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Article
Publication date: 23 November 2012

Rihab Grassa

The purpose of this paper is to analyze the income structure of Islamic banks in the Gulf Cooperation Council (GCC) countries and to explore the effect of the…

Abstract

Purpose

The purpose of this paper is to analyze the income structure of Islamic banks in the Gulf Cooperation Council (GCC) countries and to explore the effect of the diversification of banks' earning on risks that may harm these latter.

Design/methodology/approach

Using data from 2002‐2008 for 42 Islamic banks, this article provides descriptive and analytical analysis and multiple regression equations.

Findings

This article reveals that greater reliance on the income share of the profitlosssharing products is associated with higher risk and higher insolvency risk for both listed Islamic banks and non‐listed Islamic banks. However, no effect has been observed between the operation income of non‐profitlossessharing products and risk levels. That is why listed banks prefer to invest less in non‐profitlosssharing products than in profitlosssharing products.

Research limitations/implications

Financial regulators in emerging Islamic financial market should help Islamic banks to find equilibrium between the expansion of the Islamic financial market and respect for the raison d'être of Islamic finance: the profit and loss sharing mechanisms.

Originality/value

To the best of the author's knowledge, this is the first article that empirically tests why Islamic banks prefer to invest less in profitlosssharing products. Also, this article contributes to studying the relationship between Islamic finance and risk.

Details

Accounting Research Journal, vol. 25 no. 3
Type: Research Article
ISSN: 1030-9616

Keywords

Content available
Article
Publication date: 11 December 2019

Ahmad Abbas and Ainun Arizah

The purpose of this paper is to analyze marketability constructed from market share and concentration and to test its effect on the profitability and the mediation effects…

Abstract

Purpose

The purpose of this paper is to analyze marketability constructed from market share and concentration and to test its effect on the profitability and the mediation effects of profitloss sharing under stewardship theory.

Design/methodology/approach

This research employs data of financial statements published by ten sharia commercial banks listed in the Indonesia Financial Services Authority during the period 2011–2016. The data are analyzed into path analysis model using multiple mediators.

Findings

The result reveals that sharia banks’ marketability in Indonesia tends to be low. Based on the test of significance through Partial Least Square, it is found that marketability has a positive effect on the level of profitability, indicating that market share and concentration of sharia banks positively lead the change on the level of Return on Asset and Return on Equity. This paper further identifies the mediation effects emerged through mudharabah and musharakah. The results point out that mudharabah has a partial effect and musharakah has a competitive effect on the relationship between market share and profitability.

Practical implications

This paper can be a decision-maker for Central Bank and Financial Services Authority for encouraging sharia banks to enhance the power market through the mode of finances with profitloss sharing.

Originality/value

The growth of sharia banks is currently becoming highlight of the literature of sharia banks. This paper provides insights into stewardship theory that sharia banking management provides the concept of the alignment of interest.

Details

Asian Journal of Accounting Research, vol. 4 no. 2
Type: Research Article
ISSN: 2443-4175

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Article
Publication date: 14 November 2016

Noraina Mazuin Sapuan, Nur Azura Sanusi, Abdul Ghafar Ismail and Antoni Wibowo

The purposes of this study are twofold. First, to theoretically examine the profit-sharing (mudarabah) contract that produces an optimal distribution of return in the…

Abstract

Purpose

The purposes of this study are twofold. First, to theoretically examine the profit-sharing (mudarabah) contract that produces an optimal distribution of return in the presence of social learning (shuratic process) within the environment of asymmetric information. Second, to empirically investigate the optimal condition of profit-sharing ratio (PSR) and social learning for profit-sharing (mudarabah) contract in Islamic banking.

Design/methodology/approach

Data from one of the biggest and earliest Islamic banks in Malaysia were taken as a proxy of an Islamic bank. The data are collected from the period of 2009 to 2013, and these will be used for the simulation process by using the genetic algorithm (GA) technique.

Findings

The empirical results discovered that Islamic banks had used social learning in their daily activities, especially in the asset side. The results also showed that the trend of social learning has a positive relationship with the trend of Islamic banks’ net profit. Additionally, the results also indicated that the Islamic banks’ net profit has a positive relationship with its PSR from the profit-sharing (mudarabah) financing and securities investment.

