Risk‐return analysis of Islamic banks' investment deposits and shareholders' fund

Abstract

Purpose

The purpose of this paper is to study the differences or variance in the yields of Islamic and conventional bank deposits and capital, respectively, in view of their contractual differences, namely the former which is based on equity and the latter on debt.

Design/methodology/approach

The paper uses a financial ratio approach.

Findings

It was found that deposit yields in conventional banks were lower than return on equity (ROE), which truly reflect the contractual differences between fixed deposit and bank's capital. Also, it was found that Islamic banks' deposit yield and ROEs do not reflect their risk‐taking properties, as their variances were found to be smaller.

Research limitations/implications

The paper adds to the literature on risk‐return relationship in Islamic capital theory, which currently lacks theoretical studies.

Practical implications

The paper shows that increasing the level of risk taking in mudarabah investment account could increase its expected returns.

Originality/value

Since both shareholders' capital and mudarabah investment accounts constitute risk capital, variance in yields should be proportional to risk. The paper is the first attempt to explore and compare yields from Islamic bank capital and mudarabah deposits.

Citation

Azhar Rosly, S. and Ashadi Mohd. Zaini, M. (2008), "Risk‐return analysis of Islamic banks' investment deposits and shareholders' fund", Managerial Finance, Vol. 34 No. 10, pp. 695-707. https://doi.org/10.1108/03074350810891010