Why do Islamic Banks Concentrating Finance in Murabaha Mode? Performance and Risk Analysis (Sudan: 1997-2018)

Abstract

During 1997-2018, Islamic Banks (IBs) in Sudan provided finance by Murabaha mode to their clients with more than 45% on average. This position raises questions of why do IBs concentrating finance in Murabaha Mode rather than other modes? is this concentration implying risk and does it have influence on the financial performance of IBs? This study aimed to discusses the reasons and answer these questions. Nonperforming loan(NPL), Murabaha to gross finance, Musharaka to gross finance, Mudabaha to gross finance and Salam to gross finance were used to indicate the credit risk. Return on Equity (ROE) was used to indicate the financial performance of IBs. Ordinary least squares technique was employed to determine the trend of relations between the variables. The main results of the study show that there is an important positive relationship between the NPL and provision finance by both Murabaha and Mudaraba modes. Whereas were a negative with both Musharaka and Salam. Moreover, it’s found that there is strong negative relationship between NPL and ROE. The main reason for the expansion granting finance by Murabaha mode is that IBs are heavy rely on collaterals and in case of clients’ failure to pay, they sell collaterals to keep their financial performance safety. The study strongly recommends IBs importance of diversify the granting finance among Islamic modes of finance to avoiding the risk of concentration the finance by Murabaha mode. Furthermore, monetary authority in Sudan need to keep IBs aware with the risk associated with Islamic modes, especially Murabaha.