Success Factors of Islamic Banks: An Empirical Studyservice under the same economic, environmental and social conditions. Apart
from the difficulty of assessing the cost efficiency of a bank, because there is
in fact no such thing as “same conditions” for any two banks, its evaluation
requires information not available in the annual financial reports.
For this reason, we will assume that Islamic financial services provided by
Islamic banks are similar so that we may compare their expenses but we will
use changes on expenses instead of absolute numbers as depicted in Table 11.
Table 11: Percentage of Expenses Growth
BANK 1998/99 1999/2000 2000/2001 1998/2001 Average
A 0.75 2.99 7.25 11.28 3.76
B 14.29 -37.50 133.33 66.67 22.22
C -25.81 -10.33 32.12 -12/10 -4.03
D 6.25 -5.88 0.00 0.00 0.00
E -0.87 48.92 9.33 61.40 20.47
F --- 1.92 0.00 1.92 0.96
G -7.77 -2.46 8.63 -2.27 -0.76
Average -2.19 -0.33 27.24 18.13 6.09Consequently, our consideration of the cost efficiency will be in the form
of answering the following question. If a bank can reduce its expenses why
can’t another bank do the same? It is evident from the table that two Islamic
banks were able to reduce their costs, and they happens to be the same banks
that realized the highest level of deposits and assets during the period covered
by the study. In contrast, we notice that two other banks had their costs
increased by an annual average of more 20 per cent, despite only a very
modest increase in their investments and deposits.
Keeping in mind that the overall objective of spending is to serve the
bank’ investment, we should quickly move to the ratio of expenses to assets,
which is illustrated in Table 12 in an attempt to discover the indication of this
index as to how the Islamic bank achieves its objectives.
Four banks were able to reduce their cost/invested assets index. Two of
them were able to reduce this index by 56 per cent and 33 per cent
respectively during the three years. This index rose in three other banks by 45
per cent, 35 per cent and 25 per cent respectively during the same time!
Furthermore, this index as is declining in banks A and G and, to some extent,
C as indicated by its yearly changes. This implies that these banks look after
their cost efficiency. On the other hand, it takes an upward movement in
banks D, E, and F, and, to some extent, B.