Dividend Signaling Hypothesis and Short-Term Asset Concentration in Interest-Free Banking

This 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