IDEAS home Printed from
   My bibliography  Save this article

Why Islamic Banks Tend to Avoid Participatory Financing? A Demand, Regulation, and Uncertainty Framework


  • Muhammad Nouman

    () (Institute of Business and Management Sciences (IBMS), The University of Agriculture, Peshawar)

  • Karim Ullah

    (Institute of Management Sciences, Peshawar)

  • Saleem Gul

    (Institute of Management Sciences, Peshawar)


Participatory financing arrangements including Musharakah and Mudarabah are the essence of Islamic banking and represent the true spirit of Islamic banking and finance. Therefore, Islamic banks are expected to allow and promote participatory financing. In practice, Islamic banks adopt participatory financing arrangements for the scheme of deposits. However, they do not adopt participatory financing on the assets side due to several constraints. By far, the non-participatory financing arrangements, particularly Murabahah and Ijarah, are the most dominant modes of financing around the globe. Many authors have provided different explanations for the tendency of Islamic banks to avoid participatory financing. However, literature is divergent and the typology of the constraints to participatory financing is missing. Therefore, there is no unified understanding of the constraints to participatory financing. The present study employs insights form the extant literature using a systematic literature review and synthesizes a coherent participatory financing constraints framework using the thematic synthesis method to name and make sense of what makes participatory financing a less attractive option for Islamic banks. This study adds to the Islamic banking and finance literature by synthesizing the divergent literature, and conceptualizing a participatory financing constraints framework which can be used as a dependable framework for assessment in any related case study and policy implications. Moreover, it demonstrates an application of systematic review in Islamic banking research.

Suggested Citation

  • Muhammad Nouman & Karim Ullah & Saleem Gul, 2018. "Why Islamic Banks Tend to Avoid Participatory Financing? A Demand, Regulation, and Uncertainty Framework," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 10(1), pages 1-32, March.
  • Handle: RePEc:bec:imsber:v:10:y:2018:i:1:p:1-32

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Aggarwal, Rajesh K & Yousef, Tarik, 2000. "Islamic Banks and Investment Financing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 93-120, February.
    2. repec:dau:papers:123456789/9551 is not listed on IDEAS
    3. Rasem N. Kayed, 2012. "The entrepreneurial role of profit-and-loss sharing modes of finance: theory and practice," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing, vol. 5(3), pages 203-228, August.
    4. Abbas Mirakhor & Iqbal Zaidi, 2007. "Profit-and-loss Sharing Contracts in Islamic Finance," Chapters,in: Handbook of Islamic Banking, chapter 4 Edward Elgar Publishing.
    5. Adiwarman A. Karim, 2002. "Incentive-compatible constraints for Islamic banking: some lessons from Bank Muamalat," Chapters,in: Islamic Banking and Finance, chapter 5 Edward Elgar Publishing.
    6. Ahmad, Ausaf, 1993. "Contemporary Practices of Islamic Financing Techniques," Occasional Papers 25, The Islamic Research and Teaching Institute (IRTI).
    7. Mohamed Ariff & Munawar Iqbal, 2011. "Introduction to Islamic Financial Institutions," Chapters,in: The Foundations of Islamic Banking, chapter 1 Edward Elgar Publishing.
    8. In W Song & Carel Oosthuizen, 2014. "Islamic Banking Regulation and Supervision; Survey Results and Challenges," IMF Working Papers 14/220, International Monetary Fund.
    9. Ariss, Rima Turk, 2010. "Competitive conditions in Islamic and conventional banking: A global perspective," Review of Financial Economics, Elsevier, vol. 19(3), pages 101-108, August.
    10. Ali Yasseri, 2002. "Islamic banking contracts as enforced in Iran," Chapters,in: Islamic Banking and Finance, chapter 8 Edward Elgar Publishing.
    11. Khan, Tariqullah & Ahmed, Habib, 2001. "Risk Management: An Analysis of Issues in Islamic Financial Industry (Occasional Papers)," Occasional Papers 91, The Islamic Research and Teaching Institute (IRTI).
    12. Pejman Abedifar & Shahid M. Ebrahim & Philip Molyneux & Amine Tarazi, 2015. "Islamic Banking And Finance: Recent Empirical Literature And Directions For Future Research," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 637-670, September.
    13. Abdel-Fattah A.A. Khalil & Colin Rickwood & Victor Murinde, 2002. "Evidence on agency-contractual problems in mudarabah financing operations by Islamic banks," Chapters,in: Islamic Banking and Finance, chapter 4 Edward Elgar Publishing.
    14. Obiyathulla Ismath Bacha, 1995. "Conventional Versus Mudarabah Financing: An Agency Cost Perspective," IIUM Journal of Economics and Management, IIUM Journal of Economis and Management, vol. 4(2), pages 33-50, DECEMBER.
    15. Mohammad Abalkhail & John R. Presley, 2002. "How informal risk capital investors manage asymmetric information in profit/loss-sharing contracts," Chapters,in: Islamic Banking and Finance, chapter 6 Edward Elgar Publishing.
    16. Saeed Al-Muharrami & Daniel C Hardy, 2013. "Cooperative and Islamic Banks; What can they Learn from Each Other?," IMF Working Papers 13/184, International Monetary Fund.
    17. Kazem Sadr & Zamir Iqbal, 2002. "Choice between debt and equity contracts and asymmetrical information: some empirical evidence," Chapters,in: Islamic Banking and Finance, chapter 7 Edward Elgar Publishing.
    18. repec:taf:apeclt:v:24:y:2017:i:8:p:545-548 is not listed on IDEAS
    19. Nafis Alam & Rasyad A. Parinduri, 2017. "Do Islamic banks shift from mark-up to equity financing when their contracting environments are improved?," Applied Economics Letters, Taylor & Francis Journals, vol. 24(8), pages 545-548, May.
    20. Khan, Feisal, 2010. "How 'Islamic' is Islamic Banking?," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 805-820, December.
    21. Kaouther Jouaber & Meryem Mehri, 2012. "A Theory of Profit Sharing Ratio under Adverse Selection: The Case of Islamic Venture Capital," Post-Print hal-01525795, HAL.
    22. Siddiqi, Mohammad Nejatullah, 2006. "Islamic Banking And Finance In Theory And Practice: A Survey Of State Of The Art," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 13, pages 2-48.
    23. Pryor, Frederic L., 2007. "The Economic Impact of Islam on Developing Countries," World Development, Elsevier, vol. 35(11), pages 1815-1835, November.
    24. International Monetary Fund, 2002. "Islamic Financial Institutions and Products in the Global Financial System; Key Issues in Risk Management and Challenges Ahead," IMF Working Papers 02/192, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bec:imsber:v:10:y:2018:i:1:p:1-32. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dr. Attaullah Shah). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.