Islamic Banks: Efficiency and its Determinants in Pakistan

Author(s): AZEEM SARDAR, MUHAMMAD MASOOD AZEEM, TANVEER AHMED and SANIA
ZAFAR
Source: Islamic Studies, Vol. 50, No. 3/4 (Autumn - Winter 2011), pp. 423-434
Published by: Islamic Research Institute, International Islamic University, Islamabad
Stable URL: http://www.jstor.org/stable/41932605
Accessed: 06-07-2016 17:38 UTC

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Islamic Studies 50:3-4 (201 1 ) pp. 423-434

Islamic Banks: Efficiency and its Determinants in

Pakistan

AZEEM SARDAR, MUHAMMAD MASOOD AZEEM,

TANVEER AHMED, SANIA ZAFAR

Abstract

This study was conducted to find out the efficiency of Islamic banking in Pakistan .
There are 18 Islamic banks currently working in Pakistan. It includes the Islamic
bank windows of conventional banks , out of these there are five pure Islamic banks .
However , the data of 15 Islamic banks were available which were collected for the
period 2008 to 2010. Non-Parametric approach i.e. Data Envelopment Analysis
(DEA) was applied to estimate the scale , income and technical efficiency of Islamic
banks. Factors affecting these efficiencies were determined by applying Tobit model
The major findings of the study were that scale efficiency of Islamic banks was higher
as compared to the technical and income efficiency. Moreover , Islamic banks efficiency
was improving with the passage of time. The study also found that pure Islamic banks
were more efficient as compared Islamic banks branches operated by conventional
banks. This study suggests that Islamic banks should increase total assets and profit
because these variables have positive impacts on efficiency , while liabilities showed
negative impact.

1. Introduction

Islamic banking has been introduced in various countries only recently as an

alternative to conventional banking, yet its growth is rapid. The central
questions which arise with the growth of this industry are; whether these
banks are performing efficiently? Are pure Islamic banks more efficient than
the Islamic banks windows of the conventional banks? What are the factors
effecting the efficiency of these banks? Furthermore it is pertinent to ask as to
whether these banks are capable of thriving under the highly imminent
competitive business environment from the conventional banks, while
keeping full compliance with the rules defined by Islamic shari'ah? These and
many other related questions necessitate empirical research on these issues
within each individual country framework. Keeping in view these questions,
our study attempts to measure the efficiency of Islamic banks and Islamic bank

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424 AZEEM SARDAR, MUHAMMAD MASOOD AZEEM, TANVEER AHMED, SANIA ZAFAR

windows of the conventional banks operating in Pakistan. In our sample for

the present study, the following are Islamic Banks: Albaraka Islamic Bank,
Dawood Islamic Bank, Dubai Islamic Bank, Meezan Bank, and Bank Islami.
Since Islamic banks around the world are in their early stage of operation,
there are limited empirical research studies on the efficiency of these banks.
Most of the research done in Pakistan on this issue is either theoretical or
preliminary as reported by Khattak, Rehman and others.1 This is because of
the fact that Islamic banking industry is in its infancy in Pakistan. Although
one decade has gone since its inception yet it cannot be compared with the
flourishing, well established conventional banking in this country. As Rizvi
observed, this could precisely be the reason that study on efficiency
measurement of conventional banks is well documented as opposed to the case
of Islamic banking efficiency.2
The literature on the performance measurement of Islamic banks provides
a useful insight and also serves as a motivation of our work. Yudistiria
compared the efficiency of 18 Islamic and conventional banks in Malaysia by
employing Data Envelopment Analysis (DEA). He measured technical, pure
technical and scale efficiencies of all these banks and came to two conclusions:
one; that inefficiency of these banks is small (10%), however, considerable as
compared to conventional banks, two; the variations in the efficiency score of
these banks is mainly determined by the 'country specific factors.'3 Mokhtar
and others measured the efficiency of pure Islamic banks and Islamic bank
windows in Malaysia. He used the stochastic frontier approach to measure the
technical and cost efficiency. His study revealed that conventional banks
efficiency is higher than that of Islamic banks; however, the marginal
efficiency of Islamic banks is higher and increasing gradually. This study also
concluded that pure Islamic banks were more efficient than the Islamic bank
windows of conventional banks.4 Sufian examined the performance of Islamic
banks operating in Malaysia from 2001-2005.5 He also used DEA approach

