This study investigates the impact of the country’s governance on the revenue efficiency of 108 Islamic banks from 26 countries offering Islamic banking and finance products services. The technical efficiencies of individual Islamic banks have been analyzed using the Data Envelopment Analysis method. The data will be pooled across the selected countries and utilize the intermediation approach. The Ordinary Least Square estimation method is employed to examine the impact of country supervision and regulation on the technical efficiency of Islamic banks. As robustness check, the study examines the impact of the level of bank regulations and supervision on the efficiency of Islamic banks operating in different income-level countries. The results found that the stricter the supervisory power, the less strict capital requirement, the tighter the restrictions on non-banking activities, and the stricter the private monitoring enhance statistically significantly the level of efficiency of Islamic banks. In upgrading the regulations and supervision of the Islamic banks, the existing regulatory framework based on the Basel Committee on Banking Supervision (BCBS) must be complemented with the prescriptions on Islamic banking or Shariah compliance diligently, so that the Islamic banks could be regulated accurately and further improve the technical efficiency of their operations.

This study investigates the impact of the country’s governance on the revenue efficiency in the banking sectors of 42 Islamic banks in 15 countries offering Islamic banking and financial services. Technical efficiencies of individual Islamic banks were analyzed using the Data Envelopment Analysis method. The Ordinary Least Square estimation method is employed to examine the impact of country supervision and regulation on the technical efficiency of Islamic banks. With robustness check, the study assesses the impact of bank regulations and supervision on the efficiency of Islamic banks operating in different regions. The empirical findings suggest that supervisory power, activity restrictions, and private monitoring positively influence the efficiency of Islamic banks. On the other hand, we observe a negative impact of capital requirement on Middle East and North Africa (MENA) countries. The findings indicate that supervisory power, activity restrictions, and private monitoring positively influence the efficiency of Islamic banks in Asia, but vice versa on capital requirement in MENA countries. This study will contribute to the body of knowledge by assessing the types of reforms in bank regulations and supervision that work best for Islamic banks in order to increase the level of efficiency and the level of regulations and supervision of Islamic banks.

This study investigates the impact of bank regulation and supervision on the efficiency of banking sectors on 108 Islamic banks from 26 countries offering Islamic banking and finance products and services. The technical efficiencies of individual Islamic banks have been analyzed using the data envelopment analysis method (DEA). The ordinary least square estimation method is employed to examine the impact of country supervision and regulation on the technical efficiency of Islamic banks. The empirical findings suggest that supervisory power, activity restrictions and private monitoring positively influence the efficiency of Islamic banks. The study revealed that Islamic banks that are operating in Middle East and North Africa (MENA) and middle-income countries are more technically efficient given the less stringent rules on capital requirement and we found that there is statistically significant evidence that higher capital requirements are negatively associated with the efficiency of Islamic banks. The empirical findings of this study are expected to help policy-makers and government officials to better understand how their decisions affect the performance.