Islamic banks have been in existence since early 1960s. The first Islamic bank was established in 1963 as a pilot project in the form of rural savings bank in a small town of Egypt, Mit Ghamr. After that, Islamic banking movement came back to life in mid 1970s. The establishment of Islamic Development Bank in 1975 triggered the development of Islamic banks in many countries, such as Dubai Islamic Bank in Dubai (1975), Faisal Islamic Bank in Egypt and Sudan (1977), and Kuwait Finance House in Kuwait (1977).
Joharris (2007) predicted that there are over 276 Islamic financial institutions (IFI) in the world, spread over 70 countries - sprawling from London, New York and Zurich to the Middle East, Africa and Asia with capitalization in excess of US$13 billion. These include banks, mutual funds, mortgage companies and takaful providers. The pool of money held by Muslim is predicted more than US$3.0 trillion. At present, there is an estimated US$1 trillion Islamic fund in the market. Moreover, global Islamic capital market is growing at 15% - 20% per annum, including deposits in Islamic banks which are estimated to be over US$560 billion. A large part of the banking and Takaful concentration is in Bahrain, Malaysia, and Sudan. A significant part of mutual funds concentrate in the Saudi Arabian and Malaysian markets in addition to the more advanced international capital markets.
[...] One of the non-parametric approaches, known as data envelopment analysis is a mathematical programming technique that measures the efficiency of a decision making unit (DMU) relative to other similar DMUs with the simple restrictions that all DMUs lie on or below the efficiency frontier (Seiford and Thrall, 1990). The performance of a DMU is very relative to other DMUs, especially those that cause inefficiency. This approach can also determine how a DMU can improve its performance to become efficient. DEA was first introduced by Charnes, Cooper, and Rhodes in 1978. [...]
[...] measured efficiency of banks in Indonesia during 1995 2003 using asset approach to see the impact of merger and acquisition. The efficiency measurement, parametric or non-parametric, of financial institution like banks can be approached from their activities. There are three main approaches to explain the relationship between input and output of banks. Two approaches, namely, production (or operational) approach and intermediation approach, apply the classical microeconomic theory of the firm, while one approach, namely modern (or assets) approach applies modified classical theory of the firm by incorporating some specificities of banks' activities, namely risk management and information processing, as well as some form of agency problems, which are crucial for explaining the role of financial intermediaries (Freixas and Rochet, 1998). [...]
[...] Moreover, conventional banks can put their excess liquidity into SBI and do not have to extend loan to make profit, while Islamic banks have to extend financing to make profit Recommendations Islamic banks in Indonesia are still young and small, so that socialization and expansion should be the number one priority to make Islamic bank familiar to public and to reach economies of scale and critical mass in the shortest time possible. Other than organic expansion that naturally slow, to accelerate expansion Islamic banks in Indonesia (i.e. [...]
[...] Also, “decreases in bank capital ratios generally precede increases in non-performing loans evidence that thinly capitalized banks may respond to moral hazard incentives by taking increased portfolio risks” (Freixas and Rochet, 1998) Data Analysis 4.1 Data Description The data needed for this empirical analysis comes from financial statements of conventional and Islamic banks in Indonesia in the period of 2002 2006. There are six types of conventional banks, namely public bank listed on capital market, conventional domestic foreign exchange bank, conventional domestic bank, conventional regional bank, conventional mixed bank owned by domestic and foreign investors, and conventional foreign bank owned by foreigner. [...]
[...] The first difficulty has been addressed by Baumol, Panzar, and Willig (1982) and the existence of Functional Cost Analysis (FCA) program that allowed separate cost functions to be estimated for all product lines. Disaggregated cost data for five categories of banking activities identified are demand deposits, term and savings deposits, real estate loans, consumer loans, and business loans. Cost functions of the Cobb- Douglas type (one per activity are as follows: i = Ci (total cost), Qi (volume of output), wi (wage rate), ri (interest) The second difficulty is to choose output volume among the number of accounts, the number of operations on these accounts, or the dollar amounts. [...]
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