Originality/value

This study is the first of its kind that investigates the implementation of the social learning process in Islamic banking operation. This study also used the latest technique from artificial intelligence system, i.e. a GA, to attain an optimal value for PSR and social learning process.

Details

Humanomics, vol. 32 no. 4
Type: Research Article
ISSN: 0828-8666

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Article
Publication date: 23 September 2019

Hechem Ajmi, Hassaneddeen Abd Aziz, Salina Kassim and Walid Mansour

The purpose of this paper is to determine the optimal profit-and-loss sharing (PLS)-based contract when market frictions occur.

Abstract

Purpose

The purpose of this paper is to determine the optimal profit-and-loss sharing (PLS)-based contract when market frictions occur.

Design/methodology/approach

This paper opts for an adverse selection analysis and Monte Carlo simulation to assess the less risky contract for the principal and the agent when musharakah, mudarabah and venture capital financings are used in imperfect markets. Furthermore, this framework enables us to capture the level of market frictions that the principal can bear and the level of audit that he/she may undertake to mitigate bankruptcy.

Findings

The simulation results reveal that Musharakah is the less risky contract for the principal compared to Mudarabah and venture capital when the shock is low and high. Furthermore, our findings indicate that the increase of market frictions engender higher audit cost and profit-sharing ratios. The increase of the safety index in the case of high shock is most likely attributed to the increase of the audit parameter for all contracts to mitigate the selfish behavior of the agent. Accordingly, the principal tends to require a higher profit-sharing ratio to compensate for the severer information asymmetry.

Research limitations/implications

This paper has two main limits. First, the results were not compared to real data because the latter are not available. Second, this paper is a general framework to determine the less risky contract for the principal and does not consider the firm and sectoral characteristics. However, it can be extended in various ways where stress can be put on conflicts of interest between the principal and the agent with the aim to determine the contract that aligns their interests. In addition, the examination of firm dynamics in the case of equity and debt financing can provide further arguments for economic agents regarding the value of the firm, the growth rate and the lifetime of the project when information is asymmetrically distributed.

Practical implications

The findings shed some light on the necessity of the Islamic finance experts to re-think of the promotion of Musharakah because it dominates the two other contracts when market frictions occur.

Social implications

Although Maghrabi and Mirakhor (2015), Alanzi and Lone (2015) and Lone and Ahmad (2017) among others showed that profit and loss sharing can ensure economic growth, findings may motivate economic players to consider Musharakah financing with the aim to reach financial inclusion and social, which is in line with Shari’ah requirements and Islamic values.

Originality/value

Although several papers highlighted the financial contracting theory from Shari’ah perspective, they ignored the financial issues that are associated to adverse selection. This paper provides theoretical evidence regarding the selection of the less risky financing mode in case of equity financing using Monte Carlo simulation.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 12 no. 4
Type: Research Article
ISSN: 1753-8394

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Article
Publication date: 8 July 2019

Bijan Bidabad, Mahmoud Allahyarifard and Mahshid Sherafati

This paper aims to explain a new system of accounting for partnership financing that applies in Rastin profit and loss sharing banking. In this system, the interest rate…

Abstract

Purpose

This paper aims to explain a new system of accounting for partnership financing that applies in Rastin profit and loss sharing banking. In this system, the interest rate is not used in calculations and accounting, and instead, the “time value” of capital based on the amount and duration of the partnership is used.

Design/methodology/approach

Rastin Partnership Accounting principles have been founded on off-balance-sheet items and on the basis of the institutions’ obligations to the depositors and receivers of financial resources, and they are in compliance with the nature of the financial intermediary activity (a partnership of depositor in the yields of the fund receiver via the bank).

Findings

The distribution of profit among stakeholders (including workforce and capital owners) is accomplished according to the share of each beneficiary in the created value added. In this regard, Euler’s theorem, as the best mathematical-economic innovation for distribution of income is applied.

Research limitations/implications

This system is novel, and it is required to be more elaborated for further practical development and adjustment.

Practical implications

In this accounting system, the return of the partnership is distributed among sharers based on the amount and duration of their partnership. The penalty for delay in payment is calculated from the amount of the incurred loss due to negligence or blameworthy of the undertaker and not upon a penalty interest rate.

