Do profit-sharing investment account holders provide market discipline in an Islamic banking system?
Market discipline is one of the main pillars for stability and resiliency in banking system (Basel II, 2004). The mechanism of market discipline primarily relies on the role of depositors who receive timely information and act accordingly through their respective accounts. Empirical evidence shows the presence of market discipline, whereby non-insured depositors react to risk factors of the bank accordingly by either withdrawing their deposit (quantity mechanism) or demanding higher return (price mechanism). In tandem with conventional banking system, Islamic banking also emphasize on market discipline, signified by the global standard number 4 issued by Islamic Financial Services Board in 2007. However, unlike conventional banking, market discipline in Islamic Banking is conjectured to work via profit-loss sharing system. That is, the role of Profit Sharing Investment Account (PSIA) holders who are exposed to the variability of profit generated from their investment. The intriguing question of whether PSIA would be more effective and efficient in implementing market discipline remains an ongoing debate. Even there is no empirical study attempts to address this issue. Therefore, we perform empirical research to discover it.
Market discipline , Islamic banks , PSIA (profit-sharing investment account)
Alaeddin, Omar. (2017). Do profit-sharing investment account holders provide market discipline in an Islamic banking system? IF Hub, 6 (September 2017), pp. 20-21.
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