.696
0.602
0.593
1.000
0.907
0.756
0.898
0.882
0.846
1.000
1.000
1.000
Bank Islami
1.000
1.000
1.000
1.000
1.000
1.000
Burj Bank
1.000
1.000
1.000
1.000
1.000
1.000
Mean
CIMB Islamic Bank Bhd.
Bank Islam Malaysia Bhd.
Affin islamic bank Bhd.
Al Rajhi BIC(Malaysia) Bhd.
HSBC Amanah Malaysia Bhd.
0.943
1.000
0.471
0.847
0.857
1.000
0.930
1.000
0.881
1.000
1.000
0.659
0.923
1.000
0.726
1.000
1.000
0.618
1.000
1.000
0.848
1.000
1.000
1.000
0.988
1.000
1.000
1.000
1.000
1.000
0.970
1.000
1.000
1.000
1.000
1.000
Bank Syariah Bukopin
1.000
0.359
1.000
1.000
1.000
1.000
Bank Syariah Mandiri
1.000
1.000
1.000
1.000
1.000
1.000
0.882
0.843
0.906
0.978
1.000
1.000
Mean
All the numerical values of Table-2 illustrate the percentage of the realized output level
compared to the maximum potential output level at the given input mix. For instance, in 2009,
IBBL, SIBL and EXIMBBL produced 94.8, 89.8 and 69.9 percent of its potential output level
under CRS. Whereas, this three South-Asian banks have achieved their maximum potential
output level under VRS. In 2010 IBBL produced 95.5 percent, SIBL produced 88.2 percent and
EXIMBBL produced 75.6 percent of their potential output level and 94.7 percent, 84.6 percent
and 59.3 percent respectively decreases in 2011 under CRS. Under VRS in the same year, the
EXIMBBL produced the potential output 90.7 percent and 75.6 percent decrease in 2010 and
2011 respectively whereas, IBBL and SIBL produced at their maximum potential output, same
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
as 2009. Nevertheless, in 2009, three South-East Asian Banks namely Bank Islam Malaysia
Bhd., Affin islamic bank Bhd. and Al Rajhi BIC (Malaysia) Bhd. have produced 47.1, 84.7 and
85.7 percent of its latent output level under CRS. However, among these three South-East Asian
banks all the banks have attained their maximum latent output level for the next two year except
Bank Islam Malaysia Bhd. Moreover, all the South-East Asian banks have successfully achieved
under VRS excluding Bank Islam Malaysia Bhd. in 2009.
As indicated by the weighted geometric mean in Table-2, the average efficiency of all the SouthAsian Islamic banks have deteriorated from 2009 to 2011 under CRS and VRS. Meanwhile,
under CRS, the weighted geometric mean of average efficiency of South-East Asian Islamic
banks have also deteriorated between 2009 and 2010 but shows a slight increase in later years
reached at 90.60% of potential output. In contrast, the average efficiency of South-East Asian
Islamic banks was relatively high in 2009 and achieved maximum potential level at 100% in
2010 and 2011. Finally, based on the VRS and CRS, the geometric mean efficiency of the
South-East Asian Islamic Bank are relatively higher than that of South Asian Islamic Banks.
3.3 Productivity Performance of the Individual Company
Malmquist TFP index measures the productivity change and to crumble these productivity
change into technical change and technical efficiency change.
Table-3 portrayed the
performance of Islamic banks of two different regions of Asia from 2009 to 2011 in terms of TFP
change and its two subcomponents which are technical change and efficiency change
respectively. However, a value of the Malmquist TFP productivity index and its components of
greater than one imply improvements of productivity in the relevant aspects, while values less
than one indicate a decrease or deterioration in productivity. Meanwhile, subtracting 1 from the
number reported in the table gives an average increase or decrease per annum for the relevant
time period and relevant performance measure. These measures also capture the performance
relative to the best practice in the relevant performance or relative to the best practice in the
sample.
