Risk Sharing Paradigm of Islamic Banks: Case of Bangladesh

Abstract

Purpose

The purpose of this study is to examine the effect of risk sharing and non-risk sharing instruments on both the profitability of Islamic banks and the economic growth of the country. This study also aims to improve the profit and loss sharing-based asset growth of Islamic banks.

Methodology/approach

The data for this study are obtained from the annual reports of all Islamic banks from Bangladesh using Bank scope database and annual report for the period of 1983–2014. The research uses Autoregressive Distributive Lag approach.

Findings

The findings reveal that risk sharing instruments are positively related to profitability and the economic growth of the country. This study also finds that non-risk sharing instruments play a predominant role in the profitability of the Islamic bank but are negatively related to the economic growth of the country.

Research implications

Banks and other financial institutions need to pay greater attention to systemic risk created by risk transfer and apply risk sharing methods of financing more vigorously than has hitherto been the case.

Originality/value

This study will also contribute to the literature as relatively few Islamic financial literatures deal with the relationship between equity financing and profitability which may make a strong contribution to the area of Islamic finance.

Citation

Chowdhury, M.A.F., Shoyeb, M., Akbar, C. and Islam, M.N. (2016), "Risk Sharing Paradigm of Islamic Banks: Case of Bangladesh", Mutum, D.S., Butt, M.M. and Rashid, M. (Ed.) Advances in Islamic Finance, Marketing, and Management, Emerald Group Publishing Limited, Leeds, pp. 103-130. https://doi.org/10.1108/978-1-78635-899-820161007