Islamic banks do not turn “more Islamic” when their contracting environments get better: They remain similar to conventional banks

Nafis Alam and Rasyad Parinduri

MPRA Paper from University Library of Munich, Germany

Abstract: Islamic banks, as their charters require, should share their profits and losses with their customers through equity financing; but they do mark-up financing instead, which is similar to bank 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 what Islamic banks do when the countries they are in reform their economies. We do not find better contracting environments induce Islamic banks to do more equity financing, which suggests that Islamic banks are unlikely to shift from mark-up to equity financing in the near future—they are likely to remain similar to conventional banks.

Keywords: Islamic banks; equity financing; mark-up financing; contracting environments (search for similar items in EconPapers)
JEL-codes: D22 G21 P51 (search for similar items in EconPapers)
Date: 2014
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