The purpose of this paper is to analyze the income structure of Islamic banks in the Gulf Cooperation Council (GCC) countries and to explore the effect of the diversification of banks' earning on risks that may harm these latter.
Using data from 2002‐2008 for 42 Islamic banks, this article provides descriptive and analytical analysis and multiple regression equations.
This article reveals that greater reliance on the income share of the profit‐loss‐sharing products is associated with higher risk and higher insolvency risk for both listed Islamic banks and non‐listed Islamic banks. However, no effect has been observed between the operation income of non‐profit‐losses‐sharing products and risk levels. That is why listed banks prefer to invest less in non‐profit‐loss‐sharing products than in profit‐loss‐sharing products.
Financial regulators in emerging Islamic financial market should help Islamic banks to find equilibrium between the expansion of the Islamic financial market and respect for the raison d'être of Islamic finance: the profit and loss sharing mechanisms.
To the best of the author's knowledge, this is the first article that empirically tests why Islamic banks prefer to invest less in profit‐loss‐sharing products. Also, this article contributes to studying the relationship between Islamic finance and risk.
