What can we learn about Islamic banks efficiency under the subprime crisis? Evidence from GCC Region

•Distinct three kinds of efficiency: technical, pure technical and scale efficiency•Non-parametric approach (DEA) is used to measure efficiency.•Islamic banks in GCC region are sensitive to subprime crisis.•Permanent negative effect of financial turmoil on Islamic banks.•Results have useful insights for stockholders and bankers.

The study investigates the influence of subprime crisis on the efficiency of Islamic banks in the GCC region using data envelopment analysis for the period spanning from 2005 to 2011. We focus on three aspects of efficiency, namely overall technical efficiency, pure technical efficiency and scale efficiency. Empirical findings highlight a slight decline in Islamic bank efficiency further to the subprime crisis just like their conventional peers all over the world. However, most Islamic banks have remained efficient whereas some of them witnessed a relatively minor decrease in their efficiency level. The most acute intensity of drop in efficiency was recorded on average in 2009 for all categories of efficiency; that is two years after the subprime crisis occurrence.