UNDERSTANDING FINANCIAL EFFICIENCY IN ISLAMIC BANKS: A CONCEPTUAL PERSPECTIVE
DOI:
https://doi.org/10.35631/AIJBES.829050Keywords:
Financial Efficiency, Islamic Banks, Islamic Finance, Technical EfficiencyAbstract
Financial efficiency is particularly important in Islamic banking because of its implications for competitiveness, long-term resilience, and sustainability. Despite substantial empirical research, its conceptualisation remains fragmented across different dimensions, measurement approaches, and analytical perspectives, which limits conceptual clarity and complicates the interpretation of efficiency across studies. Using a conceptual literature review, this study critically synthesises relevant prior research to clarify the meaning, dimensions, measurement approaches, and contemporary issues of financial efficiency in Islamic banking. Financial efficiency is distinguished from financial performance by focusing on how effectively banks transform resources into financial outcomes rather than on profitability outcomes alone. Financial performance reflects a bank’s financial outcomes, commonly assessed through profitability. The synthesis identifies technical, cost, profit, scale, and allocative efficiency as complementary dimensions of financial efficiency. It further highlights that the interpretation of efficiency in Islamic banks should consider their Shariah-compliant operational structures, ethical principles, and social objectives alongside conventional financial considerations. The findings suggest that a more holistic understanding of financial efficiency is necessary to reflect the multidimensional and evolving nature of Islamic banking. The paper contributes to the literature by consolidating fragmented perspectives on financial efficiency and providing a clearer conceptual basis for understanding and evaluating its multidimensional nature in Islamic banking. Future research should extend this conceptualisation by examining how sustainability, technological transformation, and Shariah-related considerations can be incorporated into multidimensional efficiency assessment.
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