DO REGULATION, MAQASID SHARIAH AND INSTITUTIONAL PARAMETER IMPROVE ISLAMIC BANK EFFICIENCY?
We use a new dataset on Islamic bank to link the regulation and bank efficiency. Specifically, we examine how bank efficiency is influenced by: (i) bank regulation, (ii) contract enforcement, (iii) economic freedom, and (iv) shariah law parameters. Our hypothesis tries to prove that a better regulation will produce a higher level of efficiency. We will also try to prove that shariah law parameter will promote better efficiency among Islamic banks. Specifically, our results suggest that a significant relationship exists between bank efficiency and greater restrictions on Islamic banks’ activities. The results also show that regulatory quality has a positive and significant impact on bank efficiency. The negative coefficient of the economic freedom indicates that since Islamic bank have greater ability to enter into banking industry and obtain an easy license, create products and services, and close the business. All would dampen bank efficiency. Overall, our findings support the argument that regulation should be adapted to the risk and size level of the Islamic banks that are being regulated.
Alam, N. 2013. Impact of banking regulation on risk and efficiency in Islamic banking”, Journal of Financial Reporting and Accounting, Vol. 11(1), pp. 29-50.
Al-Delaimi, K., & Battall, A. H. 2006. Using Data Envelopment Analysis To Measure Cost Efficiency With an Application on Islamic Banks. Scientific Journal of Administrative Development. 4:134–156.
Al-Jarhi, M. A. 2009. Islamic Finance: An Efficienct and Equitable Option. The Islamic Research and Training Institute, Jeddah
Akhigbe, A. and McNulty, J. 2005. Profit Efficiency Sources and Differences among Small and Large U.S. Commercial Banks. Journal of Economics and Finance. 29 (3): 289-299
Avkiran, N. K. 1999. An application Reference for Data Envelopment Analysis in Branch Banking: Helping the Novice Researcher. International Journal of Bank Marketing. 17(5): 206-220
Ayadi, R., Arbak, E., Ben-naceur, S., & Groen, W. P. De. 2013. Financial Development , Bank Efficiency and Economic Growth across the Mediterranean. Retrieved from (www.medpro-foresight.eu)
Barra, C., Destefanis, S. and Lavadera, G. L. 2013. Regulation and Crisis: The Efficiency of Italian Cooperative Banks. Working Paper No. 338
Barth, James R., Gerard Caprio, Jr., and Ross Levine, 2004. Bank supervision and regulation: What works best? Journal of Financial Intermediation. 13:205-248.
Barth, J.R., Caprio, G., Levine, R., 2006. Rethinking Bank Regulation: Till Angels Govern. Cambridge University Press, Cambridge, UK.
Barth, J.R., Caprio, G., Levine, R., 2008. Bank regulations are changing: for better or worse? Comparative Economic Studies. 50: 537–563.
Barth, J. R., Lin, C., Ma, Y., Seade, J., and Song, F. M. 2013. Do bank regulation, supervision and monitoring enhance or impede bank efficiency? Journal of Banking and Finance. 37(8): 2879-2892
Battese, G. E. and Coelli, T. J. 1995. A Model for Technical Inefficiency Effects in A Stochastic Frontier Production Function for Panel Data. Empirical Economics. 20:325-332.
Beck, T., Demirgüç-Kunt, A., & Merrouche, O. 2012. Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking & Finance. 37(2): 433–447. doi:10.1016/j.jbankfin.2012.09.016.
Canhoto, A. and Dermine, J. 2003. A note on banking efficiency in Portugal, New vs. Old banks. Journal of Banking and Finance. Vol. 27: 2087-2098
Chortareas, G., Girardone, C. and Ventouri, A. (2012), “Bank supervision, regulation, and efficiency: Evidence from the European Union”, Journal of Financial Stability, 8, pp. 292– 302
Demirguc-Kunt, A., Laeven, L. and Levine, R. 2004. Regulations, Market Structure, Institutions, and The Cost of Financial Intermediation. Journal of Money, Credit and Banking. 36 (3): 593-622
Forughie, S. H. Z. and De Zoysa, A. D. 2012. Australian Banks Performance During The Global Financial Crisis: An Analysis on the Efficiency and Productivity. Saarbrucken, Germany: Lambert Academic Publishing.
Fries, S. and Taci, A. 2004. Cost Efficiency of Banks in Transition: Evidence from 289 Banks in 15 Post-Communist Countries. European Bank for Reconstruction and Development. Working Paper No. 86: 1-29
Ftiti, Z., Nafti, O., & Sreiri, S. (2013) Efficiency Of Islamic Banks. The Journal of Applied Business Research, 29(1):285–304.
Girardone, C., Nonkerrs, J. C. and Velentza, E.F. 2009. Efficiency, Ownership and Financial Structure in European Banking: A Cross- Country Comparison. Managerial Finance. 35(3):227-245
Hassan, M. and Dridi, J. (2010). The Effects of Global Crisis on Islamic and Conventional Banks: A Comparative Study. IMF Working Paper. WP/10/201
Hassan, M. K., Sanchez, B., & Yu, J.-S. (2011) Financial development and economic growth: New evidence from panel data. The Quarterly Review of Economics and Finance, 51(1), 88–104. doi:10.1016/j.qref.2010.09.001.
Hughes, J. P., & Mester, L. J. (2008). Efficiency in Banking : Theory , Practice , and Evidence. Working paper series Research Department, Federal Reserve Bank of Philadelphia.
