The Impact of Banks’ Characteristics on Profit Distribution Management of Islamic Banks

Abstract In practice, Islamic banks manage profit sharing to manage risks by following interest rate, namely Profit Distribution Management (PDM). Results indicate that management considers banks’ financial characteristics in doing PDM and reserves push PDM more. Market share and third-party funds confirm the prospect theory. Low market share and high third-party funds suggest high uncertainty of returns, so bank takes risk by drawing reserves partially for competitive return although income is low. Effectiveness of third-party funds and banks’ age do not confirm the theory. Assets’ compositions don’t support or restrict PDM. This study implies the need of tighter regulation of reserves.

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