Islamic Banking in Malaysia: Bank Muamalat and Bank Islam's Efficiency Measurement Using D.E.A. Approach

Abstract

This paper aims to measure the efficiency of Malaysian two-lead entire-fledge Islamic banks to develop a research phenomenon supported by theoretical and literature reviews. This study measures the technical and cost efficiencies of the two selected banks using the non-parametric frontier method called Data Envelopment Analysis (DEA). The empirical study summarizes the findings of the technical efficiency (TE) and cost efficiency (CE) of selected banks. The study revealed that, although the fully-fledged Islamic banks were more efficient than the Islamic windows, they were still less efficient than the conventional banks. The findings of this study revealed that the technical and cost efficiencies of Malaysian Islamic banks could be improved further. This finding would also facilitate the Islamic banking industry in Malaysia and set the direction for future improvement of Islamic banking operations in Malaysia. Additionally, this study would open a fruitful avenue for future research on Islamic banking efficiency and competition in other Muslim countries.