Performance Analysis of Islamic Banking in Pakistan Using DEA Technical Efficiency and Maqasid-e-Shariah Index

Abstract

Purpose: The goal of Islamic banking is to offer Shariah compliant products along with ultimate objective of high performance. We question whether Islamic banks are able to achieve the Shariah objectives as well as the efficiency. Design/Methodology/Approach: We use Maqasid-e-Shariah index (MSI) to assess the level of Shariah compliant and DEA technical efficiency score to measure the performance of Islamic banks in Pakistan. Results of efficiency and MSI scores are combined and plotted on four quadrants. Since the best bank is set as benchmark, the study provides relative results not absolute. Findings: The study has four main findings based on the results. Meezan Bank falls in quadrant 1 which achieves highest level of technical efficiency and high level of MSI score. Bank Islami and Al-barakah Bank fall in quadrant 2 which depicts that both banks achieve high technical efficiency but low MSI scores. Dubai Islamic Bank falls in quadrant 3 having low score in technical efficiency and high score in MSI. Quadrant 4 has the lowest level in both the technical efficiency and MSI. None of the banks falls in this quadrant. Although, Meezan Bank achieves the highest level of MSI, nevertheless all banks are required to improve the MSI scores. Originality/Significance: Large number of studies uses the DEA approach to measure the efficiency of Islamic banks. On the other hand, another set of research studies prefer MSI approach to determine the efficiency of Islamic banks. To the best of our knowledge, this is perhaps the first study in Pakistan, which uses both approaches to compare the technical efficiency and Maqasid-e-Shariah based efficiency of Islamic banks. Practical and Social Implications: Since all Islamic banks are meant to achieve highest possible level of Maqasid-e-Shariah, the management of these banks has to focus on improving MSI scores along with highest technical efficiency. In this regard, the paper provides insight to management, Shariah advisors and regulators in the performance of Islamic banking from both conventional and Shariah aspects.