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banking industry faces competitive pressure worldwide as the financial
structure changes rapidly. Furthermore, bank efficiency is a socially
optimal target since it reduces the average cost of financial transactions
and therefore enhances the society’s welfare.
The paper proceeds as following: Section two gives an overview
of Bahrain’s economy and Section three explains the structure of the
banking sector in Bahrain. Section four is devoted to Islamic banking in
Bahrain. The discussion of the efficiency concepts is given in Section
five. Econometric methodology is explained in Section six. Hypotheses
and model specifications are provided in Section seven. Data analysis
and empirical results are discussed in Section eight. Then, Section nine
Economy of Bahrain: An Overview
The Bahrain economy has doubled in size over the last 15 years,
GDP has been growing consistently since 1989. Bahrain has one of the
highest average income in the Middle East. In 2000, per capita GDP has
reached BD 4343. Bahrain has the highest literacy rate in the Arab world
and the longest life expectancy in the region. According to UNDP human
development index (2003), The kingdom of Bahrain is ranked 37th out of
173 countries with a rating of "high" and first in the Arab world.
The economy of Bahrain is based on the petroleum industry,
transit trade, and financial services. Services account for about two-third
of GDP. Bahrain benefited from the region’s economic boom in the 1970
and 1980s. During that time, Bahrain’s government had encouraged
economic diversification, it has focused on the development of its non-oil
industry by investing heavily on industrial infrastructure and heavy
industries. Due to diversification away from the oil sector, the
contributions of the oil and gas sectors to GDP have declined from 25 per
cent to around 18 per cent. The industrial development has grown in
importance and currently the manufacturing sector provides about 12 per
cent of GDP. Bahrain mainly produces Aluminum, which generates 40
per cent of the country’s non-oil export earnings, ship-building, and light
goods such as furniture and fiberglass. Furthermore, tourism is Bahrain’s
fastest growing industry, a major source of employment and contributes
about 10 percent of GDP (HSBC, 2001).