1 N. A. Khattak, and K. Rehman, "Customer Satisfaction and Awareness of Islamic Banking

System in Pakistan," African Journal of Business Management 4 (2010) 5: 662-671, May 2010.
Available online at http://www.academicjournals.org/AJBM, ISSN 1993-8233; A. Ahmad, A.A.
Humayoun and U. Hassan, "An Analysis of Functions Performed by Islamic Bank: A Case of
Pakistan," European Journal of Social Sciences, 17 (2010), 1.
2S. F. A. Rizvi, "Post Liberalization Efficiency and Productivity of the Banking Sector in
Pakistan," The Pakistan Development Review, 40 Part II (Winter 2001), 4: 605-632.
3 D. Yudistiria, "Efficiency in Islamic Banking: An Empirical Analysis of Eighteen Banks,"
Islamic Economics Studies, 12 (2004), 1: 1-19.
4 H. S. Mokhtar, N. Abdullah and S. M. Al-Habshi. "Efficiency of Islamic Banking in Malaysia:
A Stochastic frontier Approach," Journal of Economic Cooperation , 27 (2006), 2: 37-70.
5 F. Sufian, "The Efficiency of Islamic Banking Industry: A Non-Parametric analysis with non-
discretionary input variable," Islamic Economic Studies, 14 (2007), No. 1 and 2: 53-87.

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ISLAMIC BANKS: EFFICIENCY AND ITS DETERMINANTS IN PAKISTAN ^25

and concluded that scale inefficiency prevailed over pure technical inefficiency
in the studied Islamic banks. In addition to this, he asserted that foreign banks
are technically more efficient as compared with domestic ones which are
sound in terms of scale efficiency. Bader, Arif and Hassan also conducted
research to find out efficiency of Islamic versus conventional banks.6 They also
applied Data Envelopment Analysis (DEA) to measure and compare the cost,
revenue and profit efficiencies. They concluded that there was no significant
difference between Islamic versus conventional banks on the basis of overall
efficiency. Although, Islamic banks exhibited relatively better efficiency
performance as compared to conventional banks, yet differences are not
statistically significant. Moreover, all those banks studied proved to be more
inefficient in revenue efficiency than the cost and profit efficiency. Shahid,
Rehman, Niazi and Raoof compared the efficiency of five Islamic versus five
conventional banks in Pakistan.7 They found out the technical, cost and
allocative efficiencies of these banks by utilizing DEA. Their results indicate
that the Islamic banks competed well with the conventional banks in cost and
allocative efficiency. However the technical efficiency of conventional banks
was higher than that of the Islamic banks.
From the preceding review of literature, it emerges that the findings on
the efficiency measurement of Islamic banking around the world presents a
mixed picture. There is considerable diversity in the literature as to how
efficiently the Islamic banks are performing in different parts of the world.
This diversity is not only restricted to the overall efficiency score but also
among various types of efficiency e.g. technical, scale, cost, allocative etc.
From the dearth of literature on Islamic banks efficiency and the enormous
variation in the results of available research, it is thus essential to measure
efficiency of Islamic banks and its various determinants in each individual
country specific frame work.
The present study is significant in the sense that it is designed to provide
the empirical reference from Pakistan on the efficiency measurement of
Islamic Banks. On one hand, this study fills the research gap on this issue in
Pakistan, while on the other hand it usefully contributes to the overall
available literature on this subject. In addition to efficiency measurement, this
study also attempts to find out factors affecting the efficiency of Islamic banks

6 M. K. I. Bader, S. Mohammad, M. Arif, and T. Hassan, "Cost, Revenue and Profit Efficiency
of Islamic Versus Conventional Banks: International Evidence Using Data Envelopment
Analysis," Islamic Economics Studies , 15 (2008) 2: 23-76.
H. Shahid, H., Ramiz ur Rehman, G.S.K. Niazi and A. Raoof, "Efficiencies Comparison of
Islamic and Conventional Banks of Pakistan," International Research Journal of Finance and
Economics , ISSN 1450-2887, 49 (2010). http://www.eurojournals.com/finance.htm.

