Efficiency and Development of Islamic Banking in Malaysia

The present empirical study investigates the efficiency of Islamic banks in Malaysia with attention to policies of the central banks for the period 1997-2008.During this period, Islamic banking system in Malaysia has two phases of development. This study measures the technical, Allocative, pure technical, scale and cost efficiency of these banks using the Data Envelopment Analysis (DEA) technique. This is a pioneer study that has analyzes polices of central bank of Malaysia in both phases and has compared the efficiency of Islamic banks in these phases. In general, the results show that on average, the efficiency of the Islamic banking industry increases in these phases which corresponds positively to their deposits, asset and financing growth. This could suggest that the entrance of the second full fledge Islamic bank in the second phase and the entrance of foreign full fledge banks in the third phase had given a positive impact on the efficiency of Islamic banking industry as a whole.

Keywords:

Efficiency , Islamic Banking , Malaysia , Data Envelopment Analysis (DEA)