The impact of efficiency on Islamic banks’ performance: a cross-country study

This paper contributes to Islamic finance literature by offering a large-scale evidence on the impact of efficiency on the performance of Islamic banks all over the world. Our initial sample includes all Islamic banks around the world. Using a sample of 151 Islamic Banks with financial years ending within the period January 2013 and December 2013, we examine, controlling for Bank-specific characteristics and country-specific characteristics, whether high efficiency leads to more profitability in Islamic Banks. We define higher efficiency as the lower Cost-to-income ratio. We find that higher levels of Islamic banks’ efficiency banks (i.e. lower Cost-to-income ratio) are positively associated with banks’ performance (measured by return on assets). In addition, our analysis shows that there is a positive association between risk-based capital adequacy and the existence of Sharia auditing department and the performance of Islamic banks. Finally, the analysis shows that three Hofstede culture dimensions (i.e. power distance, individualism; uncertainty avoidance) and the nature of the banking system positively influence the performance of the Islamic banks.