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

Author

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  • Alam, Nafis
  • Parinduri, Rasyad

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.

Suggested Citation

  • Alam, Nafis & Parinduri, Rasyad, 2014. "Islamic banks do not turn “more Islamic” when their contracting environments get better: They remain similar to conventional banks," MPRA Paper 59939, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:59939
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    References listed on IDEAS

    as
    1. Abdul-Rahman, Aisyah & Abdul Latif, Radziah & Muda, Ruhaini & Abdullah, Muhammad Azmi, 2014. "Failure and potential of profit-loss sharing contracts: A perspective of New Institutional, Economic (NIE) Theory," Pacific-Basin Finance Journal, Elsevier, vol. 28(C), pages 136-151.
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    6. Beck, Thorsten & Demirgüç-Kunt, Asli & Merrouche, Ouarda, 2013. "Islamic vs. conventional banking: Business model, efficiency and stability," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 433-447.
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    More about this item

    Keywords

    Islamic banks; equity financing; mark-up financing; contracting environments;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

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