Determinants of technical efficiency of Islamic banks in GCC countries

Abstract

Purpose

This study aims to discuss the determinants of Islamic banks’ efficiency. It tries to explore the source of Islamic banks’ inefficiencies to propose solutions to guarantee an acceptable level of technical efficiency of such banks in Gulf Cooperation Council (GCC) countries.

Design/methodology/approach

To achieve this objective, the authors use a parametric approach, especially, the stochastic frontier approach, using production function and panel data analysis. The authors apply a package Frontier 4.1 for the estimation process, which is composed of two principal steps. In the first step, the authors estimate Islamic banks’ efficiency scores in different GCC countries based on an output distance function. In the second step, the analysis highlights the impact of managerial-specific education on Islamic accounting and finance, scarcity of Sharīʿah scholars, the board independence and chief executive officers’ (CEOs) duality on GCC Islamic banks’ efficiency.

Findings

This study’s results document that managerial-specific education on Islamic accounting and finance and the board of directors’ composition, especially, the board’s independence, can largely explain the technical efficiency scores of Islamic banks in GCC countries. Especially, the authors find evidence that managerial-specific education is negatively associated with the inefficiency term. The coefficient of the Sharīʿah scholar’s variable has a positive sign indicating that the more there are Sharīʿah experts, the more the bank is efficient. In addition, CEOs’ duality seems to have no significant effect on GCC Islamic banks’ efficiency.

Practical implications

GCC Islamic banks need to improve the presence of independent members on the board of directors. In addition, these banks are invited to count more on Sharīʿah auditors and educated staff characterized by a high level of competency in the domain of Islamic banking and finance.

Originality/value

To the best of the authors’ knowledge, this is the first study that highlights the effect of managerial-specific education in Islamic accounting and finance and scarcity of Sharīʿah scholars on Islamic banks’ efficiency.

Citation

Ben Mohamed, E., Meshabet, N. and Jarraya, B. (2021), "Determinants of technical efficiency of Islamic banks in GCC countries", Journal of Islamic Accounting and Business Research, Vol. 12 No. 2, pp. 218-238. https://doi.org/10.1108/JIABR-12-2019-0226