Do Islamic banks shift from mark-up to equity financing when their contracting environments are improved?

Nafis Alam, Rasyad A. Parinduri

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13 Citations (Scopus)


Islamic banks should share their profits and losses with their customers through equity financing but most of their assets are mark-up financing, which resembles loans. Theoretically, one of the reasons is Islamic banks operate in poor contracting environments where equity financing is very risky. Using fixed-effects models, we examine whether better contracting environments induce Islamic banks to shift from mark-up to equity financing. We find no evidence that contracting environments do, which means debt-like instruments will continue dominating Islamic banks’ assets in the near future.

Original languageEnglish
Pages (from-to)545-548
Number of pages4
JournalApplied Economics Letters
Issue number8
Publication statusPublished - 2017
Externally publishedYes


  • contracting environments
  • equity financing
  • Islamic banks
  • mark-up financing

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