How efficient are alternative financial institutions? An empirical investigation of Islamic REITs in Malaysia

The literature shows that despite Sharia-compliant restrictions, Islamic Real Estate Investment Trusts (REITs) exhibit higher financial returns than conventional trusts. However, efficiency analysis which directly assesses the effect of Sharia-compliant is lacking. This paper provides the first such analysis of Malaysian REITs from 2007 to 2015. The findings show that Malaysian REITs can reduce their inputs consumption by 35.8% without reducing outputs, implying a significant potential for improvement. Nevertheless Islamic REITs achieve higher efficiency levels than conventional REITs indicating that the Sharia-compliant effect is positive. It is suggested that REITs can increase efficiency through good governance, capitalisation, and diversification.