Transparency and performance in Islamic banking: Implications on profit distribution

Nada Lahrech, Abdelmounaim Lahrech, Youssef Boulaksil

Research output: Contribution to journalArticlepeer-review

11 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)61-88
Number of pages28
JournalInternational Journal of Islamic and Middle Eastern Finance and Management
Volume7
Issue number1
DOIs
Publication statusPublished - Apr 14 2014
Externally publishedYes

Keywords

  • Performance
  • Profit distribution
  • Transparency

ASJC Scopus subject areas

  • Business and International Management
  • Finance

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