Table 3: Islamic Banks Relative Malmquist TFP Change Relative Technical Change between
Time Period t and t + 1, 2009-2011
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
TFP
Name of the Islamic Banks
RTC
REC
Bangladesh
South Asia
Pakistan
20092010
20102011
20092010
20092010
20092010
Mean
20092010
20102011
Mean
Islami Bank Bangladesh Ltd.
1.023
1.007
1.007
1.007
0.998
1.007
1.007
0.992
1.000
Shahjalal Islami Bank Ltd.
0.826
1.000
1.000
1.000
0.633
0.730
1.000
1.000
1.000
Al-Arafa Islami Bank Ltd.
0.841
1.000
1.000
1.000
0.766
0.804
1.000
1.000
1.000
First Security Islami Bank Ltd.
1.009
1.000
1.000
1.000
0.770
0.890
1.000
1.000
1.000
EXIM Bank of Bangladesh Ltd.
0.684
0.864
0.864
0.864
0.443
0.618
0.864
0.985
0.925
Social Islami Bank Ltd.
0.995
0.982
0.982
0.982
0.686
0.850
0.982
0.960
0.971
Bank Islami
0.460
0.359
0.359
0.359
1.000
0.565
0.359
1.159
1.518
Burj Bank
1.348
1.000
1.000
1.000
0.399
0.874
1.000
1.000
1.000
0.898
0.902
0.902
0.902
0.712
0.792
0.902
1.012
1.052
CIMB Islamic Bank Bhd.
1.241
1.000
1.000
1.000
0.949
1.095
1.000
1.000
1.000
Bank Islam Malaysia Bhd.
1.500
1.869
1.869
1.869
1.120
0.962
1.869
0.825
1.347
Affin islamic bank Bhd.
1.460
1.180
1.180
1.180
1.276
1.257
1.180
1.000
1.090
Al Rajhi Banking & Investment
Corporation (Malaysia) Bhd.
1.196
1.167
1.167
1.167
1.099
1.062
1.167
1.000
1.084
HSBC Amanah Malaysia Bhd.
0.309
0.659
0.659
0.659
0.964
0.717
0.659
0.937
0.798
Bank Syariah Bukopin
1.547
1.000
1.000
1.000
0.625
1.086
1.000
1.000
1.000
Bank Syariah Mandiri
1.303
1.000
1.000
1.000
0.872
1.088
1.000
1.000
1.000
1.222
1.125
1.125
1.125
0.986
1.038
1.125
0.966
1.046
Mean
Malaysia
Indonesia
South East Asia
Mean
Table 4 portrays calculated changes in the Malmquist-based Total Factor Productivity (TFP) and
Relative Technical Change (RTC) index. In terms of South Asian Islamic banks none of the
banks has positive productivity changes during the adjacent years of 2009-2010, 2010-2011
except Bank Islami. Moreover, the situation was similar in South-East Asian region only HSBC
Amanah Malaysia Bhd has positive productivity change. In addition, only Bank Islami and IBBL
have positive average TFP annual growth rate in South Asian region. On the contrary, the
scenario was just opposite in South-East Asian Islamic banks. All South-East Asian Islamic
banks have positive average TFP annual growth rate except HSBC Amanah Malaysia Bhd. As a
final point, the geometric mean of average TFP change of South Asian banks has deteriorated
during the periods of 2009-2011, with 13.8 percent. On the other hand, average TFP increased
by 8.6 percent.
The Malmquist TFP index is further decomposed into its two components, technical change and
efficiency change. The result of technical change and efficiency change are also displayed in
Table-4 and portrays the index values of technical progress or retreat as measured by average
shifts in the best-practice frontier from period t to t+1. According to the results, the average
change of Relative Technical Change (RTC) of all the Islamic Banks have faced negative growth
rate during the study period 2009-2010
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
Table 4: Changes in Firms Relative Efficiency and Changes in Efficiency Components by Firms
between Time Period t and t + 1, 2009-2011
Changes in Efficiency
2009-2010
PECH
2009-2010
SECH
2010-2011
PECH
2010-2011
SECH
Islami Bank Bangladesh Ltd.
Shahjalal Islami Bank Ltd.
Al-Arafa Islami Bank Ltd.
First Security Islami Bank Ltd.