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426 AZEEM SARDAR, MUHAMMAD MASOOD AZEEM, TANVEER AHMED, SANIA ZAFAR

operating in Pakistan. For the measurement of efficiency, this study focuses

exclusively on the Islamic banking industry as a whole which includes the full
Hedged Islamic banks and the Islamic bank windows of the conventional banks
operating in Pakistan. This way, it provides the efficiency comparison of the
pure Islamic banks with those being run by the conventional banks. Our
study employs non-parametric approach that is Data Envelopment Analysis
(DAE). DEA has a quality that it can estimate efficiency even if the sample
size is small. Since, the member of Islamic banks in case of Pakistan is small;
DEA is best suited technique for efficiency analysis of Islamic banking. This
technique can also evaluate yearly performance of individual banks, which is
helpful to study the individual bank performance from last few years. For the
investigation of various factors influencing the efficiency of Islamic banks, our
research employs Tobit model. Results of the model are helpful for providing
appropriate suggestions for the improvement of efficiency of Islamic banks in
Pakistan.

2. Methodology
Charnes and others8 introduced DEA for performance evaluation. As
mentioned earlier, due to small number of Islamic Banks in Pakistan DEA is
best suited technique because it can estimate efficiency even if the sample size
is small. It is a linear programming technique which evaluates the relative
efficiency of decision making units and also provides the best level of input
and output mix. Sufian explained that this technique can also evaluate annual
performance of individual banks.9
The efficiency can be measured by
H m

Eb= ii outputib/M inputjb, for i- 1,

Where outputib represents the ith output of bth bank and wi shows the
weight assigned to output. Similarly inputjb is the ith input of bth bank and
wj is weight associated with input. This efficiency ratio Eb is maximized by
selecting optimal weights assigned to input and output.

^ ' Wi
ut outputik/i-i inputjk 1, for k- 1

The equation 2.2 shows that efficiency ratios must be either 1 or less than
1. Moreover weights of input and output must be positive. The optimal

8 A. Chames, W.W. Cooper and E. Rhodes, "Measuring Efficiency of Decision Making Units,"
European Journal of Operational Research, 2 (1978), 429-44.
' F. Sufian, "The Efficiency of Islamic Banking Industry."

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ISLAMIC BANKS: EFFICIENCY AND ITS DETERMINANTS IN PAKISTAN

weights of input and output are determined by converting non-linear function

into linear function for bth bank.

3. Data and Model Specification

18 Islamic banks are exercising Islamic modes of banking operation in
Pakistan. In this study, data of 15 Islamic banks were collected for the period
ranging from 2008 to 2010. The data for the rest of three banks were not
available for the time period specified being investigated. Data was collected
from financial statements of the banks. In this study, three types of efficiencies
including scale, income and technical efficiencies were estimated under
constant returns to scale (CRS) and variable returns to scale (VRS) by applying
DEA. Inputs used for measuring technical efficiency were deposits and
operating fixed assets while outputs were advances and investment. Similarly,
total revenue and total expenditures were taken as output and input
respectively to measure income efficiency.
To find the determinants of above mentioned efficiencies, following
Tobit model was used

Yjt = C + ai In TASETjt + 02 In TLIABIjt + cu In TPROFITjt + ou In NOBjt + asDPUBLICjt

+ ctDFPREIGNjt + ctfDPISLAMICjt + O8D2008jy + a9D2009jt + aioD2010jt + /xjt

Where ai, 012

The quantitative variables included in this model are: TASETjt, which is

total assets of j-th bank; TLIABIjt, which is total liabilities of j-th bank;
TPROFITjt, which is total profit of j-th bank and NOBjt, which is total
number of branches of j-th bank. Natural log was taken of all these
quantitative variables for the purpose of analysis. The qualitative variables
incorporated in the model are represented by dummy variables which are:
DPUBLICjt, which was for public owned bank; DFOREIGNjt, which is for
foreign owned bank; DPISLAMICjt, which is for pure Islamic bank and
D2008, D2009, D2010 represent the years 2008, 2009, 2010 respectively. If
banks exhibit these qualitative characteristics then assign value one to these
dummy variables other wise 0. This model is applied on each type of efficiency
by taking them as dependent variable one by one.

