PSIA holders’rates of return were higher than those of the shareholders’dividend yield rate. In
explaining the size of the differences between the rates of return on PSIA and the shareholders’ROEs,
the variable with the greatest explanatory power was the return on assets, implying that when this was
high the bank took a maximum Mudarib share of proﬁts. Some other corporate governance variables
had the expected signs, as did a country dummy representing the maturity of the market for Islamic
banking, but there was little evidence of the effectiveness of corporate governance in protecting the
interests of the UIAH.
Research limitations/implications –A limitation of the research was that the inefﬁciency of the
stock markets in the relevant countries and the fact that a few of the banks were not listed made it
impossible to use shareholders’stockmarket returns. ROE is not a very good proxy, as it is unclear how
much value should be placed on retained earnings. Dividend yield rates provide a better comparison
with UIAH rates of return, but the data were availablefor only 20 of the banks. Nevertheless, the results
of the analysis strongly suggest that in a signiﬁcant proportion of cases, UIAH are not being treated
Practical implications –The implication is thatthe regulation of Islamic banks needs to be improved to
provide betterprotection to UIAH.
Social implications –Islamic banks operate mainly in emerging markets where the effectiveness of
regulation is limited. The ethical basis of Islamic ﬁnance provides some mitigation of this problem but
apparentlyfails to do so in a signiﬁcantproportion of cases. This should be borne inmind when assertions are
made about the ethicalbasis of Islamic ﬁnance.
Originality/value –There is a dearth of empirical studies of the practices of Islamic banks and in
particular of their treatment of their customers. This is because of various factors: the relative novelty of
Islamic ﬁnance, the paucity of data and the relativelysmall size of the body of researchers in the ﬁeld. This
paper aims to contributeto ﬁlling this gap.
Keywords Islamic banking, Corporate governance, Equitable treatment, Proﬁt-sharing
Paper type Research paper
Islamic Banks (IBs) have developed proﬁt sharing investment accounts (PSIA) for
customers’savingsand repository accounts in place of conventional interest-bearing deposit
accounts to mobilize funds on which IBs and their customers can earn Shari’ah-compliant
returns (Archer et al.,2010). Customers deposit their funds in so-called “proﬁt sharing
investment accounts”as capital providers, and the bank invests these funds on the
customers’behalf in return for a share of the proﬁt or for a fee as remuneration for
management. Thereare two types of PSIAs:
(1) A restricted PSIA (RPSIA), a separately managed fund that is not commingled
with other funds of the IB. This is similar to mutual funds and is generally
considered by IBs for the purpose of ﬁnancial reporting as “off-balance sheet
(2) An unrestricted PSIA (UPSIA) is an account such that an IB has full discretion to
use and invest the UPSIA funds. These accounts are widely used by IBs in place of
conventional interest-bearing deposits.
The contractual bases for these types of accounts are the Mudarabah or Wakalahcontracts,
where in a Mudarabah the customers as Rabb al Mal provide capitaland the bank provides
work as Mudarib (entrepreneuror asset manager) and shares proﬁt, or the bank in Wakalah
acts as Wakeel (agent) and receives a fee plus (typically) a performance related bonus
(Archer et al.,1998).
The Mudarabah contract, like the Commenda contract used by medieval Italian
traders, was used originally for ﬁnancing trade ventures in which the trader