Relationship between Islamic Banking Profitability and Determinants of Efficiency

The paper investigates the efficiency of the 78 Islamic banks in 25 countries for the period 1992-2009. The efficiency estimates of individual banks are evaluated using the non-parametric Data Envelopment Analysis (DEA) method. The empirical findings seem to suggest that the Islamic banks have exhibited high Pure Technical Efficiency (PTE). A multivariate analysis based on the Tobit model reinforces these findings and significantly associated with operating expenses against asset, size, equity, NPL, Asia Financial Crisis and national income level (GDP). The Fixed Effect Model (FEM) used to analyze profitability proposed that profit efficiency is positive and statistically significant with operating expenses against asset, equity, high income countries and non- performing loans against total loans. Interestingly, the empirical results show that more profitable banks are those that have higher operating expenses against asset, more equity against asset and concentrated at high income countries, demonstrating a close relationship between monetary factors in determining Islamic banks profitability