4. Results and Discussion

4.1. Technical and Scale Efficiency

Technical and scale efficiency of Islamic banks in Pakistan were calculated

under constant and variable returns to scale for the years 2008 to 2010. Table 1
depicts that five banks in 2008 were technically efficient under CRS, while

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42g AZEEM SARDAR, MUHAMMAD MASOOD AZEEM, TANVEER AHMED, SANIA ZAFAR

nine were technically efficient under VRS. The table also shows that technical
efficiency under VRS was higher than CRS in 2008. The most inefficient bank
under CRS in 2008 was Bank Al-Flah. This bank can become efficient if it
reduces input level to 52.4% from the level currently in use. It was also found
that Bank Al-Habib was most inefficient bank in the same year under VRS.
This bank can become efficient if it reduces input level to 33.1% from the level
of currently in use. The reason for the low efficiency of these banks can be
explained on the ground that banks are opening new windows which are more
probable to generate inefficiency. We also found that there were five banks
which were scale efficient. Only one bank was operating at increasing returns
to scale (1RS), five at CRS and rest of eight banks were operating at decreasing
returns to scale (DRS).
In 2009, four banks were technically efficient under CRS and eight banks
under VRS. Similarly, four banks were scale efficient in this year. There was
no bank operating at 1RS while 10 banks at DRS and five were operating at
CRS. Bank AL-Flah was the most inefficient bank under CRS; while Soneri
Bank was the most technically inefficient under VRS. The average technical
efficiency in 2009 was less as compared to 2008. The reason for this
phenomenon is also grounded in the fact that many new branches opened up
in this year as compared to previous ones which added up the fixed cost of
these banks.
There were five banks which were technically efficient under CRS and 10
banks under VRS in 2010. It was also found that five banks were scale efficient
in this year. There were four banks operating at 1RS and five banks at DRS.
The technical efficiency scores of the banks were higher than both of previous
years which meant that Islamic banking efficiency was increasing with the
time. The results of study showed that the most inefficient bank in this year
was Bank AL-Falah.
Table 1 also shows that average efficiencies of pure Islamic banks* were
higher than the Islamic banks branches operated by conventional banks. This
is due to the fact that pure Islamic banks have more branches than the Islamic
banks branches of conventional banks. National Bank and Standard Chartered
were the most efficient banks. These banks were fully technically efficient
under CRS and VRS and also under Scale efficiency.

4.2. Factors Effecting on Technical and Scale Efficiency

Table 2 shows the results of various determinants which effect technical and
scale efficiency. It was found that quantitative variable of profit (LNTPOFIT)
and total assets (LNTASET) had positive impact on technical efficiency, while
number of branches (LNNOB) and total liabilities (LNLIABI) affected

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 ISLAMIC BANKS: EFFICIENCY AND ITS DETERMINANTS IN PAKISTAN ^29

negatively. The positive relationship of assets and profit with technical efficiency
is in Une with results obtained by Pasiouras Sifodaskalakis and Zoupounidis.10
While negative impact of liabilities was similar to the findings of Sathye.11
The study reveals that dummy variables of pure Islamic banks
(DPISLAMIC) and public owned banks (DPUBLIC) had positive impact on
efficiency. Dummy variable of year 2010 had significant positive impact on
efficiency at 1 % level of significance and it depicted that in 2010 Islamic banks
has became more efficient as compared to previous years.

