Does investment deposit return in Islamic banks reflect PLS principle?

• Main Author: Hichem Hamza
• Format: Article
• Language: English
• Published: Elsevier 2016-03-01
• Series: Borsa Istanbul Review
• Subjects: Islamic bank; Profit and loss sharing; Investment deposits return; Governance; Risk taking
• Online Access: http://www.sciencedirect.com/science/article/pii/S2214845015300715

The main purpose of this paper is to examine the compliance of investment deposit return with profit and loss sharing principle. This compliance is analyzed through the impact of bank's risk, governance mechanisms and competition environment on investment deposit return. We use a pooled regression model applied to a panel of sixty Islamic banks during the period 2004–2012. The estimation indicates that the management of investment deposit and PLS assets is characterized by a moral hazard behavior and excessive risk taking. The estimation reveals that capital ratio and interest rate affect positively investment deposit return. Small Islamic banks offer a better return of deposit compared to the large bank. We find no evidence of the impact of board of directors and Sharia board. Following these results, we suggest that investment accounts holders should be integrated in the bank governance system. Besides, the Islamic banks are incited to develop a new generation of investment deposits.