Research Journal of Recent Sciences _________________________________________________ ISSN 2277-2502 Vol. 4(6), 45-52, June (2015) Res.J.Recent Sci. International Science Congress Association 45 Comparing the Efficiency of Islamic Banks of Pakistan and Malaysia: by using the Dea Approach Amara Javed, Naeem Ullah and Qaiser Ali Malik Department of Business and Economics, FURC, PAKISTAN Available online at: www.isca.in , www.isca.me Received 23rd January 2014, revised 15th March 2014, accepted 18th June 2014 Abstract The purpose of this paper is to do compare the efficiency of Islamic banks of Pakistan and Malaysia. Data Envelopment Analysis (DEA) model is used to determine the technical and cost efficiency of Pakistani Islamic banks and Malaysian Islamic banks. After analysing the data of 20 Islamic banks, it is concluded that Cost efficiency of Pakistani Islamic banks is better than Malaysian Islamic banks. Whereas, according to the technical efficiency Malaysian Islamic banks are working better than Pakistani Islamic banks. So, Pakistani Islamic banks can acquire improvement in the resource utilization process and can reach the level of efficient banks. Malaysian Islamic banks should improve their cost efficiency to produce optimum outputs. Keywords: Islamic banks, Pakistan, Malaysia, cost efficiency, technical efficiency. IntroductionIt is an established fact that banks are the dominant suppliers of external finance, which is playing a vital role in channelling the capital from savings to the investment. Intermediate saving is not only a vital role which is performed by the banks, but relatively to verify the quality of borrowers and increasing their profitability to enhance the productivity, and they also monetize their liabilities2-6. So, efficiency of the banks, that is virtual capability to exploit resources and generate more output efficiently, is a perfect gauge as it seeks to measure quality of bank and also its functions in economy. According to the nassar and muhammad, Islmaic banking is established on the values of Islamic law (Shari’ah) and which should be showed by the Islamic economies. Sharing of profit and loss and exclusion of payment and collection of interest are two foundations of Islamic banking. In last few centuries, many financial organizations have practiced a versatile, advanced and economical and modest environment at a broder scale. Islamic banking concept is the most developed part, which has extremely captured the interest of Islamic and present-day economists. Many researches showed that there are 396 Islamic banks in 53 countries and aggregate deposits which all these banks are handling is US$ 442 billion. According to the J.mester10, while applying efficient techniques to certain industries judments also has to be used. In banking sector many issues arises when applying the techniques, and these issues arises because of efficiency estimation. The main problem in banking is to how to measure inputs and outputs. “Production” and “Intermediation” approaches are widely used. The production approach focused on operating cost of banks. The banks inputs are labour and physical capital; whereas outputs are bank’s accounts etc. Intermediation approach deliberates production process of borrowing and lending of all funds as financial intermediation . Therefore, main stressed on entire cost, which includes interest expense and operating expense. In this appraoch, Inputs are labour, deposits etc, whereas outputs can be measured by the dollar volume which includes all sorts of loans. Many researchers delibrated that after an increment in output anyone output should be decreased or any input be increased and vice versa11. The aim of the paper is to do comparing the efficiency of the Islamic banks of Pakistan and Malaysia. To find out which country is more efficient than other. DEA model is applying for the analysis of banks to determine the technical efficiency and cost efficiency. Data of five years (2008-2012) will be scrutinized of 20 Islamic banks from Pakistan and Malaysia. Literature review: The role of banking sector in the economy of any country is fundamental and banks performance has been renowned since past12 and they should maintain their stability13,14. Measuring the efficiency of banks is a tool which is used by banks to measure the performance of banks15. There are many ways to measure efficiency but commonly used is profit maximization strategy; how to maximize output from minimum input and efficiency therefore is measured by minimization of cost. Researchers have used different strategies to analyse that how banks increase their efficiencies. According to Kumar and Gulati16 variables used to find the efficiency are staff productivity, size and market share. Noulas17 scrutinized that state controlled banks are less efficient than private banks. Research Journal of Recent Sciences _____________________________________________________________ ISSN 2277-2502Vol. 4(6), 45-52, June (2015) Res.J.Recent Sci. International Science Congress Association 46 Cost of production can be minimised due to high competition and hence it stimulates efficiency18. Hamim et al.19 studies on efficiency of banks revealed that increased competition in the market might force them to perform capably, and this instrument would also be used to analyse the bank’s success. It also emphasises to produce the highly valued product, in which they can excel and make more profits therefore only if they provide efficient services. Several studies such as, Vassiloglou and Giokas20 conducted on DEA Model which is used to measure the technical and cost efficiency of banks. Randhawa and Lim21 used DEA model to scrutinize the banks’ technical efficiency. Their conclusion exhibited banks with large size have a higher technical efficiency than the small sized banks. Chun and Lim22 evaluated that profit efficiently is less than cost efficiency. Jackosn and Fethi23 concluded that profitable and large banks operate at high levels of technical efficiency. Yong Tan and Christos24 found ownership doesn’t play any significant role in boosting the efficiency of banking sector. Vigender et al25 concluded that efficiency can be increased through micro financing. High competition in the banking sector attributes towards lower profitability (ROE and ROE) of competing banks. Samad26discussed that production efficiency, profit earned by the BIMB and the rate by which BIMB uses the funds found its rate is lesser than other conventional banks. Cost-effectiveness indexes showed profit received by BIMB is lower than other banks. Bashir27 recognized the factors of Islamic banking performance as profits and suggested these profits could be generated from overheads and short term customer findings. He further claims that in Islamic bank deposits are considered as common and preferred shares; capitals which are held by the banks disseminate which have the impact that might be negative and results in reducing some of the amounts reverse. According to Gaganis, Liadaki, Doumpos, and Zopounidis28 return on assets, logarithm of personnel, loans to deposit ratio and logarithm of income per capita have significant positive impact on banks efficiency. Shaista and Umadevi29 concluded that profitability of conventional banks are higher than the Malaysian Islamic banks. The determinants were ROA, banks’ size, board size, operational efficiency, Quality of asset and profitability. Ratio of cost to total income is used for the estimation of operational efficiency30 and which is also used to find the bank’s management ability while monitoring the operating expenses31. Banks becomes less risky if the operational ratios are smaller and there is positive growth in the profitability29. Other researchers such as Tanna et al.32 by means of these determinants found that operational efficiency have a negative relationship with the profitability. Bashir27, Barth at al.33 and Vong and Hoi34 used the ratio of total asset in the place of operating expenses and the result shows that higher value results in increased profitability. Alkassim31study showed how much bank profitable according to their loans, to find this he uses operational ratios. Ahmed and Hassan35 scrutinized that performing well than Islamic banks because of higher operational ratios. Wasiuzzaman and Tarmizi36 revealed that net interest margin and performance of banks has a positive relationship. Kumar et al37 exhibited that performance of private banks are better than the public banks of India. There are many studies which showed that efficiency of banks can be measured by two different approaches. But one non-parametric approach which is widely used to measure the efficiency is Data Envelopment Analysis (DEA); the other being parametric Stochastic Frontier Analysis (SFA)38-40. DEA is a decision approach which is extensively utilized for evaluating the performance of the private as well as public sector41. Charnes et al.42 firstly described DEA as the measure of efficiency by using mathematical planning model (CCR model) for frontier based. These studies conducted in different countries such as Hadian and Hosseini43 examined that commercial banks are less efficient than specialised banks. Hasan Z44 using DEA approach showed that state-owned banks are less efficient than private banks. Chakrabarti and Chawla45 conducted their research on Indian banks to analyse the relative efficiency by using the DEA model. The two models used to stipulate the input-output vector were “Value” and “Quantity” approach. Their outcomes show that according to the “Value” approach, overseas banks are considerably much proficient than other bank groups. And according to the “Quantity” approach, performances of private Indian banks are good as compared to