A stochastic frontier model for measuring online bank profit efficiency

Performance Analysis of Indonesian Islamic and Conventional Banks

The study examined profit efficiency among catfish farmers in Benue State of Nigeria using a stochastic profit frontier approach. A multi-stage sampling technique was used to collect data from 143 catfish farmers through a well structured questionnaire. The study used a Cobb-Douglas stochastic profit frontier function to analyze the data and was estimated using a computer software, FRONTIER 4.1 version. The estimated elasticity parameters of variables with respect to gross profit of catfish farmers revealed the significance of all the independent variables included in the stochastic profit function. However, the number of ponds (-0.02), cost of feed (-0.30), cost of fingerlings (-0.11) and cost of hired labour (-0.004) had an inverse relationship with the profit of farmers with cost of feed being the most important variable decreasing the profit of farmers in the study area. The negative elasticity of number of ponds with respect to farmers’ profit was likely due to under-utilization of ponds capacity. The result further indicated that the kilogramme of catfish produced (elasticity of 1.43) was the most important variable determining profit in catfish farming in the study area. Analysis of profit efficiency revealed a varied (23-99%) profit efficiency of the farmers with a mean value of 0.84. This implies that the farmers were able to obtain a little above 80 percent of their potential profit from a unit mix of inputs. This means that about 16 percent of the profit is lost due to inefficiency of management. Thus, in the short run there is scope for increasing profit from catfish production by 16 percent by adopting the technology and the techniques used by the ‘best practiced’ catfish farmers. Analysis of the factors influencing profit efficiency revealed that while age of famers, farming experience and duration of culture positively influenced profit efficiency, years of education, off-catfish-farm income, and training negatively influenced profit efficiency. The policy implication of these findings is that profit inefficiency in catfish production can be reduced significantly overtime as the farmers get more experienced and a more conducive environment is created, to encourage more aged farmers to be involved in catfish production in a bid to alleviate poverty and food insecurity in the state and the country at large. Keywords: Profit Efficiency, Catfish, Stochastic Frontier African Journal of Food, Agriculture, Nutrition and Development , Volume 12 No. 6

Improving profit efficiency in vegetable farming, especially for Spinach, is vital in enhancing income, livelihoods, and nutrition security and reducing the poverty of smallholder farmers, particularly in developing countries like South Africa. Despite the country’s potential, spinach production faces major challenges, including unreliable markets, low adoption of modern production systems, and production inefficiencies that affect farm returns. This has been attributed to a lack of adequate and reliable information to guide producers on measures for improving productivity through cost effective production systems and efficient market systems, eventually leading to profit inefficiency. Therefore, this study sought to assess the profit efficiency of smallholder spinach producers under irrigated agriculture in the Eastern Cape Province, South Africa. The study made use of multi-stratified sampling procedures to select 150 spinach producers under irrigation. The stochastic profit frontier function was applied to assess the profit efficiency of smallholder spinach farmers. The results indicated that most farmers operated in farm sizes of 3 ha with an average age of 48 years. The estimates of the stochastic profit frontier function showed that farm size, cost of fertilizer, seed, and pesticides increased profit while labour used decreased profit. Findings indicated a 10% profit loss due to a mixture of technical and allocative inefficiency in the production of spinach, while farmers were able to attain an average profit inefficiency of 90%. Moreover, findings revealed numerous factors that positively affected the profit efficiency of spinach farmers, including socioeconomic, institutional, and cultural. The study findings imply that profit efficiency can increase significantly through the use of high-quality fertilizer, seeds, and pesticides. The allocative efficiency results indicate that improvement in access to extension services, farmers’ level of education, and farm experience can result in the increased allocative efficiency of spinach farmers in the study site. The study further suggests that smallholder farmers must adopt innovative technology to enhance their agricultural productivity, and this is likely to improve household income and nutrition security. Thus, the study recommends that policymakers and government must invest in farmers’ education through effective extension delivery programs and the provision of credit to help farmers increase their profit efficiency.