EXIM Bank of Bangladesh Ltd.
Social Islami Bank Ltd.
1.000
1.007
1.000
0.992
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
0.907
0.952
0.834
1.181
1.000
0.982
1.000
0.960
Bank Islami
1.000
0.359
1.000
1.159
Burj Bank
1.000
1.000
1.000
1.000
Mean
CIMB Islamic Bank Bhd.
Bank Islam Malaysia Bhd.
Affin islamic bank Bhd.
Al Rajhi BIC (Malaysia) Bhd.
HSBC Amanah Malaysia Bhd.
0.988
0.913
0.979
1.037
1.000
1.000
1.000
1.000
1.179
1.585
1.000
0.825
1.000
1.180
1.000
1.000
1.000
1.167
1.000
1.000
1.000
0.659
1.000
0.937
Bank Syariah Bukopin
1.000
1.000
1.000
1.000
Bank Syariah Mandiri
1.000
1.000
1.000
1.000
1.026
1.084
1.000
0.966
Name of the Islamic Banks
Bangladesh
South Asian Banks
Pakista
n
Malaysia
Indonesi
a
South East Asian Banks
Mean
In order to examine a change in scale efficiency, the efficiency change is further decomposed
into two subcomponents, namely pure efficiency change and scale efficiency change in which
the results are reported in Table-4. The results indicate that the pure efficiency and scale
efficiency appear to be an equally important source of growth to efficiency change. It shows that
in both pure and scale efficiency, four of the South-Asian banks named SJIBL, AAIBL, FSIBL
and Burj bank have been found to be consistently efficient, where another four banks named
IBBL, SIBL, EXIMBBL and bank Islami through the year 2009 to 2011 are not consistently
efficient. On the other hand, all the South-East Asian Islamic Banks were efficient except Bank
Islam Malaysia and HSBC Amanah Malaysia. However, among the all Islamic banks, Bank
Islami has attained the highest deterioration with (-64.1) and Bank Ismal Malaysia has achieved
the highest growth of scale efficiency with 58.5 percent during the study period through 20092011.
3.4. Productivity Performance of the Islamic Banks
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
Table 5 summarizes the performance of the Malmquist productivity index of two important
regions for Islamic Banking sector in Asia during the year 2009 and 2011. According to the
geometric mean of South Asian Islamic bank, IBBL recorded the highest growth in TFP and
technical changes with 0.6% and 0.7% respectively. Furthermore, Bank Islami has dented its
growth in TFP and efficiency change with (-76.8%) and (-35.5%). All the banks are under
deterioration in growth. On the hand, the geometric mean of South-East Asian Islamic bank,
Affin Islamic Bank has attained the highest growth in TFP and technical changes with 36.5% and
25.6% respectively. Besides, HSBC Amanat Malaysia has accomplished the lowest growth in
TFP and technical change with (-47.1%) and (-32.7%). However, All the South-East Asian
Islamic banks have improved in Malmquist productivity index.
Table 5: Summary of the Malmquist Productivity Index of Islamic Banks, 2009-2011
Bangladesh
Pakista
n
South Asian Banks
Name of the Islamic Banks
Islami Bank Bangladesh Ltd.
Shahjalal Islami Bank Ltd.
Al-Arafa Islami Bank Ltd.
First Security Islami Bank Ltd.
EXIM Bank of Bangladesh Ltd.
Social Islami Bank Ltd.
Bank Islami
EFFCH
1.000
TECHCH
1.007
PECH
1.000
SECH
1.000
TFPCH
1.006
Malaysia
Indonesi
a
South East Asian Banks
1.000
1.000
1.000
0.922
0.971
0.724
0.803
0.881
0.593
0.834
1.000
1.000
1.000
0.870
1.000
1.000
1.000
1.000
1.061
0.971
0.724
0.803
0.881
0.547
0.810
0.645
0.359
1.000
0.645
0.232
Burj Bank
1.000
0.734
1.000
1.000
0.734
Mean
0.942
0.742
0.984
0.960
0.717
1.000
1.085
1.000
1.000
1.085
1.241
1.086
1.081
0.786
0.948
1.256
1.061
0.673
1.086
1.000
1.000
1.000
1.143
1.086
1.081
0.786
1.177
1.365
1.146
0.529
1.000
0.983
1.000
1.000
0.983
1.000
1.066
1.000
1.000
1.066
CIMB Islamic Bank Bhd.
