Measuring the Value of Islamic Banks

This study tries to measure the effect of risk sharing in adding value to Islamic banks. In particular, this study is important to accurately gauging the impact of Islamic banking sector on the real economy. The adoption of risk sharing modes of contracts by Islamic bank as intermediary would leads to the fairness in serving the interest of community as a whole and is expected to promote value creation to the depositors, shareholders and eventually to the economy. In analysing the value added or wealth created by Islamic banks, we will use the Annual Reports of Islamic banks in Malaysia from 2008-2012. Our analysis will focus on main hypothesis, i.e., risk sharing create more value added and equitable distribution of wealth. Our finding shows that the adoption of risk sharing would lead to the fairness in serving the interest of community as a whole and is expected to promote value creation to the depositors, shareholders and eventually to the economy. The treatment on non-performing financing and investment risk allowance might change the distribution of wealth. Financial reporting based on contract might produce a more transparent distribution of wealth.