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Bank Efficiency in Malaysia a DEA Approach

Fakarudin Kamarudin (), Fadzlan Sufian (), Annuar Md. Nassir (), Nazratul Aina Mohamad Anwar () and Hafezali Iqbal Hussain
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Fakarudin Kamarudin: Faculty of Economics and Management, Universiti Putra Malaysia, 43400 Serdang, Selangor Darul Ehsan, Malaysia
Annuar Md. Nassir: Faculty of Economics and Management, Universiti Putra Malaysia, 43400 Serdang, Selangor Darul Ehsan, Malaysia
Nazratul Aina Mohamad Anwar: Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia, 71800, Negeri Sembilan, Malaysia

Journal of Central Banking Theory and Practice, 2019, vol. 8, issue 1, 133-162

Abstract: The purpose of the present paper is to examine the revenue efficiency of the Malaysian Islamic banking sector. The study also seeks to investigate the potential internal (bank specific) and external (macroeconomic) determinants that influence the revenue efficiency of Malaysian domestic Islamic banks. We employ the whole gamut of domestic and foreign Islamic banks operating in the Malaysian Islamic banking sector during the period of 2006 – 2015. The level of revenue efficiency is computed by using the Data Envelopment Analysis (DEA) method. Furthermore, we employ a panel regression analysis framework based on the Ordinary Least Square (OLS) method to examine the potential determinants of revenue efficiency. The results indicate that the level of revenue efficiency of Malaysian domestic Islamic banks is lower compared to their foreign Islamic bank counterparts. We find that bank market power, liquidity, and management quality significantly influence the improvement in revenue efficiency of the Malaysian domestic Islamic banks during the period under study. This study provides for the first time empirical evidence that covering all three efficiency concepts, namely cost, revenue, and profit efficiency is completely missing from the literature. By calculating these efficiency concepts, we can observe the efficiency levels of the domestic and foreign Islamic banks. In addition, by comparing both cost and profit efficiency, we can identify the influence of the revenue efficiency on the banks’ profitability.

Keywords: Islamic Banks, Revenue Efficiency, Data Envelopment Analysis, Panel Regression Analysis, Domestic; Foreign (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2019
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