Do Islamic banks need to earn extra profits?

Abstract

Purpose This paper aims to draw upon existing debate over “financial sector rent” (bank rent) to analyze the current pattern of financing of Bangladeshi and Indonesian Islamic banks during the period of 2011 and 2015. Design/methodology/approach The empirical evidence through a comparative approach of analyzing the performance of Islamic banks with that of conventional banks in respective countries – two of the largest countries where majority of the population are Muslims – is drawn to demonstrate the objective. Findings While Islamic banks in Bangladesh are primarily concentrating on the murabaha (mark-up contract) mode of financing, some transactions under musharaka (partnership/equity-based contract) are observed in the Indonesian Islamic banking sector. This anomaly in Indonesia can be explained by the nature of their musharaka financing which is not of the purely “participatory” financing type. As a result, we can observe the quasi-murabaha syndrome in Indonesian Islamic banking sector. The concentration of asset-based financing including consumers’ financing (hire purchase) in the credit portfolio gives Islamic banks relatively higher Islamic bank rent opportunity for protecting their “franchise value” as Sharīʿah-compliant (Islamic law-compliant) lenders. However, Indonesian Islamic banks share a still infant Islamic banking market, and enjoy less rent opportunity under a severe competition with conventional banks. Research limitations/implications The bank rent approach suggests that the syndrome observed both in Bangladesh and Indonesia can be ironically justifiable. Moreover, the mode of profit-and-loss sharing provides, in practice, an idea of the difficulty in managing the participatory financing embedded with high credit risk. Under this scenario, it is necessary for Islamic scholars and the regulatory authority to design an appropriate financial architecture, enabling Islamic banks to avail the benefit from a wider variety of Sharīʿah-based Islamic financing. Originality/value This paper expands the newly emerged concept of “Islamic bank rent” to make sense of the murabaha syndrome in Bangladesh and the quasi-murabaha syndrome in Indonesia. This approach also contributes to clarifying the unique risk and cost to be compensated with the spreads that Islamic banks are expected to earn.

Analysing Islamic banking ethical performance fromMaqāṣid al-Sharī‘ahperspective: evidence from Indonesia

“…Based on the annual report regarding the PLS financing ratio, BMI 49.9313% has the highest ratio compared to BSM 28.0784% and BNIS 19.0509%. This confirms the findings of Suzuki, Uddin, and Sigit (2019) who report that IBs in Indonesia are utilising more transactions under Musharaka, compared to IBs in Bangladesh that are primarily concentrating on Murabaha.…”

“…These ethical issues that motivated the current research also apply to other banks worldwide, and are not limited to Indonesia (see Maali, Casson, and Napier 2006;Haniffa and Hudaib 2007;Kamla and Hussain 2013;Suzuki, Uddin, and Sigit 2019;Miah Mohammad and Suzuki 2020). Concerning our use of a single case study, we are not seeking to test a theory but rather to provide a micro-level illustration of a historical process, namely the ethical divergence in the practice of IBs.…”

Does sharia governance influence corporate social responsibility disclosure in Indonesia Islamic banks?

“…The diversity of products and services offered by Islamic banks in Indonesia encourages the MUI to form a council that is in charge of supervising Islamic bank products and services to remain under Islamic law (Suzuki, Uddin, and Sigit 2019). The commission is called the Dewan Syariah Nasional-MUI (DSN-MUI).…”

Analysing Banking Compliance from Maqasid Shariah Perspective: Evidence from Islamic and Conventional Bank in Indonesia

“…The original version of the maqasid shariah index (MSI) was created by Mohammed, Razak, and Taib (2008) to assess the effectiveness of IBs in adhering to maqasid Shariah. According to some of Islamic economists, the relative stability of Islamic banks in the face of economic turmoil is a major factor in the growing interest in IBs as an alternative to conventional banking 13 , making it intriguing to conduct the MSI analysis of IB over the past five years. This study was also motivated by IBs' disproportionate reliance sale at a markup (Murabahah) agreement, as opposed to PLS agreements (e.g., Musharakah, Mudharabah) in which profits and losses are shared.…”