Efficiency of Islamic banks and role of governance: empirical evidence

Purpose – The purpose of this paper is to study the efficiency level of Islamic banks, the differences between Islamic banks in the MENA region and Southeast Asia and the role of the governance in improving performance. Design/methodology/approach – This paper examines, on the one hand, the performance of Islamic banks by measuring their efficiency through data envelopment analysis (DEA) method and, on the other hand, the determinants of this efficiency emphasizing on the impact of the governance structure through the panel estimation of Islamic banks based on the three proxies of cost efficiency, namely, technical efficiency (TES), pure technique (PTE) and scale efficiency (SES). Findings – The findings indicate that Islamic banks are experiencing an improvement in their efficiency cost. The technical efficiency of Islamic banks is largely explained by the scale efficiency where Islamic banks realize large economies of scale in order to achieve optimal size, especially in Malaysia and the GCC countries. Pure technical efficiency is less important than the efficiency of scale and improvement is necessary regarding the managerial performance. In terms of governance, the results show that the board of directors through its size and independence and the presence of a central Sharia board constitute a robust determinant of the Islamic banks’ efficiency. The ownership structure and the size of the Sharia board do no effect banking efficiency. Originality/value – The originality of this paper lies mainly on the examination of the effect of the governance structure on the Islamic banks’ efficiency where studies on this issue for Islamic banks are almost inexistent. In addition, the size and the diversity of the Islamic banks’ panel constitute the strong point of this study.