Does the Profit and Loss Sharing Financing increase the Performance of Islamic Banks?

Abstract

The profit and loss sharing financing may be effect on the performance indicators of Islamic banks. This paper aims to tests the relationship between PLSF and profitability, liquidity and risk indicators and analyzes why the Islamic banks neglect the long term financing, based on empirical case of thirteen bank at level of thirteen Islamic countries namely: Algeria, Bahrain, Bangladesh, Dubai, Indonesia, Iran Jordan, Kuwait, Malaysia, Pakistan, Qatar, Saudi Arabia and Sudan, during 1997 to 2013. We use the regression analysis model with unbalanced panel data. The relationship between PLSF and performance indicators (Profitability, liquidity, risk) is significant, and the dual fixed effects model is accepted which shows the difference in the relationship between the variables differs depending on the characteristics of the bank and the country as well as period. We propose to re-test this problematic with distinction between Mudharaba, Musharaka and PLSF, and the use of other econometrics method.