How To Measure Efficiency in Islamic Bank

Banking efiiciency is very important in the macro level and also in micro level. The banking that efficient  will helps in order to increase the effectiveness of the macroeconomic policies. Banks efficiency is socially the optimal target because it reduces the average cost of the financial transactions and also also enhance and increase the society’s welfare.

The Methods measure banking efiiciency:

In order to measure the banking efficiency, we should examine all the financial ratio from the bank. There are return on equity ratio, the capital asset ratio, the cost and also the income ratio.

The cost Efficiency in Islamic Bank

The cost efficiency in Islamic Bank gives a measure of how close the bank’s cost to the best practice bank’s cost that produces the same bundle of output under the same condition. The cost function can be specified under this formula :

C = f (Q, P, v, u)

The Profit efficiency in Islamic bank

The efficiency in the bank is measured bt the system that stated how close the bank comes tearning the maximum profit that given its output  level.  The profiot function in the bank employ’s bank’s profit as the dependent variable and also the same explanatory variables as the cost function. This is the formula for the profit efficiency :

π  = f (Q, P, v, u)

The Explanatory Variables For Profit Efficiency in Islamic Bank

  1. Variables input prices

It symbolize with P1. P1 is the price of the labour and also calculated as the total salaries and staff expenses over the full time number of the staff.

  1. The other factor is P2. P2 is the price of the fund that which measured as the interest expenses over time and also saving the deposit . In the Islamic bank because there are no interest so the interest are replace by the profit and revenue sharing that distributed to the customer.

P3. Is the symbol for the price of physical capital that is equal to the depreciation over  the capital and also the investment in leasing. In the case example of the Islamic bank the depreciation value should also include the depreciation in physical capital that is bought for the leasing.

What is the main challenge in the Islamic bank ? The main challenge in the Islamic bank is how we identify the level of the output from Islamic bank, because we know that the product of the Islamic bank are different with their own counterpart.

The product that Issued by the Islamic bank actually can be classified and categorize in to three different part of the product. There are several product as follows:

  1. The short term debt. Usually from treasury bills, trading product, bond and also short term loans and advances. Also deposit at the other financial institutions that also mature in one year. The example of this kind of product from Islamic bank are Murabaha, salam and also qardhul hassan funding
  2. The long term debtt. This is for example are non trading bonds, and also medium and long term bonds. The example of this product are sukuk, istisna and also ijarah or leasing
  3. The investment, for example securities and also other investments. The example of this product are musharaka, securities and also managed funds.

Reference :

  • Alfarisi, Mohamad F & Lukman, S, ( 2019 ),” Measuring Efficiency In Islamic Bank: evidence From Indonesia, Jurnal Ekonomi dan Keuangan Islam Vol 5 no 1
  • Hussein, Khaled, Efficiency Islamic Bank, IRTI Jeddah, Power Point Presentation
  • Ismal, Rifki ( 2013 ) Islamic Banking In Indonesia New Perspective On Monetary and Financial Issues, Wiley Finance Studies

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Mohammad Heykal, S.E., M.Si.