Operational Efficiency in Islamic Banking: The Sudanese Experience

In this paper, we estimate the operational efficiency in 17 Sudanese (Islamic) banks between 1990-2000. We adopt the stochastic cost frontier approach. Our findings show that Islamic banks do not create inefficiency per se. Furthermore, although the average efficiency is almost stable between 1990-2000, there are wide efficiency differences across Sudanese banks. Despite the small size of the foreign banks, they are more efficient than state-owned and joint-ownership banks. Sudanese banks are not ready yet to confront the globalisation challenges. We also examine the sources of inefficiency by estimating a second stage inefficiency regression. Several interesting findings emerged. First, the increase in the level of foreign and private shares in Sudanese banks should enhance the cost efficiency in the banking sector. Second, in order to improve efficiency, Sudanese banks should increase their (low) paid-up capital ratio but not through merger and acquisition activities. Third, Sudanese banks have an advantage in murabaha and musharaka modes of finance which are not fully utilised yet. Fourth, Sudanese banks should implement serious programmes for human capital development in order to reduce the current level of cost inefficiency