Review of Islamic Economics, Vol. 8, No. ɪ, 2.004
One objective of the present work is to investigate the nature of
these criteria and methods in general and see if their application to
Islamic banking has been in order. Another, rather more important,
aim is to ask whether the criteria and methods employed are
commensurate with the requirements of an Islamic social order. We
shall see that, though relevant, these criteria and methods are
inappropriate when judged by this touchstone. The paper contains
much of what is now stock-in-trade in conventional economics, but
the discussion may enrich and add to the literature on its maturing
Islamic counterpart.
Writings on efficiency measurement of banks normally provide a
broad general sketch of the economy, its financial structure, number
and size of banks, their sources and uses of funds and the like. The
information helps the reader understand the objectives and methods
used for the measurement of efficiency in the work, as also the policy
conclusions that follow from it.4 Efficiency studies in the area of
Islamic banking do address this requirement, but the information they
provide is often meagre and patchy.
The paper is divided into seven sections. In the next section, I
explain the concept of efficiency and its variants as used in
conventional economics, including banking. The concepts follow
from the goals banks pursue, and mould the criteria for evaluating
their performance. Section 3 examines a leading example of ratio
analysis to evaluate the performance of Islamic banks. Section 4
presents the theoretical framework of econometric models used to
measure the efficiency of production units, to prepare the reader for
the subsequent appraisal of such models. Section 5 reviews briefly
some of the applications of the benchmark models to Islamic banks.
In Section 6, I examine the efficacy of the current efficiency criteria
with reference to the social priorities of Islam. Section 7 offers some
concluding observations.
II. Efficiency: Concepts and Criteria
In mainstream economics the primary objective of business including
finance is the maximization of profit for its owners. Concepts of
efficient performance are invariably geared to this norm. In principle,
the ideal is possible to achieve (i) if a production unit (PU) produces
maximum output with given inputs or (ii) obtains a given output