Bank Islam Malaysia Bhd.
Affin islamic bank Bhd.
Al Rajhi BIC(Malaysia) Bhd.
HSBC Amanah Malaysia Bhd.
Bank Syariah Bukopin
Bank Syariah Mandiri
Mean
1.028
1.010
1.012
1.014
1.050
Note: TFPCH = Total Productivity Change; EFFCH = Efficiency Change; TECHCH = Technical
Change; PECH = Pure Efficiency Change; and SECH = Scale Efficiency Change.
On average, the TFP of the South Asian Islamic banks is just below the perfect efficient level,
mainly due to negative technical changes. In contrast, the TFP of the South-East Asian Islamic
bank is over the perfect efficient level because of positive change in both technical and efficiency
change. Furthermore, the efficiency change is largely contributed by scale efficiency rather than
pure efficiency. This indicates that the size of the companies is not a factor in affecting efficiency
changes. This study found that there were very few substantial growths in technical components
and efficiency change which suggest that TFP in the Banking sector is due to the innovation in
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
technical components coupled with a considerable improvement in the efficiency aspect. On
average, the Islamic Banks were found to be experiencing a technical progress. Finally, in terms
of efficiency (both pure and scale), all the Islamic banks from two regions of Asia have been
touched perfect growth level, but the growth level of South-East Asian Islamic banks is
marginally higher than that of the South Asian banks.
5. Conclusions
The researchers used DEA to explore the contributions of technical and efficiency change to the
growth of productivity in the Islamic banking sector of two regions of Asia by applying the
generalized output-oriented Malmquist index for the years 2009-2011. The efficiency measures
of Islamic banks are comparatively measured where it is found on the point of efficiency. The
TFP of the Islamic banks of South Asia were unable to achieve efficient level due to high
deterioration in technical changes by 26.6%. Furthermore, the efficiency change is more
contributed by the pure efficiency rather than scale efficiency. This indicates that the size of the
companies have a very limited influence in affecting efficiency changes. However, this study also
found that there were diminutive significant growths in technical components and no
improvement in efficiency change which suggest that TFP in the South Asian Islamic banks is
due to the less innovation in technical components coupled with a insignificant improvement on
the aspect of efficiency.
On the contrary, the efficiency of South-East Asian Islamic banks was higher than South Asian
banks and accomplished perfect growth level. In addition, the TFP achieved unit efficient level
because of positive contribution from technical and relative efficiency change with 1% and 1.2%
during the study period. This indicates that the size of the banks have a significant influence in
affecting efficiency changes. Nevertheless, this study also found that there were significant
growths in technical components and efficiency change which suggest that TFP in the SouthEast Asian Islamic banks is due to desirable innovation in technical components coupled with a
significant improvement on the aspect of efficiency.
According to the geometric mean of Malmquist Productivity Index, the South Asian banks are
isolated to be experiencing a technical progress. In contrast, efficiency change with the
subcomponent of this efficiency change, namely pure efficiency seemed to be attaining the unit
level. Hence, this finding indicates that in the South Asian Islamic banks, the larger the size of
the banks, the higher the probability for the companies to be more efficient in utilizing their inputs
to generate more outputs.
Due to the negative impact of the technical change, the overall TFP for these firms within the
period of study is maintained at a value just lower than 1 (reflected by the mean 0.734 of TFP
change). However, one the significant implications of this study that findings will have
noteworthy benefits for the Islamic banks in assisting them to take strategies in terms of the
operations and management in order to improve the efficiency and technical change of banks to
utilizing their inputs to generate more outputs. Moreover, this will improving their competitive
edge and further strengthens their positions in the industry. This result indicates that Islamic
banks have a great potential to further increase their TFP through improvements in both
efficiency and technical component such as enhancing the use of information and
communication technology in order to provide good services to customers.
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
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