the foreign banks. Ramanathan12 conducted his research in countries of GCC to evaluate the bank’s performance. MPI is used to find the pattern of efficiency which could be changes over the period of 2000-2004. Their results revealed that four banks of GCC countries have an improvement in the productivity through the specified period. And there is reduction in productivity in Qatar’s banks. MethodologyThis research work is focused on Quantitative method. Five years data has been selected for the research i.e. 2008-2012. Data has been taken from the annual balance sheet and income statement of all the banks. Those firms have been chosen in the sample whose information was readily available for the sample period. Sample size of the research is 20 Islamic banks in which 6 banks are Pakistani and rest of the 14 banks are Malaysian. To measure the efficiency of any bank, two methodologies were commonly used which are Parametric approach and nonparametric approach. Both approaches are different from each Research Journal of Recent Sciences _____________________________________________________________ ISSN 2277-2502Vol. 4(6), 45-52, June (2015) Res.J.Recent Sci. International Science Congress Association 47 other because both have a different ways to manage the error and the suppositions done through the shapes of efficient. Both methodologies have their own strengths and flaws. Parametric approach consists of SFA and TFA. Another approach is non-parametric which includes disposal hull analysis (DHA) and DEA. DEA model is applied to evaluate the efficiency of Pakistani and Malaysian Islamic banks. DEA model is widely used as an instrument for assessing and enhance the performance of service operation. This model is used for the analysis of multi-factor productivity, which is used to evaluate the efficiencies of decision making unit (DMU) and score of efficiency evaluated by numerous input factors and output factors. Many researchers46-48 conducted their research in many countries to evaluate the efficiency of banks by using the DEA model. For the technical efficiency, two inputs and one output uses in this study. The first input is Total deposits, which includes all saving deposits, deposits from customers and from other banks. Second input is total overhead expenses, which includes personnel expense and other operating expenses. Output consists of total earning assets, which includes financing, investment securities, dealing securities and placements with other banks. To evaluate the cost efficiency, two inputs and one output is used. Prices of two inputs are mandatory. Inputs are total deposits and total equity. Pakistan’s currency is Rupees whereas Malaysian’s currency is Ringgit. To compare the technical and cost efficiency of the Islamic banks of Pakistan and Malaysia, currency would be converted into the standard currency dollar which would be easy to evaluate the results. Empirical findings: In Empirical findings, DEA approach is used to compare the technical and cost efficiency of Pakistani Islamic banks and Malaysian Islamic banks, and efficiency scores are acquired from 20 banks for the period 2008-2012. DEA analysis model is specifically used for the research in which DEAP Version 2.1 is used which was refined by Coelli et al.49Estimate level of TE and TC: TE method shows that how much banks could reduce their inputs, by using the required outputs. TC method shows that in making a best practice bank, how much bank’s cost is used. To evaluate the cost efficiency, prices are also required. Prices of input variables are also required to evaluate the cost efficiency. Results and Discussion Year-wise technical efficiency: Data was taken from the balance sheet and income statement of the Pakistani and Malaysian Islamic banks. Following Tables contains different terms such as Mean, Standard Error, Median, Standard Deviation, Sample Variance, Maximum, Minimum and Count, all these terms denoted by X, S.E, Med, S.E, S.V, Min, Max and C. All tables below show the descriptive analysis of Islamic banks of Pakistan and Malaysia. Table-1 shows that in 2008, Malaysian Islamic banks are more efficient than Pakistani Islamic banks because mean of Malaysian banks is 0.44 with a standard error 0.08, whereas Pakistani banks have 0.27 with standard error 0.021. The mean inefficient score of 27 per cent stated for Pakistani Islamic banks, if they are producing efficiently than its mean that they could produce the same output with only 73 per cent of inputs. Same in the case of Malaysia they used 56 per cent input by producing the outputs. According to the technical efficiency, Pakistani Islamic banks (mean 0.31) which means that they are not managing its inputs properly whereas, Malaysian Islamic banks (mean 0.63) are more efficient than Pakistani banks but they are also not managing its inputs well. The scale economies specify that banks