Research Paper on Islamic Bank(Meezan Bank)

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Science Series Data Report

Vol. 4, No. 1; Jan 2012

AN EMPIRICAL STUDY OF RELATIVE EFFICIENCY USING
FRONTIER ANALYSIS APPROACH – A CASE OF ISLAMIC
BANKS

Khizer Ali (Corresponding author)
Hailey College of Commerce, University of the Punjab, Lahore, Pakistan Tel: +923458800015 Email: vjkhizer@yahoo.com
Muhammad Farhan Akhtar
Hailey College of Commerce, University of the Punjab, Lahore, Pakistan Tel: +923464666786Email: vjfarhan@yahoo.com
Shama Sadaqat
Hailey College of Commerce, University of the Punjab, Lahore, Pakistan Email: shama_sadaqat@yahoo.com

Abstract
The study aims to investigate the relative efficiency of Islamic banks of Pakistan for the period 20072010. Data envelopment analysis is used with an input minimization approach to measure the efficiency of Islamic banks. The results reported that for the period under study, only one Islamic bank shows the consistency in its performance level with efficiency score 1, i.e. Meezan Bank Limited the oldest Islamic bank in Pakistan. Although Islamic banking in Pakistan is still in its initial stages, which can be observed from the continuous losses from preceding years, Islamic banks are found to be relatively efficient with the passage of time. So far as total assets are concerned, the regression results reports insignificant relation with technical efficiency. It means that the technical efficiency does not depend exclusively upon total assets of the banks. Keywords: Islamic banks; Efficiency;Data Envelopment Analysis; Pakistan 1.0 INTRODUCTION

Islamic banking represents a radical departure from conventional banking, and from the viewpoint of corporate governance; it embodies a number of interesting features since equity participation, risk and profit-and-loss sharing arrangements form the basis of Islamic financing. Using econometric techniques, this paper provides valuable insights as to the stability of Islamic banks and the factors responsible for the growth of smaller such institutions that has been witnessed in the last decade.

Around the globe over 150 Islamic financial institutions are working, which includes commercial to investment banks and Islamic leasing to insurance companies.The Islamic financial system engages the concept of participation, exploiting the funds on a profit-and-loss-sharing basis within Shariah guidelines(Masood, Niazi, & Ahmad, 2011). The Islamic financial system employs the concept of participation in the enterprise, utilizing the

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Science Series Data Report

Vol. 4, No. 1; Jan 2012

funds at risk on a profit-and-loss-sharing basis. In Pakistan efforts for the promotion of Islamic banking first start in 1970s and then realistic steps were taken in early 2001s. Since there are relatively few studies conducted in this area, specifically among Islamic banks in Pakistan, this study will broaden the scope of the literature by providing innovative empirical evidence. 2.0 LITERATURE REVIEW

Rosly and Bakar (2003) established that Islamic banking scheme (IBS) have evidenced superior return on assets (ROA). Pasiouras and Kosmidou (2007) explored the bank explicit characteristics and the factors affecting the profitability of banks in the overall banking environment. The study investigated the foreign and domestic banks operating in 15 European Union countries for the period 1995-2001. The study established that the profitability of both domestic and foreign banks not only affects by banks explicit characteristics but also there is a significant role of macroeconomic conditions and the structure of financial markets. Moreover the study found explanatory power of domestic owned banks is much more than the explanatory power of foreign owned banks (in terms of R2).Dusuki and Abdullah (2007); Ghayad (2008) examined the factors that motivated customers to deal with Islamic banks. Using self-administered questionnaires from Malaysia the...
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