Review of Islamic Economics, Vol. 8, No. 2, 2004
per annum.1 In Malaysia the Islamic institutions - exclusive plus
mixed — are expected to capture, by the year ɪoto, market share
worth 20% in terms of assets owned.
Islamic financing is at the same time becoming more diverse and
venturesome. Its base has both deepened and widened. Islamic
financial institutions include commercial, investment and offshore
banks, insurance companies, and trust funds. They now finance trade,
industry and agriculture, infrastructure projects, building construction
and so on. They have pervaded many non-Muslim countries, operating
alongside and in competition with conventional financial institutions.
It is a confirmation of the profitability of interest-free financing that
many conventional banks have chosen to open Islamic ‘windows’ or
separate branches to take advantage of Islamic financial instruments.
However, this worldwide expansion of the financial sector,
including the Islamic, has not been free of blemish or alarm. It has
often been described as ushering in grave financial crises that
devastated flourishing economies, especially in the developing world,
during the 1980s and 1990s. All countries in transition from
communism to free markets have faced at least one banking crisis,
and many more than one. The causes of trouble were both internal
and external. Countries embarked on financial reforms, restructuring
the system with emphasis on enlarging the units through capital
injections and mergers (some forced). Controversy has raged around
the issues of optimal size and type of ownership for improved banking
performance. Questions have been raised as to how good it was to let
new banks enter the market, or sell domestic banks to foreigners, or
whether the smaller banks had any future at all in the era of
globalization and banking market consolidation.’
The issues prompted a spate of writings aimed at evaluating the
performance of banks; the dominant part of the financial system. It
was being increasingly asked: How efficient are the commercial banks
in discharging their functions? The inquiry was important for the
ordinary person, bank managers, financial analysts, and public policy
makers alike. Efficient performance by the young Islamic banks was
all the more important in order for them to compete with the mature
conventional systems, especially in fund mobilization, and so increase
their share of the market. Of late, a number of studies on the
efficiency of Islamic banks have appeared, employing the usual
criteria and methods.