Abstract

While operating in competition with conventional banks, Islamic banks need to push up the returns to depositors so that they could attract funds. If an Islamic bank optimizes its investment portfolio to maximize deposit returns, it might have increasing access to the supply of deposit funds. Unlike other studies, which consider return to deposit as a cost, this study considers it as means to public benefit. It has used all 53 known full-fledged Islamic banks operating in Pakistan, Malaysia and MENA countries in a panel stochastic frontier analysis for data between 2001 and 2015 and confirmed that Islamic banks are approximately 26% optimized. Muḍārabah investment presents itself as the best candidate for boosting the efficiency. Also, if the market is favorable in terms of banking profits, market return rate of investment, banking sector development and risks, then efficiency could be increased.

Keywords

Mushārakah, Muḍārabah, Ijārah, Murābaḥah, Panel Stochastic Frontier Model, Islamic Banking, Efficiency.