Social implications

Interest rate as an essential factor in conventional accounting is not usable in Islamic banking and other similar institutions that work based on partnership, such as mutual funds and saving and loan associations. The proposed system removes this shortage and is fairer than the conventional accounting.

Originality/value

Approach of this accounting system is fully different from the conventional accounting because of intrinsic characteristics of the intermediary role of financial partnership institutions and Islamic banks.

Details

Journal of Islamic Accounting and Business Research, vol. 10 no. 4
Type: Research Article
ISSN: 1759-0817

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Article
Publication date: 14 April 2014

Nada Lahrech, Abdelmounaim Lahrech and Youssef Boulaksil

The purpose of this paper is to assess whether Islamic banks are transparent regarding profit (and loss) sharing to investment account holders. Another objective is to…

Abstract

Purpose

The purpose of this paper is to assess whether Islamic banks are transparent regarding profit (and loss) sharing to investment account holders. Another objective is to appraise whether Islamic banks' performance affects management incentives to distribute profit (and loss) to investment account holders.

Design/methodology/approach

To investigate the research issue, the authors conducted an empirical study. Data of 25 global operating Islamic banks have been collected and analyzed for the period 2006-2010. The authors also developed a mathematical model based on the generalized least-squares principle.

Findings

The research results showed that enhancing transparency will prevent Islamic banks from shadowing their profit allocation practices and place investment account holders in a better position to manage their invested funds. The study also showed that bettering Islamic banks’performance will induce them to manager profit-sharing investment account holders’ funds under bonafides.

Research limitations/implications

The main limitation is data availability. The maximum number of Islamic banks that disclose financial data covering the period of 2006-2010 limited the scope of the study to 25 banks.

Practical implications

The findings are very valuable for designing policies and standards as well as for the enforcement of these standards to improve transparency in Islamic banking.

Originality/value

The study outcome is vital to many parties involved in the Islamic banking field and can be taken as a strong foundation to make appropriate actions that would help grow and sustain Islamic banking development globally.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 7 no. 1
Type: Research Article
ISSN: 1753-8394

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Article
Publication date: 15 June 2015

Bassam Mohammad Maali and Muhannad Ahmad Atmeh

The purpose of this paper is to examine the use of the social welfare concepts of Takaful and Tabarru’ (donations) as tools to guarantee deposits in the Islamic banking…

Abstract

Purpose

The purpose of this paper is to examine the use of the social welfare concepts of Takaful and Tabarru’ (donations) as tools to guarantee deposits in the Islamic banking industry, and the effect of such practice on the concept of risk sharing in Islamic finance.

Design/methodology/approach

The study critically analyzes the Mudaraba contract used by Islamic banks to mobilize funds, the use of Profit Equalization Reserves and Investment Risk Reserves, the use of other income smoothing techniques and the insurance of Islamic banks’ by regulatory agencies in some countries based on the Takaful and Tabarru’ concepts.

Findings

This paper shows that Islamic banks are increasingly using the concepts of Takaful and Tabarru’, which are intended originally for social welfare, as tools to justify the move to more guaranteed-in-substance type of deposits, and hence, more risk shifting rather than risk sharing in the Mudaraba contract. This use, is argued, moves Islamic banking towards more market-oriented, but less Shariaa-compliant in substance.

Research limitations/implications

This papers examined the behaviour of Islamic financial institutions and Islamic scholars based on the available literature. No empirical analysis was conducted.

Originality/value

This paper contributes to the ongoing debate about the substance of Islamic banking transactions and the risk shifting inherent in such transactions. Furthermore, it is the first study that examines the extent of utilizing different social welfare concepts to legalize – from Shariaa perspective – Islamic banking transactions.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 8 no. 2
Type: Research Article
ISSN: 1753-8394

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Article
Publication date: 1 May 1996

Abdel‐Hameed M. Bashir

In this paper we analyze investment behavior under profitandloss sharing contracts in an environment of asymmetric information. Under certain restrictive assumptions…

Abstract

In this paper we analyze investment behavior under profitandloss sharing contracts in an environment of asymmetric information. Under certain restrictive assumptions, PLS contracts are characterized with over investment, where the equilibrium level of investment exceeds the first best (full information) level. A zakat tax on profit is shown to restore efficiency.