TABLE 1: TECHNICAL AND SCALE EFFICIENCY SCORES

OF ISLAMIC BANKS
Buk T.E*2008 S.E** R.S' T.E2009 S.E ILS T.E2010 S.E | TtS
Name 2001 2008 2009 2009 2010 2010
CR S I VRS CRS I VRS CRS I VRS

Albaraka 0901 I 0901 0714 i 0714 i i i

Islamic
Bank
Bank 0476 0774 0615 041 0957 0429 0783 0994 0787 5
Alfaiah
Askari 0.708 0.976 0 725 drs 0.705 0.987 0.714 drs
Bank
Bank 0658 0669 0983 rs 0915 0915 c
Habib
The Bank 1 1 1 ers 0.739 0.801 0.923 drs 0.945 1 0.945 1rs
of Khyber
Dawood 842 0842 064 0996 0642 0.764 0 767 0996 5
Islamic
Bank
Dubai 1 0679 0679 0873 0873 Dr
Islamic
Bank

Habib 86 097 0831 c

Metropolitan
Bank

Bank Islami """0.506 1 ~ 0.506 " drs ""0433*"" 0.901 0.481 ~ drs 0.718~~ 0.882 0.814 Drs
MCB

Meezan 0.716

Bank

National - - - - 1 1 1 crs 1 1 1 Crs

Bank
Soneri
Bank

Standard 1 1 1 crs .1 1 1 crs 1 1 1 Crs

Chartered
UBL ~ 0.649 0.687 """.944 drs"~" 0.858 0.95 0.903 0959 0959 i
Mean

^Technical efficiency **Scale Efficiency ^Return to Scale

10 F. S. Pasiouras, F.S., E. Sifodaskalakis and C. Zopounidis, Estimating and Analyzing the Cost
Efficiency of Greek Copor ative Banks: An Application of Two Stage Data Envelopment Analysis
Working Paper Series (UK: School of Management, University of Bath, 2007.12) UK; T.
Ahmed, Efficiency Analysis of Commercial Banks in Pakistan (Faisalabad: Department of
Development Economics University of Agriculture, 2008).
11 M. Sathye, "X-efficiency in Australian Banking: An Empirical Investigation," Journal of
Banking Finance 25 (200 1) , 6 1 3-30.

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430 AZEEM SARDAR, MUHAMMAD MASOOD AZEEM, TANVEER AHMED, SANIA ZAFAR

In this study, determinants of scale efficiency were also calculated.

Dummy variable of year 2010 and constant of this equation were significant at
1 % level of significance. On the other hand, number of branches and
liabilities of banks had significantly negative impact on scale efficiency at 10 %
level of significance. Total assets and dummy variable of pure Islamic bank
variable were significant at 5 % level. It is further concluded that assets had
significant positive impact on scale efficiency which is in line with Pasiouras's
findings.12

TABLE 2: DETERMINANTS OF TECHNICAL AND SCALE

EFFICIENCY

TECHNICAL I | I
EFFICIENCY

D2010 0.16105 0.063885 2.520941**

02009 -0.04341 0.060115 -0.72209
LNLIABI -0.03634 0.072849 -0.49884
LNTPROFIT 0.1395491 0.068257 2.044452**
LNTASET 0.06607 0.109623 0.6027
LNNOB -0.10527 0.056305 -1.86965*
DPISLAMIC 0.135282 0.079157 1.677956*
DPUBLIC 0.130658 0.11281 1.15822
DFOREIGN -0.03909 0.070983 -0.55074
C 1.107482 0.772057 1.434457

SCALE EFFICIENCY

D2010 0.157936 0.043207 3.655337***

D2009 -0.02891 0.040658 -0.71116

LNLIABI -0.110916 0.063768 -1.739349*
LNTPROFIT 0.031745 0.022982 1.381309

LNTASET 0.15644 0.074141 2.11001**

LNNOB -0.07074 0.038081 -1.85773*

DPISLAMIC 0.114903 0.057983 1.981653**

DPUBLIC 0.136193 0.076296 1.785048*

DFOREIGN -0.01941 0.048008 -0.40419

C 2.016146 0.522164 3.861135***

***significant at 1% level of significance, **significant at 5% level of significance, * indicates significant at

10% level of significance

12 F. S. Pasiouras, F.S., E. Sifodaskalakis and C. Zopounidis, Estimating and Analyzing the Cost
Efficiency of Greek Copor ative Banks.

