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

Abstract

Partici patory 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 partici patory financing.In practice, they do not adopt partici patory financing on the assets side due to several constraints.By far, the non-partici patory 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 partici patory financing.However, literature is divergent and the typology of the constraints to partici patory financing is missing.Therefore, there is no unified understanding of the constraints to partici patory financing.The present study employs insights form the extant literature using a systematic literature review and synthesizes a coherent partici patory financing constraints framework using the thematic synthesis method to name and make sense of what makes partici patory 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 partici patory 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.

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