Islamic Banks Product Mix

Abstract

This paper uses hand-collected quarterly values of the different Islamic banking products to answer the following questions: Do debt-like banking products dominate Islamic banks' assets, making them identical to conventional banks? Are bank performance and solvency sensitive to the product's inclination to achieve the aspirations of Islamic law? What are the implications of such diversification/concentration on banks' financial stability and performance? Results show that debt-like products contribute to banks' returns but increase the default probabilities. Profit-loss sharing products are significant for banks' solvency. The Herfindahl Hirschman Index and the Shannon Entropy (SE) indicate that diversification into financing modes that are in the real spirit of Islam is beneficial to bank solvency but harms returns.

Keywords: Islamic Banks, Product Mix, Portfolio Diversification, Performance

JEL Classification: G21, G23, G29