Dvidend Signaling Hypothesis and Short-Term Asset Concentration of Islamic Interest-free Banking

Joseph Farhat, M. Kabir Hassan and Bashir Al-Zu'bi

No 221, Working Papers from Economic Research Forum

Abstract: This paper finds that dividend signaling hypothesis is able to explain the phenomenon of assets concentration in short and medium investments in Islamic Interest-Free banking (IIFBs). In this paper a dividend signaling model framework has been introduced, where in the process of maintaining a stable dividend, mangers of Islamic Interest-Free banking (IIFBs) will prefer to invest in investments that have more certainty about its return, leading to a heavy use of mark-up-pricing, which in turn concentrated on short and medium investments. The empirical results are found to be consistent with the prediction of our model. Dividends in Islamic Interest-Free banking (IIFBs) are found to be stable, and bank earnings cashflow is a major source of this stability. Moreover, there is evidence that the short and medium investments are more important in generating earnings than long-term investments.

Pages: 15 pages
Date: 2002-07-18, Revised 2002-07-18
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Published by The Economic Research Forum (ERF)

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Journal Article: DIVIDEND SIGNALING HYPOTHESIS AND SHORT-TERM ASSET CONCENTRATION OF ISLAMIC INTEREST-FREE BANKING (2003)
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