in the both countries are characterized by economies of scale. In Pakistani and Malaysian Islamic banks, the strongest economies of scale of Pakistani banks (mean 0.88). The economies of scale estimate of mean 0.88 means that these banks can double their output by increasing their cost. Malaysia (mean 0.78) can also extend their Islamic banking sector but they should give more concentration, how to increase the efficiency and where to open the new branches. Table-2 shows that in 2009, Malaysian Islamic banks are more efficient than Pakistani Islamic banks because mean of Malaysian banks is 0.598, whereas Pakistani banks have 0.167. The mean inefficient score of 16.7 per cent stated for Pakistani Islamic banks, if they are producing efficiently than its mean that they could produce the same output with only 83.3 per cent of inputs. Same as, Malaysian Islamic Banks could produce the same output with 41 per cent of inputs. According to the VRSTE, Pakistani Islamic banks (mean 0.18) which means that they are not managing its inputs properly whereas, Malaysian Islamic banks (mean 0.70) are more efficient than Pakistani banks. The scale economies specify that banks in the both countries are characterized by economies of scale. In Pakistani and Malaysian Islamic banks, the strongest economies of scale of Pakistani banks (mean 0.92). Whereas, Malaysian banks (mean 0.877) are efficient but its economies of scale are less than Pakistani banks. Table-3 shows that in 2010, Malaysian Islamic banks are more efficient than Pakistani Islamic banks because mean of Malaysian banks is 0.467, whereas Pakistani banks have 0.090. The mean inefficient score of 9 per cent stated for Pakistani Islamic banks, if they are producing efficiently than its mean that they could produce the same output with only 91 per cent of inputs. Same as, Malaysian Islamic Banks could produce the same output with 54 per cent of inputs. Technical efficiency shows that, Pakistani Islamic banks (mean 0.098) which means that they are not managing its inputs at all whereas; Malaysian Islamic banks (mean 0.55) are more efficient than Pakistani banks. Malaysian banks efficiency is declining with a great value, it shows these banks are not managing its inputs properly Research Journal of Recent Sciences _____________________________________________________________ ISSN 2277-2502Vol. 4(6), 45-52, June (2015) Res.J.Recent Sci. International Science Congress Association 48 and should pay attention towards it. In 2010, Pakistan is still inefficient, whereas in 2008 its technical efficiency is much better. The scale economies specify that banks in the both countries are considered by economies of scale. In Pakistani and Malaysian Islamic banks, the strongest economies of scale of Pakistani Islamic banks (mean 0.90). The economies of scale estimate of mean 0.90 means that these banks can double their output by increasing their cost by only 90 per cent. Malaysian Islamic banks (mean 0.88) should focus on their economies of scale.Table-1 Technical efficiency of 2008 Pakistani Banks 2008 Malaysian banks 2008 CRSTE VRSTE Scale CRSTE VRSTE SCALE X .274 .311666667 .8835 .446428571 .633857143 .781571 S.E .021896727 .028305084 .020223336 .084022153 .091268343 .085556 Med .2705 .294 .9105 .3295 .5305 .9775 S.D .053635809 .069333013 .049536855 .314382108 .341494871 .320122 S.V .0028768 .004807067 .0024539 .09883611 .116618747 .102478 Min .217 .237 .81 .076 .216 .076 Max .367 .441 .92 1 1 1 C 6 6 6 14 14 14 Table-2 Technical efficiency of 2009 Pakistani banks 2009 Malaysian banks 2009 CRSTE VRSTE SCALE CRSTE VRSTE SCALE X .1675 .1805 .9275 .598357143 .707714286 .877286 S.E .011960351 .012685293 .021198663 .058702323 .064919428 .054359 Med .1625 .1785 .9135 .601 .6735 .952 S.D .029296757 .031072496 .051925909 .21964398 .242906259 .203392 S.V .0008583 .0009655 .0026963 .048243478 .059003451 .041368 Min .136 .142 .88 .275 .377 .275 Max .202 .226 .989 1 1 1 C 6 6 6 14 14 14 Table-3 Technical efficiency of 2010 Pakistani banks 2010 Malaysian banks 2010 CRSTE VRSTE SCALE CRSTE VRSTE SCALE X .0905 .098333333 .9065 .467714286 .551285714 .889786 S.E .014910287 .013906034 .052295156 .066601771 .073185406 .05449 Med .089 .093 .954 .4095 .455 .944 S.D .036522596 .034062687 .128096448 .249201009 .273834714 .203884 S.V .0013339 .001160267 .0164087 .062101143 .074985451 .041569 Min .044 .064 .646 .187 .271 .187 Max .13 .138 .971 1 1 1 C 6 6 6 14 14 14 Table-4 Technical efficiency of 2011 Pakistani banks 2011 Malaysian banks 2011 CRSTE VRSTE SCALE CRSTE VRSTE SCALE X .137666667 .765166667 .179833333 .545928571 .863571429 .615286 S.E .014952517 .069456181 .011637344 .07417002 .043487994 .079096 Med .1355 .726 .1805 .5105 .927 .593 S.D .036626038 .170132203 .028505555 .277518804 .162717175 .295951 S.V .001341467 .028944967 .000812567 .077016687 .026476879 .087587 Min .09 .564 .138 0 .496 .001 Max .179 .985 .221 1 1 1 C 6 6 6 14 14 14 Research Journal of Recent Sciences _____________________________________________________________ ISSN 2277-2502Vol. 4(6), 45-52, June (2015) Res.J.Recent Sci. International Science Congress Association 49 This table shows that in 2011, Malaysian Islamic banks are more efficient than Pakistani Islamic banks because mean of Malaysian banks is 0.54, whereas Pakistani banks have 0.13. The mean inefficient score of 13 per cent stated for Pakistani Islamic banks, if they are producing efficiently than its mean that they could produce the same output with only 87 per cent of inputs. Same as, Malaysian Islamic Banks could produce the same output with 46 per cent of inputs. According to the technical efficiency, Pakistani Islamic banks (mean 0.76) which means that Pakistani banks are trying to operate efficiently. From last 3 years efficiency of Pakistani banks are declining but in 2011 its efficiency is boosting. Malaysian Islamic banks (mean 0.86) showing that still these banks are more efficient than Pakistani banks. Scale economies show that, the strongest economies of scale of Malaysian banks (mean 0.61). The economies of scale estimate of mean 0.61 means that these banks can double their output by increasing their cost. Pakistan (mean 0.17) with this efficiency score, it should try to improve the efficiency of their existing banks. They should more curious to create more branches because their branching network is not well. Table-5 shows that in 2012, Malaysian banks mean is 0.65, whereas Pakistani banks have 0.23. The mean inefficient score of 23 per cent stated for Pakistani Islamic banks, if they are producing efficiently than its mean that they could produce the same output with only 77 per cent of inputs. Same as, Malaysian Islamic Banks could produce the same output with 35 per cent of inputs. According to the technical efficiency, Pakistani Islamic banks (mean 0.89) which shows that Pakistani Islamic banks are using its inputs very efficiently to produce its outputs, but it still lacking in some places. Malaysian Islamic banks (mean 0.86) showing that it is operating efficiently but Pakistani banks are more efficient. Scale economies show that, the strongest economies of scale of Malaysian banks (mean 0.75). The economies of scale estimate of mean 0.75 means that these banks can double their output by increasing their cost. Pakistan (mean 0.26) with this efficiency score Pakistan tries to improve the efficiency of their existing banks. They should extend their Islamic banking sector but they should give more concentration on how to the efficiency and where to open new branches. Year-wise cost efficiency: All tables below show the descriptive analysis of cost efficiency of Islamic banks of Pakistan and Malaysia. This table shows that Pakistani Islamic banks measured Cost efficiency which is 0.67 or 67% with a standard error 0.087. In other words these banks have wasted 33%of its cost while producing their outputs. Whereas, Malaysian Islamic bank’s cost efficiency is 60% with a standard error 0.084. Pakistani Islamic banks have high cost efficiency than Malaysian Islamic banks. Pakistani and Malaysian Islamic banks should use its input more efficiently to produce maximum output and should do reduction in their cost by 33% and 40% respectively. Table-5 Technical efficiency of 2012 Pakistani banks 2012 Malaysian banks 2012 CRSTE VRSTE SCALE CRSTE VRSTE SCALE X .237833333 .889833333 .267333333 .654071429 .865857143 .755286 S.E .018133609 .033498673 .016912849 .062012801 .064647808 .040984 Med .2435 .8915 .2855 .6545 .9645 .746 S.D .044418089 .082054657 .041427849 .232030656 .241889949 .153347 S.V .001972967 .006732967 .001716267 .053838225 .058510747 .023515 Min .166 .764 .195 .075 .101 .522 Max .288 1 .303 1 1 1 C 6 6 6 14 14 14 Table-6 Cost efficiency of 2008 Islamic Banks 2008 X S.E Med S.D S.V Min Max C Pakistani 0.677667 0.087322264 0.6555 0.21389499 0.045751067 0.351 1 6 Malaysian 0.607286 0.084115464 0.5745 0.314731248 0.099055758 0.03 1 14 Table-7 Cost efficiency of 2009Islamic Banks 2009 X S.E Med S.D S.V Min Max C Pakistani 0.7355 0.090412296 0.673 0.221463993 0.0490463 0.446 1 6 Malaysian 0.548071 0.077064584 0.4625 0.288349271 0.083145302 0.024 1 14 Research Journal of Recent Sciences _____________________________________________________________ ISSN 2277-2502Vol. 4(6), 45-52, June (2015) Res.J.Recent Sci. International Science Congress Association 50 In 2009, Pakistani Islamic banks have a 73% cost efficiency with standard error 0.09. Whereas, Malaysian Islamic banks have a 54% cost efficiency with a standard error 0.07. Pakistani Islamic banks and Malaysian Islamic banks should reduce their cost by 27% and 46% respectively. These results depict that during the year Pakistani banks performed better than Malaysian banks. In 2010, cost efficiency of Pakistani Islamic banks is 65% with