Deposit is considered to be the most important source of a banks’ fund, which plays a significant role in running a banking industry. Existence and expansion of banks are mainly influenced by their ability to attract deposits from different segments of the society. Although every bank expects that flow of deposits will be sufficient and smooth, changes in economic and commercial activities make deposit management more challenging to the bank managers. As deposit is considered the life-blood of a bank, analyzing the deposit performance has become a key factor to evaluate a banks overall performance [10]. In banking industry of Bangladesh, Islamic banks are operating successfully besides other conventional banks. Although they are few in number in the industry, Islamic banks are performing well ahead in comparison with conventional banks in some respect [13]. Therefore, to evaluate the performance of both types of banking system, deposit performance has been taken as the basis of comparison. Though the deposit schemes of both types of banks are almost similar there are differences in techniques applied in the process of deposit mobilization by these two banking systems [1]. Therefore this study aims at measuring deposit performance of both types of banks in Bangladesh, comparing their position and identifying in which aspect Islamic banks are ahead of conventional banks and in which area conventional banks are performing better. For this purpose, all the Private Commercial Conventional Banks (PCCBs) and Islamic Banks (IBs) of Bangladesh have been studied for last 10 consecutive years ranging from 2007 to 2016. Using some variables like total deposit, segment wise deposit, categories of deposit, growth rates and productivity aspect, this study shows that PCCBs are ahead if total amount is measured but in terms of growth and productivity IBs show better performance. This can be considered as a very time proven and rational study since no other study concerned on such issue earlier in Bangladesh. These results would help both types of banks know their position in terms of deposit performance and thus also reflect the performance of banking sector as a whole since these two types of bank together constitute almost seventy percent of banking industry in Bangladesh.

An attempt has been made to investigate the online bank specific deposits efficiency using stochastic frontier technique and it intends to determine various factors affecting the efficiency level of banks for the period 2001 - 2007. We used a panel of 20 banks divided into four groups namely, NBs (National Banks), ISBs (Islamic Banks), FBs (Foreign Banks), and PBs (Private Banks) in Bangladesh. In this study, a comparison was made with the efficiency scores of banks group-wise, year-wise and individually. This study showed that the estimated year-wise average online banks deposits efficiency was 0.738 while group-wise average deposits efficiency was 0.777. At the bank group level, Nationalized Commercial Banks (NBs) and Islamic Banks (ISBS) were more efficient by 90.9 and 86.8% respectively, followed by Private Banks (PBs) which had 63.4% and Foreign Banks (FBs), 62.7%. We observed that the foreign banks were less efficient in producing deposits. However, the overall deposits efficiency of all bank groups steadily increased over time except in 2007. The most efficient bank was found to be Islami Bank Ltd. and the most inefficient bank was Pubali Bank with efficiency scores of 0.96 and 0.52, respectively. Key words: Deposits efficiency, stochastic frontier analysis, banking industry.

Examining the relationship between default risk and efficiency in Islamic and conventional banks

This paper investigates the effect of income diversification on the performance of Islamic banks in Malaysia, Saudi Arabia, Kuwait, United Arab Emirates, Bahrain and Qatar where they operate alongside conventional banks in a dual banking system. Accounting data was drawn from 68 conventional and 42 Islamic banks from 1997 to 2009. The main focus was to see whether a greater reliance on non-financing income impacts on earnings quality and if so, how this may vary between Islamic and conventional banks. Commission and fee income, trading income and other non-financing income constitute non-financing income. For conventional banks, this is known as non-interest income, but in Islamic banking the payment and receipt of interest is prohibited so this 'other income' is referred to as non-financing income (that is, income unrelated to deposit-taking and loan granting). Islamic banks operate as universal banks and offer retail and wholesale financing plus investment banking services. Using various empirical approaches, we find that non-financing income positively influences banks' risk-adjusted performance on a net overall impact basis. Greater income diversification on its own, increases income volatility and this negatively impacts bank's risk-adjusted performance. Islamic banks are found to be more focused on deposit/loan financing and less diversified in terms of non-financing income activities compared to conventional banks. We find that Islamic banks appear to be less susceptible to earnings volatility given their lower diversified income source. Islamic banks have lower profitability (on average) on a risk-adjusted basis when compared to their conventional counterparts.