Details

Managerial Finance, vol. 22 no. 5
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 4 July 2016

Wasim K. AlShattarat and Muhannad A. Atmeh

Islamic banks use Mudarabah contract to replace the interest-bearing deposits with profit-sharing investment accounts. The purpose of this paper is to explore the…

Abstract

Purpose

Islamic banks use Mudarabah contract to replace the interest-bearing deposits with profit-sharing investment accounts. The purpose of this paper is to explore the challenges and problems associated with the employment of Mudarabah contract by Islamic banks.

Design/methodology/approach

The study critically analyzes the Mudarabah contract used by Islamic banks. It reviews the evolution of the contract from its traditional type to more complicated types such as compound, unrestricted, commingled and continuous Mudarabah. The paper investigates the problems that have emerged from implementing such types in current business settings.

Findings

The paper proves that implementing the Mudarabah contract by banks imposes several problems among which are the following: difficulty in the determination of total profit resulting from Mudarabah and in allocating this profit to the multiple parties involved in Mudarabah; usage of reserves to cater against future losses may undermine the concept of Mudarabah profit-loss sharing and lead to earnings management; corporate governance is also a major problem in Mudarabah contract, as the depositors are exposed to risks but have no governance rights; and Mudarabah may also lessen the fair presentation of financial reporting.

Research limitations/implications

The paper examines the evolving Mudarabah contract and its implementation challenges, based on available literature (no empirical analysis was conducted).

Practical implications

The implications are significant for the future development of Islamic contracts and Islamic accounting treatments.

Originality/value

Many studies explored the Mudarabah contract from a Shariah or law perspective. However, this paper investigates the Mudarabah contract with a focus on the implication on accounting and financial reporting because of the lack of studies in this area. Furthermore, it demonstrates the persistent flaws in the Mudarabah contract, and it proposes a new model for mobilizing funds, i.e. mutual fund.

Details

Journal of Financial Reporting and Accounting, vol. 14 no. 1
Type: Research Article
ISSN: 1985-2517

Keywords

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Article
Publication date: 16 April 2010

Simon Archer, Rifaat Ahmed Abdel Karim and Venkataraman Sundararajan

The aims of this paper are: first, to draw attention to the issues of displaced commercial risk (DCR) which arise as a result of the risk characteristics of profitsharing

Abstract

Purpose

The aims of this paper are: first, to draw attention to the issues of displaced commercial risk (DCR) which arise as a result of the risk characteristics of profitsharing investment accounts (PSIA), the main source of funding of Islamic banks in most jurisdictions; and, second, to present a value‐at‐risk approach to the estimation of DCR and the associated adjustments in capital requirements.

Design/methodology/approach

The paper is based on empirical research into the characteristics of PSIA in practice, which vary to a greater or lesser extent from what one would expect them to be in principle, on an analysis of the capital adequacy and risk management implications that flow from this, and on an econometric formulation whereby the extent of DCR in Islamic banks may be estimated.

Findings

The findings are, first, that the characteristics of PSIA can vary from being a deposit like product (fixed return, capital certain, all risks borne by shareholders) to an investment product (variable return, bearing the risk of losses in underlying investments), depending upon the extent to which the balance sheet risks get shifted (“displaced”) from investment account holders to shareholders through various techniques available to Islamic banks' management. Second, the paper finds that this DCR has a major impact on Islamic bank's economic and regulatory capital requirements, asset‐liability management, and product pricing. Finally, it proposes an econometric approach to estimating DCR but report that individual Islamic banks generally lack the data needed to apply this approach, in the absence of which panel data for a population of Islamic banks may be used to estimate DCR for that population.

Research limitations/implications

Empirically, the paper is thus limited by the lack of data just mentioned. Furthermore, the application of the proposed panel data approach has been left for future research.

Originality/value

The analysis of the issues and the development of the econometric model represent in themselves an original research contribution of some significance.

Details

Journal of Islamic Accounting and Business Research, vol. 1 no. 1
Type: Research Article
ISSN: 1759-0817

Keywords

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