Ibrahim, W.H.W. and A.G., Ismail (2015) Conventional bank and Islamic banking as institutions: Similarities and differences Humanomics, 31 (no 3): 272-298
Ismail, A.G. and A., Tohirin (2010) Islamic law and finance. Humanomics, 26 (no. 3): 178-199
Jazil, T. and Syahruddin. 2013. The Performance Measures of Selected Malaysian and Indonesian: Islamic Banks Based on the Maqasid al- Shariah Approach. Retrieved http://download.portalgaruda.org/article.php?article=320091&val=7636&title=THE%20PERFOMANCE%20MEASURES%20OF%20SELECTED%20MALAYSIAN%20AND%20INDONESIAN%20Islamic%20Banks%20based%20on%20the%20Maqasid%20al-Shari%C3%A2%E2%82%AC%E2%84%A2ah%20Approach
Kamarudin, F. and Yahya, M. H. 2013. Cost, Revenue and Profit Efficiency in Islamic vs Conventional Banks: Empirical Evidence Using Data Envelopment Analysis (DEA). Pertanika Journal Social Science and Humanity. 21(5):1-18
Kasman, A. and Yildirim, C. 2006. Cost and Profit Efficiencies in Transition Banking: The Case of New EU Members. Applied Economics. 38: 1079-1090.
Kaufmann, K., Kraay, A., & Mastruzzi, M. (2010). Governance matters V: Worldwide Governance indicators. World Bank
Levine, R. 1998. The Legal Environment, Banks, and Long-Run Economic Growth. Journal of Money, Credit and Bankin 30(3):596-620
Massally, T.K. and Duff, S. (2018) What can we learn from Sierra Leone’s new Regulatory Sandbox? CGAP Blog post, May 15, 2018. Washington, D.C.: CGAP. http://www.cgap.org/blog/what-can-we-learn-sierra-leones-new-regulatory-sandbox
Mohammed, M.O., Tarique, K. M. and Islam, R. 2015. Measuring the Performance of Islamic Banks Using Maqasid-Based Model. Intellectual Discourse 23: Special Issue. 401-424
Mokhtar, H. S. A., Abdullah, A., Al-Habsi, S. M. (2006) Efficiency of Islamic Banking in Malaysia: A Stochastic Frontier Approach. Journal of Economic Cooperation 27, (2) 37-70.
Monge-Naranjo, A. 2009. Entrepreneurship and Firm Heterogeneity with Limited Enforcement. Annals of Finance. 5(3-4):465-494.
Murinde, V. (2012) Financial Development and Economic Growth: Global and African Evidence. Journal of African Economies, 21 (suppl 1), i10–i56. doi:10.1093/jae/ejr042.
Ngalim, S.M., A.G., Ismail and N.I., Yaa’kub (2015) A Comparative Analysis of the Maqasid Shari’ah of Islamic Banks in Malaysia, Indonesia and the Gulf Cooperation Council Countries. In Mehmet Asutay and Abdullah Q. Turkistani (eds.) Islamic Finance, Political Economy, Performance and Risk, Volume I, Berlin & London: Gerlach Press.
Pasiouras, F., Tanna, S. and Zopounidis, C. (2008) Banking regulations, cost and profit efficiency: Cross-country evidence. Retrieved from Electronic Copy: http://ssrn.com/abstract:1103436
Radaelli, C. M. and Francesco, F. D. 2007. The Oxford Handbook of Regulator. In Baldwin, R., Core, M. and Lodge, M. (eds), Oxford Handbooks in Business and Management, Oxford: 279-301
Repkova, I. (2015) Banking Efficiency Determinants in the Czech Banking Sector. Procedia Economics and Finance 23: 191-196
Reverchuk, S., Lobozynska, S. and Megits, N. 2013. Evaluating the Efficiency of Banking System During a Pre- Crisis and Crisis Period by Using Cluster Analysis (2004-2019). SAGE Open October-December 2013: 1-19. DOI: 10.1177/2158244013504575
Sassi, H. (2013) The impact of bank regulations and institutions of efficiency in selected MENA banks. International Journal of Economics and Finance 5(No. 8): 84-100
Sealay, C. W. and Lindley, J.T. 1997. Inputs, Outputs and A Theory of Production and Cost at Depository Financial Institutions. The Journal of Finance. 32(4): 1251-1266
Sufian, F. (2009) Determinants of bank efficiency during unstable macroeconomics environment: Empirical evidence from Malaysia. Research International Business and Finance 23: 54-77
Sufian, F. and Hassan, M. K. 2011. Economic Freedom and Bank Intermediation Spreads: Do Countries Level of Economics Development Make A Difference? Social Science Research Networks. http://dx.doi.org/10.2139/ssrn.1931090
Sufian, F. and Habibullah, M.S. 2014. Economic Freedom and Bank Efficiency: Does Ownership and Origins Matter? Journal of Financial Regulation and Compliance. 22(3):174-207
Yilmazkuday, H. (2011). Thresholds in the Finance-Growth Nexus: A Cross-Country Analysis. The World Bank Economic Review 25 (2): 278-295.
Zhang, J., Wang, P., & Qu, B. (2012) Bank risk taking, efficiency, and law enforcement: Evidence from Chinese city commercial banks. China Economic Review, 23(2): 284–295. doi:10.1016/j.chieco.2011.12.001
Journal of Islamic Monetary Economics and Finance is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.