The efficiency of Islamic Bank in Malaysia and Indonesia : An analysis of DEA

Islamic banking efficiency depends on a number of factors, including competition with conventional banks, regulatory frameworks, and business policies. There has to be an adequate methodological framework to ensure that efficiency is measured correctly to achieve a proper picture of bank performance. The present study takes into account the efficiency of Indonesian and Malaysian Islamic banks from 2006 to 2023, employing Data Envelopment Analysis (DEA) to estimate Technical Efficiency (TE), Pure Technical Efficiency (PTE), and Scale Efficiency (SE). 24 Islamic banks, 12 from each of two countries, were studied to evaluate financial performance, operating effectiveness, and efficiency trends. The results show considerable variations in banking efficiency across the two countries. In Malaysia, Islamic banks have shown consistent improvements in efficiency, with TE rising from 0.73 in 2006 to 0.97 in 2023. Most banks, including ALI, CITI and MBI maintained optimal levels of efficiency throughout reflecting good management and scale operations. Conversely, Indonesian Islamic banking sector experienced greater volatility, with TE declining significantly between 2015 and 2017 to a low of 0.58 in 2017. However, there has been a recovery trend since 2018, indicating efforts to enhance operating efficiency. While Malaysia’s banks benefited from stable regulatory frameworks and market maturity, Indonesian banks faced challenges related to scale inefficiencies and fluctuating financial conditions. The study contributes to understanding efficiency dynamics in Islamic banking and offers insights for policymakers, regulators, and banking institutions. It emphasizes the importance of effective asset management, operational strategies, and regulatory policies in sustaining efficiency. However, limitations such as data availability, external economic influences, and methodological constraints are acknowledged