The proposal and application of a 2-Dimensional Fuzzy Monte Carlo Frontier analysis for estimating Islamic bank efficiency

Abstract

The current study proposes a novel 2-Dimensional Fuzzy Monte-Carlo Frontier Analysis to estimate and compare the level of efficiency for a sample of 49 Islamic Banks across 25 countries worldwide over the period 2013-2021. Additionally, in the second stage, we propose a bootstrapped robust regression approach to comprehensively examine the determinants of efficiency. Our results show that there is heterogeneity in the level of efficiency within the Islamic banking sector. Furthermore, we find that the Islamic banks in the sample experienced an improvement in efficiency over the examined period. Finally, we find that bank size, bank liquidity (measured by the ratio between net loans and gross loans), and bank risk (proxied by the ratio between loan loss reserves and gross loans) have a significant and positive impact on Islamic bank efficiency. Policy implications based on our findings are provided.