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ISLAMIC BANKS: EFFICIENCY AND ITS DETERMINANTS IN PAKISTAN 43 j

4.3. Income and Scale Efficiency

Table 3 explains the Income and Scale efficiencies of Islamic banks in Pakistan.
These are presented for the years 2008 to 2010 as under. The determinants of
these efficiencies are given in table 4. Table 3 revealed that one Islamic bank
was income efficient under CRS in 2008, while three under VRS. This showed
that income efficiency of Pakistan's Islamic banks was very low. The reason
for the low efficiency of these banks can be explained on the ground that
banks are opening new branches which are more probable to generate
inefficiency. The UBL was the most inefficient bank under CRS. This bank
can become efficient if it reduces input level to 90 % from the level of
currently in use. The study also found that even under VRS UBL was the
most inefficient bank in the same year. This bank can become efficient if it
reduces the input level to 89.7 % from the level of current use. In this study,
we found that only Standard Chartered Bank was scale efficient. Five banks
were showing 1RS and one CRS while the rest of the eight banks were
operating at DRS.
In 2009, one bank was income efficient under CRS and four banks under
VRS. It was found that one bank was scale efficient in this year. There were
four banks operating under 1RS and 10 banks under DRS while one was
operating under CRS. Dawood Islamic Banks was the most income inefficient
bank both under CRS and VRS. On the other hand in scale efficiency,
National Bank had lowest score. The average income efficiency in 2009 was
higher as compared to 2008.
There was one bank which was income efficient under CRS and three
banks under VRS in 2010. It was also found that there was one bank which
was scale efficient in this year. There was no bank operating under 1RS and 12
other banks were operating under DRS. The average income efficiency scores
of Islamic banks were almost same in 2009 and 2010 but higher than 2008.
These results showed that Islamic banking efficiency was increasing. The
results of the study showed that the most income inefficient bank in this year
was Dawood Islamic Bank. The table 3 also showed that average efficiencies of
pure Islamic banks were lower than the Islamic banks branches operated by
conventional banks. The findings of this study are in line with the results of
Mokhtar et al. (2006). If we compare the public banks* with private banks, it
is revealed that the Public banks' efficiency was higher. The most efficient
banks under income efficiency were National Bank.

(National Bank and The Bank of Khyber are public banks.)

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432 AZEEM SARDAR, MUHAMMAD MASOOD AZEEM, TANVEER AHMED, SANIA ZAFAR

TABLE 3: INCOME AND SCALE EFFICIENCY SCORES

OF ISLAMIC BANKS

Banks Name LE* 2008 S.E** KS* LE 2009 S.E R.S LE 2010 S.E2010 ILS
2008 2008 2009 2009 2010

CR S VRS CRS VRS CRS VRS

Albaraka Q 25 Q412 03Q3 Dr Q (M Q 261 Q399 d[S Q 26 Q 426 Q 61 dfS

Islamic Bank

Bank Alfalah 0.194 0.745 0.26 Drs 0.377 1 0.377 drs 0.348 0.957 0.363 drs

Askari Bank 0.181 0.434 0.417 Drs 0.234 0.51 0.458 dn

Bank al Habib 0.379 0.458 0.826 1rs 0.585 0.79 0.741 irs 0.587 0.598 0.981 drs

The Bank f Q 225 Q 663 Dn Q 594 Q 989 Q 6 dfs 0.837 0.675 drs
Knyber

Daw(x>d
Bank
Islamic Q ^ Q 476 Q 346 Drs 0 092 Q 23 0 4Q1 dfS 0 Q4 Q 1 0 39g drs

Dubai
Bank
Islamic 0.123 0.579 0.212 Drs 0.271 0.763 0.355 drs 0.248 0.721 0.345 drs

