Risk implications and discretionary financial reporting of Islamic financial institutions : a collection of research essays

Publication Type:
Thesis
Issue Date:
2009
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NO FULL TEXT AVAILABLE. This thesis contains 3rd party copyright material. ----- Islamic banks are uniquely characterised by religious constraints that prohibit interest based activities. Instead, Islamic banks enter into performance based contracts with depositors who are paid a pre-agreed share of profits (less a management fee) earned for the year. However, it is anecdotally evident that some of these banks pay distributions that mimic competitive deposit interest rates, which may be far removed from the underlying performance of the bank. Moreover, the religious constraints result in a substantial portion of fixed return financing assets. Among other effects, these are likely to have significant implications for shareholder earnings' performance which may consequently impact the bank managers' incentives to utilise discretionary accounting choice. In this collection of research essays, I first investigate the factors associated with the 'management' of profit distributions to depositors. I find some, though limited, support to suggest that such profit distribution management is directly related to religiosity, financial development, asset composition, and existence of discretionary reserves, while it is inversely related to market familiarity with Islamic banking, market concentration, depositor funding reliance and the age of the Islamic bank. In the second study, I find that the financial stability of Islamic banks is inversely related to the level of fixed rate assets, profit sharing assets and the existence of discretionary reserves. The results of the third study suggest that some loan loss provisioning decisions may be associated with the extent of profit distribution management, with Islamic banks consistently reporting lower loan loss provision expense.
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