Exploration of the equilibrium level of Musharaka financing in full-fledged Islamic banks

Abstract

Purpose This study aims to develop and estimate the Musharaka demand and supply model for full-fledged Islamic banks to explore patterns and stability of Musharaka equilibrium in the market. Design/methodology/approach This quantitative study uses a deductive approach to explore financial statement-level data of 30 Islamic banks of six countries between 2012 and 2017. Findings The results show that the Musharaka market is stable when Musharaka demand is purchase price elastic and supply is sale price inelastic. It indicates that the current banking industry is unable to increase supply when there is an increase in Musharaka returns. In comparison, industry demand for Musharaka is increasing at a higher rate, corresponding to a decrease in Musharaka price. Practical Implications This study is fundamental in estimating the market stable market returns and market quantity of Musharaka financing. If market returns and quantity deviate, market forces will push it to equilibrium. Originality/value The theoretical and empirical studies worked on the application and suitability of Musharaka financing. However, they failed to explain demand and supply forces in determining the level of Musharaka financing in the economy using empirical data. Without an equilibrium model, policymakers would be unable to predict the movement of the Islamic stock market index (the price of Musharaka financing) and the incidence of Musharaka financing. Further, it is not possible to apply expansionary intervention by policymakers if the stability of the market is unknown.

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