Do Islamic banks shift from mark-up to equity financing when their contracting environments are improved?. Issue 8 (4th May 2017)

• Record Type: Journal Article
• Authors: Alam, Nafis; Parinduri, Rasyad A.
• Is Part Of: Applied economics letters. Volume 24:Issue 8(2017)
• Page Start: 545
• Page End: 548
• Publication Date: 2017-05-04
• Subjects: Islamic banks -- equity financing -- mark-up financing -- contracting environments; D22 -- G21 -- P51; Economics -- Periodicals; Economics, Mathematical -- Periodicals; 330
• DOI: 10.1080/13504851.2016.1210759
• Languages: English
• ISSNs: 1350-4851

Abstract

ABSTRACT: Islamic banks should share their profits and losses with their customers through equity financing but most of their assets are mark-up financing, which resembles loans. Theoretically, one of the reasons is Islamic banks operate in poor contracting environments where equity financing is very risky. Using fixed-effects models, we examine whether better contracting environments induce Islamic banks to shift from mark-up to equity financing. We find no evidence that contracting environments do, which means debt-like instruments will continue dominating Islamic banks' assets in the near future.