Efficiency of Islamic Banks in Malaysia

Efficiency of Islamic Banks in Malaysia
 
Mariani Abdul Majid*
NOR GHANI MD. NOR**
FATHIN FAIZAH SAID
 
ABSTRACT
 
IN RECENT YEARS, MALAYSIAN ISLAMIC BANKS HAVE TO OPERATE IN AN INCREASINGLY COMPETITIVE ENVIRONMENT. THIS TREND IS EXPECTED TO CONTINUE AS THE COMPETITION FROM CONVENTIONAL BANKS PICKS UP, PARTLY IN RESPONSE TO THE ASEAN FREE TRADE AGREEMENT (AFTA), BUT ALSO IN RESPONSE TO THE GENERAL GLOBALIZATION OF MARKETS. HOW ISLAMIC BANKS WILL BE AFFECTED BY THE INCREASED COMPETITIVE PRESSURES DEPENDS IN PART ON HOW EFFICIENTLY THEY ARE RUN. THIS PAPER EXAMINES THE PRODUCTIVE EFFICIENCY OF MALAYSIAN COMMERCIAL (ISLAMIC AND CONVENTIONAL) BANKS OVER THE 1993 TO 2000 TIME PERIOD. THE GOAL OF THE ANALYSIS IS TO IDENTIFY THE…show more content…
Total deposits in the Islamic banking system amounted to RM47 billion (9.5 percent) compared to RM495 billion total deposits in the entire system (Abdul Kader, 2002).
 
The gale of economic liberalization currently sweeping across the globe provides another reason for looking into the efficiency of Islamic banks since it poses a further competitive challenge to the Islamic banking institutions. It is expected that by the year 2007, trade liberalization will require Malaysian domestic banks to compete with other global players on an equal playing field. Such a change implies that local Islamic banking institutions will have to be efficient, innovative, competitive and resilient players in the market. This is particularly important since foreign banks that are arguably more efficient may also offer Islamic banking products to take advantage of brisk demand for Islamic banking products.
 
The policy relevance of this study can be viewed from the target set by the Malaysian central bank (Bank Negara Malaysia) for the Islamic banking institutions to command a 20 percent market share by year 2010 as outlined in its financial sector master plan. How the increased competition expected in the future affects Islamic banks partly depends on how efficient the banks
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