Islamic bank rent

Yasushi Suzuki and S.M. Sohrab Uddin

International Journal of Islamic and Middle Eastern Finance and Management, 2014, vol. 7, issue 2, 170-181

Abstract: Purpose - – This paper aims to draw on the bank rent approach to evaluate the existing pattern of financing of Islamic banks and to propose a fairly new conceptualization of Islamic bank rent. Design/methodology/approach - – The bank rent theory is adopted to generate the theoretical underpinnings of the issue. After that, empirical evidence from the banking sector of Bangladesh is used to support the arguments. Findings - – Repeated transactions undermurabahaare observed in the Islamic banking sector of Bangladesh. The asset-based financing gives the Bangladeshi Islamic banks relatively higher Islamic bank rent opportunity for protecting their “franchise value” asShari’ah-compliant lenders, while responding to the periodic volatility in transaction costs of profit-and-loss sharing. Research limitations/implications - – The bank rent approach suggests that themurabahasyndrome can be ironically justifiable. On the other hand, the current profit-and-loss sharing risk provides an idea of the difficulty in assuming the participatory financing with higher credit risk in practice. Islamic scholars and the regulatory authority need to design an appropriate financial architecture which can create different levels of rent opportunities for Islamic banks to avail the benefit from the variety of Islamic financing as declared by IslamicShari’ah. Originality/value - – This paper introduces a fairly new concept of “Islamic bank rent” to make sense of themurabahasyndrome. This approach also contributes to clarifying the unique risk and cost to be compensated with the spreads that Islamic banks are expected to earn. To draw empirical evidence, as far as it could be ascertained, the data of both Islamic banks and conventional banks with Islamic banking windows/branches are used for the first time.

Keywords: Bangladesh; Islamic bank rent; Murabaha; Profit-and-loss sharing risk (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:v:7:y:2014:i:2:p:170-181

DOI: 10.1108/IMEFM-11-2013-0119

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