Effects of credit, liquidity, and operational risks on efficiency of Islamic banks in Africa
Keywords:
Africans, Credit, LiquidityAbstract
Islamic banks in Africa are characterized with some technical inefficiencies. The low efficiency of Islamic banks in the region has been linked to high exposure to different risk variables. However, adequate attention has not been given to such risk variables in past studies on Islamic bank efficiency. This study therefore assessed the effects of credit, liquidity and operational risks on efficiency of Islamic banks in Africa. Twenty (20) Islamic banks were selected across Africa for a period of eight (8) years from 2012 to 2019. Data were collected from annual reports of the banks and analysed via Data Envelopment Analysis (DEA) and Ordinary Least Square (OLS) regression. The study found that the banks were not efficient as the average overall technical efficiency (OTE) was 0.748. The inefficiencies could be traced to both managerial inefficiencies (PTE, 0.827) and poor selection of operating scale (SE, 0.902). The study also found that non-performing financing ratio (p = 0.002), deposit-asset ratio (p = 0.019), and operating expenses to earnings ratio (p = 0.000), have a negative and significant relationship with OTE at 5% level of significance. The study concluded that Islamic banks in Africa are not technically efficient and that exposure to credit, liquidity and operational risks had impaired their technical efficiencies. The study recommends employment of staff with requisite skills and knowledge of Islamic banking and finance to enhance their efficiency. Timely identification of potential risks and adequate risk management are also necessary to forestall high risk exposure which jeopardize technical efficiency.
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