Sharia Based Profit & Loss Distribution in Islamic Banking. Reality or Myth? An Analysis based on the Application of weightages

Abstract

This study explores the calculation and application mechanism of weightages in profit distribution by Islamic Banks and Windows in Pakistan to identify the factors, which determines the said weightage. Quasi experiments as well as regression analysis are carried out on the three months data of five full-fledged Islamic Banks and Nine Islamic Windows of Conventional Banks to identify the significance and impact of Size of deposits, its tenure, profit frequency and profit rates on the weightages of the respective deposit product. The Quasi Experiments conducted on all fourteen Islamic Banks & Windows suggest that it is only the profit rate, which is being used for weightage calculation by these banks and other factors are insignificant. Regression results confirm that there is significant positive relationship between all the factors and weightages; however, it is the profit rate, which had the most significant impact. This study suggests various measures to the Regulators, Scholars and Islamic Banks for improvement in the profit distribution mechanism.