Efficiency analysis of Mudarabah and leasing firms in Pakistan

Leasing firms consider the conventional interest-based method whereas, the modaraba firms consider the sharia-based non-interest-based method to operate in the financial market. The role of both these Financial Institutions (FIs) is of much importance for the sustainable development of Small and Medium Enterprises (SMEs). While comparing modaraba firms and conventional leasing firms, in the first stage, the current paper has computed Technical Efficiency (TE), Pure Technical Efficiency (PTE), and Scale Efficiency (SE) of modaraba and leasing firms. Data Envelopment Analysis (DEA) is applied by following a value-added approach. Equity, liabilities, fixed assets, Operating expenses and are selected as input variables whereas, income and investments are selected as output variables. The results suggest that sharia-compliant modaraba firms are competing well with conventional leasing firms. It indicates that there is no major difference in the efficiency of both FIs. In the second stage, the study also analyzes the association of firm-specific factors with efficiency with the help of the Tobit regression model which suggests that leverage, tangibility, operating expenses, and profitability of the firm are significantly related to the efficiency of both Financial Institutions.