Islamic Banks’ Profit and Violations in Murābaḥah Financing

Purpose — This paper investigates the relationship between murābaḥah contracts and the profitability of Islamic banks, explicitly examining how potential Sharīʿah non-compliance issues related to murābaḥah contracts might impact the banks’ profitability. Design/Methodology/Approach — Employing the Generalised Method of Moments (GMM) estimation for fixed effects dynamic panels, this study analyses quarterly data from 2013Q4 to 2023Q1 of the four largest Islamic banks in Saudi Arabia. Findings — The results reveal a positive correlation between the increase in the value of murābaḥah contracts and Islamic earnings. While domestic macroeconomic conditions influence this relationship, international conditions have minimal impact. This investigation meticulously identifies instances of Sharīʿah violations within Islamic banks as they pursue a ‘search for yield’. Originality/Value — Prior studies have fallen short in establishing a definitive association between the profits of Islamic banks and the value of murābaḥah contracts. This research bridges this gap and introduces a novel dimension to the existing literature by illuminating the potential compromises in Sharīʿah compliance when employing murābaḥah contracts. The dual focus on both financial implications and ethical considerations makes this study unique, representing a significant contribution to the ongoing discourse in Islamic finance literature. Research Limitations/Implications — The availability of data on murābaḥah contracts may pose constraints to this study. Practical Implications — The analysis sheds light on various scenarios where Islamic banks may compromise their adherence to Sharīʿah principles in pursuit of higher profits, offering valuable solutions to address and rectify such violations.