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Transparency and performance in Islamic banking Implications on profit distribution

Transparency and performance in Islamic banking Implications on profit distribution Purpose – The purpose of this paper is to assess whether Islamic banks are transparent regarding profit (and loss) sharing to investment account holders. Another objective is to appraise whether Islamic banks' performance affects management incentives to distribute profit (and loss) to investment account holders. Design/methodology/approach – To investigate the research issue, the authors conducted an empirical study. Data of 25 global operating Islamic banks have been collected and analyzed for the period 2006‐2010. The authors also developed a mathematical model based on the generalized least‐squares principle. Findings – The research results showed that enhancing transparency will prevent Islamic banks from shadowing their profit allocation practices and place investment account holders in a better position to manage their invested funds. The study also showed that bettering Islamic banks’ performance will induce them to manager profit‐sharing investment account holders’ funds under bonafides. Research limitations/implications – The main limitation is data availability. The maximum number of Islamic banks that disclose financial data covering the period of 2006‐2010 limited the scope of the study to 25 banks. Practical implications – The findings are very valuable for designing policies and standards as well as for the enforcement of these standards to improve transparency in Islamic banking. Originality/value – The study outcome is vital to many parties involved in the Islamic banking field and can be taken as a strong foundation to make appropriate actions that would help grow and sustain Islamic banking development globally. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Islamic and Middle Eastern Finance and Management Emerald Publishing

Transparency and performance in Islamic banking Implications on profit distribution

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Publisher
Emerald Publishing
Copyright
Copyright © 2014 Emerald Group Publishing Limited. All rights reserved.
ISSN
1753-8394
DOI
10.1108/IMEFM-06-2012-0047
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to assess whether Islamic banks are transparent regarding profit (and loss) sharing to investment account holders. Another objective is to appraise whether Islamic banks' performance affects management incentives to distribute profit (and loss) to investment account holders. Design/methodology/approach – To investigate the research issue, the authors conducted an empirical study. Data of 25 global operating Islamic banks have been collected and analyzed for the period 2006‐2010. The authors also developed a mathematical model based on the generalized least‐squares principle. Findings – The research results showed that enhancing transparency will prevent Islamic banks from shadowing their profit allocation practices and place investment account holders in a better position to manage their invested funds. The study also showed that bettering Islamic banks’ performance will induce them to manager profit‐sharing investment account holders’ funds under bonafides. Research limitations/implications – The main limitation is data availability. The maximum number of Islamic banks that disclose financial data covering the period of 2006‐2010 limited the scope of the study to 25 banks. Practical implications – The findings are very valuable for designing policies and standards as well as for the enforcement of these standards to improve transparency in Islamic banking. Originality/value – The study outcome is vital to many parties involved in the Islamic banking field and can be taken as a strong foundation to make appropriate actions that would help grow and sustain Islamic banking development globally.

Journal

International Journal of Islamic and Middle Eastern Finance and Management – Emerald Publishing

Published: Apr 14, 2014

Keywords: Performance; Profit distribution; Transparency

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