Dividend signaling hypothesis and short-term asset concentration of Islamic interest-free banking

Abstract EN

his paper finds that dividend signaling hypothesis is able to explain the phenomenon of assets concentration in short and medium investments in Islamic Interest-Free banking (IIFBs).

In this paper a dividend signaling model framework has been introduced, where in the process of maintaining a stable dividend, mangers of Islamic Interest-Free banking (IIFBs) will prefer to invest in investments that have more certainty about its return, leading to a heavy use of mark-up-pricing, which in turn concentrated on short and medium investments.

The empirical results are found to be consistent with the prediction of our model.

Dividends in Islamic Interest-Free banking (IIFBs) are found to be stable, and bank earnings cashflow is a major source of this stability.

Moreover, there is evidence that the short and medium investments are more important in generating earnings than long-term investments