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Do Mudarabah and Musharakah financing impact Islamic Bank credit risk differently?

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  • Warninda, Titi Dewi
  • Ekaputra, Irwan Adi
  • Rokhim, Rofikoh

Abstract

Extant literature still ponders over the influence of profit-loss sharing financing on Islamic bank credit risk. Comprehending that Mudarabah and Musharakah as profit-loss sharing financing retain different features, this study aims to investigate whether they influence credit risk differently. Specifically, this study intends to analyze whether Mudarabah is riskier than Musharakah. Additionally, whether Mudarabah and Musharakah non-linearly impact credit risk. Employing ten-year unbalanced panel data from 63 Islamic banks in the Middle East, South Asia, and Southeast Asia, we find that Mudarabah is not riskier than Musharakah. Furthermore, Mudarabah does not show non-linear impact while Musharakah financing exhibits reverse U-shaped (non-linear) influence on Islamic bank credit risk. Our empirical results suggest that credit risk reaches its maximum level when the proportion of Musharakah financing is approximately 37–39% of the total bank financing.

Suggested Citation

  • Warninda, Titi Dewi & Ekaputra, Irwan Adi & Rokhim, Rofikoh, 2019. "Do Mudarabah and Musharakah financing impact Islamic Bank credit risk differently?," Research in International Business and Finance, Elsevier, vol. 49(C), pages 166-175.
    • Handle: RePEc:eee:riibaf:v:49:y:2019:i:c:p:166-175
    DOI: 10.1016/j.ribaf.2019.03.002
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    More about this item

    Keywords

    Islamic Bank; Mudarabah; Musharakah; Profit-loss sharing financing;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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