Purpose: The aim of the present paper is to examine the revenue efficiency of the Indonesian Islamic banking sector. The study also seeks to investigate the potential internal (bank specific) and external (macroeconomic) determinants that influence the revenue efficiency of Indonesian domestic Islamic banks. Method/design/approach: We employ the whole gamut of domestic and foreign Islamic banks operating in the Indonesian Islamic banking sector during the period of 2009 to 2018. The level of revenue efficiency is computed by using the Data Envelopment Analysis (DEA) method. Furthermore, we employ a panel regression analysis framework based on the Ordinary Least Square (OLS) method to examine the potential determinants of revenue efficiency. The results indicate that the level of revenue efficiency of Indonesian domestic Islamic banks is lower compared to their foreign Islamic bank counterparts. Results and conclusion: We find that bank market power, liquidity, and management quality significantly influence the improvement in revenue efficiency of the Indonesian domestic Islamic banks during the period under study. Research implications: By calculating these efficiency concepts, we can observe the efficiency levels of the domestic and foreign Islamic banks. In addition, by comparing both cost and profit efficiency, we can identify the influence of the revenue efficiency on the banks’ profitability. Orinalitty/value: The preferred method allows us to distinguish between three different types of efficiency, namely cost, revenue, and profit efficiencies. Furthermore, we perform a series of parametric (t-test) and non-parametric (Mann- Whitney [Wilcoxon] and Kruskall-Wallis) tests to examine whether the domestic and foreign Islamic banks are drawn from the same population.

This study investigates the efficiency levels of the Jordanian, Egyptian, Saudi Arabian and Bahraini banking systems. The study sample comprises information on 82 banks operating in Jordan, Egypt, Saudi Arabia and Bahrain over the 1992-2000 period. We utilized the Fourier-flexible stochastic frontier approach to estimate cost and profit efficiency levels in the banking systems under study. Cost efficiency estimates averaged around 95% over the 1992-2000 period. Standard and alternative profit efficiency estimates averaged 66% and 58%, respectively. Islamic banks are found to be the most cost and profit efficient while investment banks are the least (cost and profit efficient). Large banks, in assets terms, appear to be relatively more cost and profit efficient. Geographically, Bahrain banks are found to be the most efficient while Jordanian banks are the least efficient.

In recent years most developing countries, including Myanmar, have been seriously affected by the negative effect of climate variability—such as erratic rainfall, increased temperatures, longer dry spells, flooding and saltwater intrusion—during the crop growing season. Furthermore, most farmers lack knowledge of climate variability and how to cope with the negative effect of climate change. This study aimed to evaluate the profitability and profit efficiency of rice farmers in the Ayeyarwady Delta, Myanmar, during 2019 monsoon growing season, taking into consideration the effect of weather shock and farmers’ agricultural adaptation practices to climate variability. The Cobb-Douglas functional form was applied, with maximum likelihood techniques, to estimate rice growing productivity and the influencing factors of profit inefficiency among individual rice farmers. The average profit efficiency level of the yield loss group was approximately 0.39, while that of the no yield loss group was 0.66, indicating a relatively large gap between the two groups (27% wider distribution). Observation of the climate adaptation performances of rice farmers indicated that rice production incorporating climate adaptation practices (CAP) led to a significantly better average profit efficiency score (66%) than rice production omitting CAP. This study clearly revealed that the effect of weather variability on individual rice farmers leads to large variations in net profit and profit efficiency for monsoon rice production in the study area. Climate-smart agricultural practices should be developed through agricultural extension services, and using farmer-to-farmer extension services, to share information and technologies among smallholder rice farmers.

