The name is absent

Measuring The Efficiency of
Islamic Banks: Criteria, Methods
and Social Priorities

Zubair Hasan

Abstract: With the rapid expansion in recent decades of Islamic financial institutions,
banks in particular, assessments of their performance have also proliferated. This
paper does two things. First, it takes stock of the criteria and methods used to
measure the efficiency of Islamic banks, and of the results obtained. Second, it asks if
the approaches chosen are commensurate with the objectives of Islamic banking.

Islamic economists appear to have used mainstream cost-profit considerations
in assessing bank performance: ratio analyses and various sorts of input or output
frontier models. Also, the way they use the techniques is often marred by gaps, errors,
and inconsistencies that render their conclusions vulnerable even in their own
framework.

This paper suggests that the performance of Islamic banks be evaluated, with
reference to their social responsibilities in an Islamic framework. The fulfilment of
cost-profit criteria may still be necessary but cannot be, for Islamic banks, a
sufficiency condition as well. We may have to evolve goal-oriented efficiency criteria
and basic changes in the organizational structure of the Islamic banking, before the
system can meet the needed norms.

I. Introduction

There has been an unprecedented expansion in the financial sector of
the economies of both developed and developing countries over the
past fifty' years or so.‘ Even Islamic banking, with a formal standing
of no more than two decades, has had its share of expansion. At
present it is claimed that about 261 banks in about too countries
manage assets worth no less than $250 billion, growing at 10-15%

Dr Zl^,BΛ1R Hλsλn is Professor of Islamic Economics and Finance, Faculty of
Economics and Management Sciences, International Islamic University of Malaysia,
Kuala Lumpur, Malaysia

© 1004, INTERNATIONAL ASSOCIATION FOR ISLAMIC ECONOMICS

Review of Islamic Economics, Vol. 8, No. ɪ, 1004, pp. 5-30.

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