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Islamic Financial Product: Risk and Return Perspective
Abstract
This study investigates the risk-return relationship in Islamic banks using a pooled regression model applied to panel data from 27 institutions across key Islamic finance hubs, including Saudi Arabia, Bahrain, Qatar, the UAE, Sudan, Malaysia, Indonesia, Pakistan, Jordan, and Bangladesh, over the period 2005-2016. The analysis is based on a dynamic panel approach with the Generalized Method of Moments (GMM system). The findings reveal that returns on investment deposits do not fully adhere to the Profit and Loss Sharing (PLS) principle. This misalignment stems from two main issues. First, banks exhibit moral hazard and engage in excessive risk-taking with investment account holders. Second, existing deposit management practices discourage investor participation, as they lack decision-making rights, access to critical information, and guaranteed returns.
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DOI: https://doi.org/10.17509/rief.v8i1.77678
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