a standard error 0.081. They should reduce their 35% cost to produce maximum output. Cost efficiency of Malaysian Islamic banks is 38% with a standard error 0.078. They should pay more concentration on their cost. These results again depict that during the year Pakistani banks performed better than Malaysian banks. Table-9 shows that Pakistani Islamic banks measured Cost efficiency which is 0.80 or 80% with a standard error 0.078. In other words these banks have wasted 20% of its cost while producing their outputs. Whereas, Malaysian Islamic bank’s cost efficiency is 60% with a standard error 0.066. Pakistani Islamic banks have higher cost efficiency than Malaysian Islamic banks. Pakistani and Malaysian Islamic banks should use its input more efficiently to produce maximum output and should do reduction in their cost by 20% and 40% respectively. In 2012, Pakistani Islamic banks have 84% cost efficiency with standard error 0.04. Whereas, Malaysian Islamic banks have 84% cost efficiency with a standard error 0.06. Both Pakistani Islamic banks and Malaysian Islamic banks should reduce their cost by 20%. All the above results show that during 2008-2012, Pakistani Islamic banks performed better than Malaysian Islamic banks in terms of cost efficiency. So, Malaysian Islamic banks should improve their cost efficiency to produce a maximum output from minimum inputs. Conclusion Various researches had been conducted to measure the technical and cost efficiency of Islamic banks and it exhibit different research. The various analyses have identified significant management practices and these are expected to help the banks to identify areas where they might think that they need to improve their efficiency. To increase in the efficiency, it needs change over time so Islamic banks should ensure synchronization of their assets and liabilities. After analysing the data of 20 Islamic banks of Pakistan and Malaysia during 2008-2012, we concluded that according to the technical efficiency of Malaysian Islamic banks are working more efficiently than Pakistani Islamic banks. Whereas, according to the Cost efficiency of Pakistani Islamic banks are better than Malaysian Islamic banks. Inefficiency caused by improper resource allocation. Pakistan can improve its efficiency by allocating its proper inputs to generate maximum output. They should manage their reimbursement schedule, risk, precision of information, types of deposits etc. These are all have an effect on cost to the bank. The study suggests that large sized banks are the slightly efficient and small sized banks are the utmost efficient Islamic bank in the years 2008-2012 in both countries. Hence, inefficiency can be determined from the size of the bank. Though, economies of scale can be increased with the passage of time. If the bank size increases above medium sized banks then inefficiency increases and economies of scale becomes weaker. So, large size banks are not optimal. Pakistani Islamic banks are marginally inefficient. Pakistani Islamic banks can acquire improvement in the resource utilization process and can reach the level of efficient banks.Table-8 Cost efficiency of 2010Islamic Banks 2010 X S.E Med S.D S.V Min Max C Pakistani 0.653667 0.081252145 0.6295 0.199026296 0.039611467 0.426 1 6 Malaysian 0.3895 0.078798237 0.339 0.294836004 0.086928269 0.023 1 14 Table-9 Cost efficiency of 2011Islamic Banks 2011 X S.E Med S.D S.V Min Max C Pakistani 0.8055 0.078578517 0.8685 0.192477271 0.0370475 0.546 1 6 Malaysian 0.603357 0.066257208 0.6035 0.247911773 0.061460247 0.022 1 14 Table-10 Cost efficiency of 2012 Islamic Banks 2012 X S.E Med S.D S.V Min Max C Pakistani 0.843667 0.04600628 0.855 0.11269191 0.012699467 0.658 1 6 Malaysian 0.846429 0.068909298 0.927 0.257834984 0.066478879 0.023 1 14 Research Journal of Recent Sciences _____________________________________________________________ ISSN 2277-2502Vol. 4(6), 45-52, June (2015) Res.J.Recent Sci. International Science Congress Association 51 Hence, the analyst must focus to boost their efficiency. Malaysian Islamic banks should improve their cost efficiency to produce optimum outputs. Islamic banking system can generate the scope of economies to enhance the efficiency. It is very important to keep the growing spirit in the progress of Islamic banks. Our results exposed that the technical and cost efficiency of both countries could be improved further. The limitation of the study is that the research is conducted only on 20 Islamic banks due to time constraint. Another limitation of this study is that data was not easily available throughout the years 2008-2012, for this reason only 20 Islamic banks are opted. It would be recommended that further analysis of Pakistani and Malaysian Islamic banks regarding the efficiency should be done to consider the exposure of risk factor. 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