Revisiting Islamic banking efficiency using multivariate adaptive regression splines

Area of Science:

• Financial Economics
• Econometrics

Background:

• Islamic banking is a rapidly growing sector within the global financial system.
• Evaluating the impact of reforms and policies on Islamic banks' performance requires robust efficiency criteria.

Purpose of the Study:

• To estimate the efficiency of Islamic banks in developed and developing countries.
• To compare the drivers of efficiency between developed and emerging Islamic banking markets.

Main Methods:

• Employed the Multivariate Adaptive Regression Splines (MARS) method, a nonparametric technique known for its flexibility in modeling high-dimensional data.
• Utilized MARS for its robustness, offering improved estimates compared to traditional parametric approaches.

Main Results:

• In emerging regions, a strong link exists between Islamic banking efficiency and Gross Domestic Product (GDP).
• In developed regions, efficiency is primarily influenced by the Sharia Supervisory Board and board committees, confirming the significant impact of governance variables.
• Islamic banks in developed countries demonstrate higher efficiency than those in emerging countries.

Conclusions:

• The MARS method provides accurate and timely information for investors, aiding better decision-making in volatile financial markets.
• Governance structures are critical for Islamic banking efficiency, particularly in developed economies.
• Significant differences in efficiency levels exist between Islamic banks in developed and emerging markets.