Allocative and Technical Inefficiency in Sudanese Islamic Banks Using Cost Functions (1)

Abd Elrhman Elzahi Saaid, (Ph.D.)

Abstract


Dramatical changes have taken place in the Sudanese banking industry. In 1989 all the operations of these banks conformed to Islamic principles. Previous investigation showed that these banks grew rapidly in terms of assets and liabilities under difficult economic conditions. Their financial operations revealed that they obtained considerable profits despite relatively high default risk and severe economic sanctions. However, this success does not always imply the optimality. The study of the optimality involves the measurement of their managerial efficiency. This paper investigates the allocative and technical inefficiency of the Sudanese Islamic banks. For this purpose the basic stochastic frontier approach (SFA) is used. This is accomplished by decomposing the error term into two components, namely random noise (vi) and possible inefficiency (ui).  The result of this study showed that the investigated Sudanese Islamic banks were allocatively and technically inefficient. This implies that the Sudanese Islamic banks’ principles have impacted the performance of banking industry in the Sudan. This result has important implications for the government and Sudanese Islamic banks’ management.


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