Habib
Metropolitan 0.625 0.677 0.922 1rs 1 1 1 en 1 1 1 Crs
Bank

Bank Islami 0.113 0.463 0.243 Drs 0.153 0.433 0.354 drs 0.212 0.621 0.342 Drs

MCB 0.479 0.48 0.997 1rs 0.673 0.853 0.789 drs 0.343 0.474 0.724 Drs

MeezanBank 0.198 1 0.198 Drs 0.338 1 0.338 drs 0.305 1 0.305 Drs

National Bank .... 0.178 1 0.178 in

Soneri Bank 0.315 1 0.315 In 0.28 0.28 0.999 irs 0.232 0.287 0.81 Drs

Chartered 1 1 1 Cn 0.476 0.954 0.499 dn 0.617 1 0.617 Drs

UBL 0.099 0.103 0.959 In 0.352 0.716 0.492 dn 0.187 0.291 0.644 Dn

Mean 0.301 0.583 0.547 0.38 0.719 0.532 0.353 0.594 0.629

*Income efficiency **Scale Efficiency #Return to Scale

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ISLAMIC BANKS: EFFICIENCY AND ITS DETERMINANTS IN PAKISTAN 433

FACTORS EFFECTING INCOME AND SCALE EFFICIENCY

Table 4 shows the results of various factors which effect income and scale
efficiency. It reveals that total profit (LNTPOFIT), total assets (LNTASET),
dummy variables of years 2009 and 2010 and the public owned banks
(DPUBLIC) had positive impact on income efficiency, while number of
branches (LNNOB), total liabilities (LNLIABI), constant of the equation and
dummy variables of pure Islamic banks (DPISLAMIC) and foreign owned
banks (DFOREIGN) effect negatively. Assets of Islamic banks have
significantly positive impact on income efficiency, similar to that of reported
by Pasiouras.13 Dummy variable of year 2010 had highly significant at 1 %
level of significance in the case of income efficiency; where as the no. of
branches depicted highly negative impact.
The determinants of scale efficiency given in Table 4 are presented as
under. Dummy variable of year 2010 at 5% level of significance and
quantitative variable of equation i.e. assets were found significant t 10 % level
of significance and had positive impact on scale efficiency. On the other hand
number of branches, foreign owned banks, profit and constant of the equation
had negative effect on scale efficiency, which is evident from the table.

TABLE 4: DETERMINANTS OF INCOME AND SCALE EFFICIENCY

INCOME

C -2.29444 0.722344 -3.17639

SCALE EFFICIENCY

C -0.33348 0.897003

***significant at 1% level of significance, ^significant at 5% level of significance, ^significant at

10% level of significance

13 F. S. Pasiouras, F.S., E. Sifodaskalakis and C. Zopounidis, Estimating and Analyzing the Cost
Efficiency of Greek Copor ative Banks.

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434 AZEEM SARDAR, MUHAMMAD MASOOD AZEEM, TANVEER AHMED, SANIA ZAFAR

5. Conclusions

This study attempted to measure the performance of Islamic banking in

Pakistan through efficiency analysis from period 2008 to 2010. In conclusion it
can be said on the basis of the findings that efficiency of Islamic banks in
Pakistan is increasing gradually. However, the income efficiency score of pure
Islamic banks was low as compared to technical efficiency. This could be
because of the fact that most of these banks were opening new branches which
escalated the cost and reduced the overall efficiency of operation. We also
found that pure Islamic banks were more efficient as compared to the Islamic
windows of conventional banks. Moreover, the public banks were found to be
more efficient than the private banks.
Since our study also estimated the factors affecting the efficiency of
Islamic banks, we found that asset and profit had the positive effect while
liabilities and the number of branches effected efficiency negatively.

SUGGESTIONS

On the basis of the findings of this study, it is suggested that the Islamic banks
should improve their total assets and the profits. While the liabilities of the
banks should be decreased as it generates inefficiency as per the findings of this
study. Moreover, the decision to open up new branches should be very
calculated and considered only if the bank is working efficiently, not just for
the sake of expanding the area of operation. It should take place only when it
is extremely necessary. However expansion should not be stopped, but must
be well calculated.

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