225CHAPTER
11Performance of Islamic Financial Services
Financial Services
W
ith the expansion of the market for Islamic fi nancial services, questions
began to be asked about the effi ciency and cost - effectiveness of such
services vis - à - vis their conventional counterparts. Early comparative stud-
ies focused on Islamic and conventional banks within the same country or
region. Gradually, these were extended across regions. As capital markets
grew, the focus shifted to the fi nancial performance of Islamic funds relative
to Islamic indices.
THE EFFICIENCY OF ISLAMIC BANKS
A typical measure of effi ciency is the ability to convert inputs (staff costs,
fi xed assets and total deposits) into outputs (total loans, liquid assets and
other income). Several studies have been undertaken to evaluate the cost
and production effi ciency of Islamic fi nancial institutions in different coun-
tries where Islamic fi nance is practiced. The majority of such studies have
measured effi ciency using accounting ratios, comparing them with the ratios
of conventional banks of similar size and location.
Metwally (1997) compared the performance of 15 interest - free banks
with 15 conventional banks for structural differences between the two groups
in respect of liquidity, leverage, credit risk, profi t, and effi ciency. The study
found that although profi tability and effi ciency differences were not statisti-
cally signifi cant, Islamic banks tended to be more conservative in utilizing
funds for lending and were disadvantaged in their investment opportunities.
Similar fi ndings of constrained investment opportunities were observed by
Samad and Hassan (1999), who looked at the interbank performance of
Bank Islam Malaysia Berhad (BIMB) in terms of profi tability, liquidity, risk,
and solvency as well as community involvement for the period 1984–97.
They concluded that the average profi t of an Islamic bank was signifi cantly
lower than that of the conventional banks, mainly because of the limited
investment opportunities.
An Introduction to Islamic Finance: Theory and Practice, Second Edition
by Zamir Iqbal and Abbas Mirakhor
Copyright © 2011 John Wiley & Sons (Asia) Pte. Ltd.