Equity Financing and Islamic Banks' Profitability: Evidence From the Biggest Muslim Country

Tastaftiyan Risfandy
Journal article Jurnal Keuangan dan Perbankan • Juli 2018 Indonesia

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(English, 10 pages)


It was highlighted in the literature that Islamic banks' equity financing wasvery risky in practice. Theoretically, equity financing could boost Islamic banks'profitability because the riskier financial instrument was always associatedwith the greater return that could be created. Using a sample of nine Islamicbanks in Indonesia from 2009m1 to 2014m12, interestingly we found that higherproportion of equity financing was significantly associated with lower Islamicbanks' profitability. However, this negative relationship diminished in the caseof large Islamic banks, implying that the negative effect of equity financing onIslamic banks' profitability was more prominent for small banks rather than forlarge banks. Our results were robust using various estimations. Although equityfinancing was a core of Islamic banks and could differ Islamic from conventionalbanks' activities but Islamic banks altogether with policymakers shouldevaluate this instrument for the sake of Islamic banks' profitability and its prospectsin the future.JEL Classifications: D25 ; G21 ; L25DOI: https://doi.org/10.26905/jkdp.v22i3.2150.


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Jurnal Keuangan dan Perbankan

Jurnal Keuangan dan Perbankan (JKP) adalah publikasi dari Program Studi Keuangan dan Perbankan Un... tampilkan semua