Islamic Banks, Bank Efficiency, Stochastic Frontier Approach
Abstract
This study uses the basic Stochastic Frontier Approach (SFA) to analyse the technical efficiencies of 15 Islamic banking over the period 2005-2007. In specifying input-output variables of Islamic banks, the intermediation approach is selected as it is in line with the principle of Islamic financial system. According to SFA approach, closer to 100% means a bank acts more efficient. Overall, the result that Islamic banks suffer slight inefficiencies during the period 2005-2005, but tends to be increasing. The study has several important policy implications to offer, one of which is that it could be taken as a guideline for the Indonesian government to chart a policy on banking deregulation and mergers. Moreover, the study provides some information and identifies the source of inefficiency, which could, in turn, be used to assist banks’ managements to overcome the problems of inefficiency.
