1. Introduction

The efficiency concept is related both to operating efficiency and market efficiency. While operating efficiency refers to whether a firm is cost minimising or profit maximising based on published accounting, the efficiency market denotes the information efficiency and measures how relevant public information is incorporated in stock price.

Hence, the efficient stock market should take operating efficiency into consideration in price formation as it refers to public information. On the other hand, in semi-strong efficient, cost efficient banks should be able to raise capital at a lower cost and they should perform better than cost inefficient banks and therefore, generate higher shareholder return. Thus a higher cost efficiency (measured by lower cost or higher profit) will be reflected in stock performance.

Nevertheless, the literature on the relationship between bank efficiency and stock performance is not exhaustive and only a few studies have focused on this issue (Chu and Lim, 1998; Becalli et al., 2006; Parsiouras et al., 2007). Also, the relationship has been examined only for conventional banking institutions and to our best knowledge, there are no studies on the Islamic banking system.

In fact, Islamic banks exist all over the world, particularly in the Middle East and Southeast Asia. They are considered as a parallel system to conventional banks in the majority of countries and one of the fastest growing financial and economic sectors in the world. According to a report by Blominginvest bank drafted in February 2009, more than 390 Islamic financial institutions are spread across 75 countries with total assets estimated at approximately $ 1 trillion by 2010. Moody’s investors service, the rating agency, in its forecast suggested that the assets of Islamic banks will reach $ 4 trillion worldwide within 5 years.

During the last decade, the Islamic banking industry has grown at a remarkable pace, that is 20-30% per year, which equals three times the rate for conventional banks. According to many reports, the rapid and the continued growth of Islamic banking is driven by multiple factors such as: increasing demand from a large number of Muslims, the accumulated oil wealth of Muslim countries, low banking penetration in the majority of Muslim nations, increasing demand from non-Muslim customers and countries, and the support of government and regulatory authorities for the development and promotion of Islamic banking. Furthermore, the Islamic financial system has been less affected than the traditional system by the latest economic and financial crisis (2008), mainly due to its profitloss sharing principle, and also because of its strict prohibition of investments in risky instruments like toxic assets and derivatives. Furthermore, according to the IMF survey (2010) and Chapra (2009), Islamic banks have contributed to financial and economic stability during the global financial crisis. The strong performance of Islamic banks, in the last years, has encouraged several universal banks in developed countries to add Islamic products in their conventional banking industry through Islamic banks’ windows or Islamic banking subsidiaries.