EFFICIENCY OF ISLAMIC BANKS: EVIDENCE FROM ISLAMIC WINDOWS OF CONVENTIONAL BANKS IN ETHIOPIA
Keywords:
Cost Efficiency, Technical Efficiency Islamic Windows, Stochastic Frontier Analysis
Abstract
The study examines the cost and technical efficiency of selected Islamic banking windows of conventional banks in Ethiopia during the period of 2016-2020. The parametric method, stochastic frontier approach (SFA) was employed to measure both cost and technical efficiency of the banks. The efficiency scores of the sampled banks can be measured based on their performance in utilizing inputs to successfully generate output during the study period. It gauges the service quality of the banks taking loans and deposits as well as operating income and expenses into consideration. The study uses time series data from four conventional banks which provide Islamic banking widow in Ethiopia. The statistical findings show that the conventional banks have fairly better technical efficiency individually and collectively; however, the cost efficiency scores indicate that the banks are not efficient enough in terms of minimizing costs for a given scale and mix of outputs. Similarly, the results of the stochastic technical frontier estimates uncovers that there is positive significant relationship between the input variables namely total deposits and total operating expenses and output variables namely total financing and total operating income. The outputs remain an essential contributor to the cost efficiency in Islamic windows conventional banks in Ethiopia.
JEL Classification Codes: G01, G21, G24.
References
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Fernandes, F. D. S., Stasinakis, C., & Bardarova, V. (2018). Two-stage DEA-Truncated Regression: Application in banking efficiency and financial development. Expert Systems with Applications, 96, 284-301. https://doi.org/10.1016/j.eswa.2017.12.010
Hailu, S. M., & Bushera, I. (2020). Interest Free Banking in Ethiopia: Prospects and Challenges. Uluslararası İslam Ekonomisi ve Finansı Araştırmaları Dergisi, 6(2), 119-137. https://doi.org/10.25272/ijisef.678972
Hassan, K. M. (2006). The X-efficiency in Islamic banks. Islamic Economic Studies, 13(2), 49-78.
Hassan, M. K. (2003). Cost, profit and X-efficiency of Islamic banks in Pakistan, Iran and Sudan. Islamic Financial Architecture, 497.
Hauner, D., & Peiris, S. J. (2008). Banking efficiency and competition in low income countries: the case of Uganda. Applied Economics, 40(21), 2703-2720. https://doi.org/10.1080/00036840600972456
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Hussein, K. A. (2001). Operational efficiency in Islamic banking: The Sudanese experience. Islamic Research and Training Institute, Islamic Development Bank.
Imam, P., & Kpodar, K. (2016). Islamic banking: Good for growth? Economic Modelling, 59, 387-401. https://doi.org/10.1016/j.econmod.2016.08.004
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Ismail, F., Majid, M. S. A., & Rahim, R. A. (2013). Efficiency of Islamic and conventional banks in Malaysia, Journal of Financial Reporting and Accounting, 11(1), 92-107. https://doi.org/10.1108/JFRA-03-2013-0011
Johnes, J., Izzeldin, M., & Pappas, V. (2014). A comparison of performance of Islamic and conventional banks 2004–2009. Journal of Economic Behavior & Organization, 103, 93-107. https://doi.org/10.1016/j.jebo.2013.07.016
Kablan, S., & Yousfi, O. (2011). Efficiency of Islamic and conventional banks in countries with Islamic banking. Retrieved from https://mpra.ub.uni-muenchen.de/32951/
Kamaruddin, B. H., Safab, M. S., & Mohd, R. (2008). Assessing production efficiency of Islamic banks and conventional bank Islamic windows in Malaysia, International Journal of Business and Management Science, 1(1), 31-48.
Kamarudin, F., Sufian, F., Nassir, A. M., Anwar, N. A. M., Ramli, N. A., Tan, K. M., & Hussain, H. I. (2018). Price efficiency on Islamic banks vs. conventional banks in Bahrain, UAE, Kuwait, Oman, Qatar and Saudi Arabia: impact of country governance, International Journal of Monetary Economics and Finance, 11(4), 363-383. https://doi.org/10.1504/IJMEF.2018.095743
Kaparakis, E. I., Miller, S. M., & Noulas, A. G. (1994). Short-run cost inefficiency of commercial banks: A flexible stochastic frontier approach. Journal of Money, Credit and Banking, 26(4), 875-893. https://doi.org/10.2307/2077953
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Lelissa, T. (2020). The Impact of COVID-19 on the Ethiopian Private Banking System. Available at SSRN 3624944.
McKinley, V., & Banaian, K. (2005). Central bank operational efficiency: meaning and measurement. Central Banking Publications, Available at SSRN: https://ssrn.com/abstract=2508461
Meeusen, W., & van Den Broeck, J. (1977). Efficiency estimation from Cobb-Douglas production functions with composed error. International Economic Review, 18, 435-444. https://doi: 10.12691/jbms-4-4-4.
Mohamad, S., Hassan, T., & Bader, M. K. I. (2008). Efficiency of conventional versus Islamic Banks: international evidence using the Stochastic Frontier Approach (SFA). Journal of Islamic Economics, Banking and Finance, 4(2), 107-130.
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Published
2022-07-05
How to Cite
Ali, A. S., & Hailu, S. M. (2022). EFFICIENCY OF ISLAMIC BANKS: EVIDENCE FROM ISLAMIC WINDOWS OF CONVENTIONAL BANKS IN ETHIOPIA. International Journal of Islamic Banking and Finance Research, 9(1), 21-31. https://doi.org/10.46281/ijibfr.v9i1.1768
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
Copyright (c) 2022 Abdu Seid Ali, Suadiq Mehammed Hailu
This work is licensed under a Creative Commons Attribution 4.0 International License.
