Efficiency Analysis of Islamic Banking in Hderabad City Sindh

Abstract

Interest (Riba) is stringently prohibited in Islam. It is very difficult task to transform a Riba based economy into non-interested based economy. This transformation of economy can take place slowly. Development of Islamic banking industry shows that is growing very rapidly. This study will help to estimate the efficiency of Islamic banking in Hyderabad by applying Data Envelopment Analysis (DEA). Technical, cost and income efficiency will be calculated through DEA. Tobit model will also be applied to investigate the influence of different factors on efficiencies of Islamic banks. Average technical efficiency score of Islamic banking under constant (variable) return to scale was 0.837 (0.929), 0.774 (0.943) and 0.913 (0.967) respectively in 2010, 2011 and 2012. Islamic bank should increase assets and profits which have positive impact on efficiency, while liabilities and no of branches had negative impact on efficiency. Average cost efficiency score of Islamic banking under constant (variable) return to scale was 0.623 (0.730), 0.621 (0.854) and 0.879 (0.929) respectively in 2010, 2011 and 2012. Average income efficiency score of Islamic banking under constant (variable) return to scale was 0.365(0.614), 0.387(0.709) and 0.416(0.687) respectively in 2010, 2011 and 2012. The efficiency of Islamic banks is increasing day by day in Hyderabad Sindh.

Keywords: Islamic banking, Riba, Interest, technical efficiency, profits, Hyderabad.