Islamic bank profit-loss sharing financing and earnings volatility

Profit-loss sharing (PLS) financing comprises Musharakah and Mudarabah ought to be the main form of Islamic banks' financing. However, based on Southeast Asia, South Asia, and the Middle East Islamic banks' data, this research shows that the proportion of PLS financing is still deficient compared to debt financing. Moreover, it shows that only Musharakah financing displays a significant linear and nonlinear (inverse U-shape) association with Islamic bank earnings volatility. The empirical estimates suggest that earnings volatility is maximized when the proportions of Musharakah financing is about 31%. Increasing this type of financing beyond 31% may lower earnings volatility.