Conventional” corporate governance and “Sharia” or Islamic corporate governance may be different. The main research question is how Islamic Banking disclose their corporate governance? Author would like to find an answer according to maqashid Al-Shari’ah upon the realization of Islamic Ethical or Moral’s rule. In operationalizing the disclosure, this study conduct empirical investigations by taking 3 Islamic Commercial Banking and 3 Islamic Business Unit Banking in 2015 as a sample. The annual report for the sampled bank are using content analysis to generate the formula on disclosing corporate governance with maqashid al-Sharia’ah approach.Evidence showed that there is a lack of achievement on disclosure of corporate governance using maqashid Al-Shari’ah approach. Nevertheless, the overall industry focus mainly on rights and stakeholding, prosperity, and wealth rather than faith, self, intellect or ecology consequences. Additionally, the empirical results showed that there is no differences orientation between Islamic Commercial Banking and Islamic Business Unit Banking

This study examines the profit efficiency and the responsible factors for inefficiency in the selected forage production in selected areas of Kenya by using the maximum likelihood stochastic profit frontier function. This study proves that forage production is profitable with an average profit efficiency being 76.22% and 86.57% for the entire sampled population for grasses and leguminous crops, respectively. The result of the coefficients reveals some variability, which confirms that the firms in the sample have different profit frontiers. For coefficients that are significant but heavily negative in terms of magnitude is a clear indication that such variables would result in a high decrease in return to scare with respect to profit margin and vice versa. The policy implication in forage production based on these findings is that profit inefficiency can be reduced significantly by improving the cost of land preparation, land harrowing, cost of planting materials, and weed management, although other costs evaluated are also relevant.

This article estimates bank-specific profit efficiency of three broad ownership groups of Indian banks during the period 1995–96 to 2011–12, using the stochastic frontier methodology. Results reveal that during the post-liberalisation period, public sector banks in India are the best performers in terms of estimated profit efficiency. Further, foreign banks operating in India record higher profit efficiency levels compared to domestic private banks. The introduction of prudential regulations, such as capital adequacy ratios, has had a significant positive impact on the profit efficiency of Indian banks, while loan defaults adversely affect their profit efficiency. Market power does not necessarily lead to an increase in profit efficiency, while bank mergers have had a significant positive effect. Contrary to the expectation that the Indian banking system is highly resilient and sufficiently robust to cope with external shocks, the results reveal that the ongoing global financial crisis has had a significant adverse effect on the profit efficiency of Indian banks. JEL classifications: C14, G21, G28

Most farms in the Global South are small family farms and supporting these in generating ideal profits is critical for reducing poverty. We study the state of Bihar, the poorest in India where approximately 100 million people source their food and income from farms smaller than two hectares. Our research assesses the profit efficiencies achieved by smallholders in rice and wheat production and examine the variation in profit efficiencies across different farm sizes and geographical regions of the state. Applying single-step stochastic profit frontier analysis with data from 4016 randomly selected farmers, we estimate profit potential and identify sources of profit inefficiency. Spatial mapping with profit efficiency scores helps visualize differences and pattern within the state. The findings reveal that high planting cost in wheat and high harvesting costs in rice and wheat reduce profit efficiency. Additionally, excessive rainfall in August and higher temperature in November impede profit efficiency of rice and wheat, respectively. The biggest source of inefficiency in rice and wheat production is costly diesel-driven irrigation system. Our estimates suggest that closing profit efficiency gaps can increase smallholder profits by 38% in rice and 35% in wheat. Identifying strategies to close profit gaps in smallholder settings and agriculture-led economies is crucial for informing interventions that alleviate rural poverty. Graphical abstract

The existence of the regulation for Islamic banking causes it to conduct their activities by the guidance of Islamic principles which avoid some non-halal sources of income. On the other hand, the transactions between Islamic banking and conventional banking are unavoidable because conventional financial institutions still dominate all transactions in each country. Means that non-halal sources of income cannot be avoided, by the way of the transaction is done. This research aims to analyze the sources of income and its distribution of the non-halal funds of Islamic Banks in Indonesia. This research is quantitative. The method of collecting data documentation uses data from 2015-2017 with a total sample of 102 Islamic banks. The results show that there were differences in the average non-halal funds of Islamic Commercial Banks with Islamic Business Unit Bank. In addition, this study shows that Islamic commercial bank tends to have non-halal funds bigger than Islamic Business Unit Bank. On the other hand, the result shows that non-halal funds sources in the banking industry are dominated by interest income from another conventional bank and the using of non-halal funds is dominated by social activities.