Financial soundness and operational efficiency of Islamic banks in Sub-Saharan Africa: evidence from a bias-corrected DEA and panel regression framework

Abstract

Purpose This study examined the effect of financial soundness on the operational efficiency of Islamic banks operating in Sub-Saharan Africa (SSA), a region characterized by emerging Islamic banking systems and constraints. It focused on how capital adequacy, asset quality, earnings quality and liquidity management influence efficiency outcomes. Design/methodology/approach The study applies a Simar–Wilson two-stage data envelopment analysis framework to a balanced panel of 35 fully-fledged Islamic banks in SSA from 2010 to 2024. Bias-corrected efficiency scores are estimated under variable returns to scale and subsequently analyzed using a panel regression framework with two-way fixed effects and robust standard errors to control for unobserved heterogeneity across banks and time. Findings The findings revealed a heterogeneous relationship between financial soundness and operational efficiency: asset quality was positively and significantly associated with efficiency, whereas earnings quality exhibited a negative relationship, indicating a profitability–efficiency trade-off. Capital adequacy showed no direct effect, while liquidity management demonstrated a weak and context-dependent influence. Practical implications The analysis is limited to fully-fledged Islamic banks with complete data. The findings suggest that regulators and managers should prioritize asset quality improvement and efficiency-oriented strategies over balance-sheet expansion. Originality/value The study provides one of the first ever comprehensive, bias-corrected DEA empirical assessments of operational efficiency in Sub-Saharan Africa in Islamic banking. By distinguishing operational efficiency from traditional profitability measures, it challenges the assumption that improved financial soundness inherently enhances efficiency in emerging Islamic banking markets.

The authors' abstract, as published at the source. African Journal of Economic and Management Studies, 2026 · DOI ↗