Do Islamic banks shift from mark-up to equity financing when their contracting environments are improved?

Nafis Alam and Rasyad Parinduri

Applied Economics Letters, 2017, vol. 24, issue 8, 545-548

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.

Date: 2017
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DOI: 10.1080/13504851.2016.1210759

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