Murabaha syndrome of Islamic banks: a paradox or product of the system?

Purpose This paper aims to explain the "murabaha syndrome" of Islamic banks. It further attempts to offer alternatives for the expansion of profit and loss sharing (PLS)-based financing. Design/methodology/approach Audited financial statements of 18 Islamic banks in the GCC countries are analyzed to assess the financing structures of banks. Moreover, additional data about financing pattern of Islamic banks in other Muslim majority countries are collected from the Islamic finance literature. A comparative analysis is offered to examine the financing structures of Islamic banks. Findings The paper confirms murabaha (mark-up financing) concentration of Islamic banks. About 90 per cent of the total financing are concentrated on murabaha, which is the result of existing institutional underpinnings. Islamic banks would logically be involved with PLS-based financing only limitedly unless the current governing institutions are changed. Entrepreneurs' financing needs based on PLS contracts should be catered by venture capital, whereas micro-finance enterprises can meet the demand for funds of marginal clients. Originality/value Ideally, Islamic banks should practice PLS-based financing; otherwise, their raison d'etre would be difficult to justify. Islamic finance literature does not shed sufficient analytical lights in explaining Islamic banks' preference of mark-up financing to PLS-based financing. Moreover, strategies to ameliorate this condition have largely remained unexplored.