Monzer Kahfbringing together the results of a customer’s operations. It is not difficult to
rely on the historical average cost, just as it is easy to amend it to incorporate
marginal cost changes. Expected revenues are also calculated in light of the
historical returns, amended as dictated by changes in the prices of bank
services. Banks often rely on a dynamic weighted average model which uses
the most recent historical weighted average with an adjustment coefficient
that is determined on the basis of price developments after the latest historic
period.
Additionally, the following four points are the outcome of several studies
on improving bank efficiency. These points are basically related to the
behavioural patterns and key strategies of the top management in running the
bank. 1) Distribution of authority and avoidance of centrality in decision
taking; 2) Registering the bank’s stocks in the local and international stock
exchanges; 3) Increasing off-balance sheet investment out of total
investments; and 4) Cooperation with similar banks. As for delegation of
authority, several surveys carried out in the US banks showed that banks that
separate between the positions of general manager and the chairman of board
of directors usually record higher profitability than those that merge the two
positions in one person.^11 The same surveys showed that banks that are
established as joint stock companies with stocks traded on international stock
markets record high profits than those whose stocks are not traded. The
reason for this is that the management pays attention to the market value of
the stocks, thus it is more motivated toward expansion and growth. It has
also been statistically shown that off-balance sheet investment operations give
more profits than ordinary investments.^12 In Islamic banks these operations
take the form special and restricted investments and numerous autonomous
investment funds. The idea of restricted investments managed on the ancient
principle of agency is well entrenched in Islamic banks, although some (Al-
Rajhi Banking and Investment Corporation) do not depend on it to such as
an extent as to make it a strategic part of profitability management, rather it
only uses them to attract big deposits. Also some Islamic banks do not
encourage restricted investments and investment funds as shown in the
reports of banks B, C, D and G. Bank E started the experiment in 2001. On
the other hand, bank A and F were able to get 59.5 per cent and 45.3 per
cent, respectively, of their gross revenues from off-balance sheet investments.
The effect of off-balance sheet investments on their net profits was 42.7 per
cent and 141.6 per cent respectively.^13
The need for cooperation and solidarity among Islamic banks, especially
those operating in the same local market, has been proved by events where a
bank is affected by the conditions of the other banks as it happened in case