Diversity in Theory, Concentration in Practice: A Cross-Country Assessment of Financing Mode Distribution in Islamic Banking

Abstract

Islamic finance is conventionally presented as a plural system resting on a menu of Sharī‘ah-compliant contracts, ranging from sale-based instruments such as murābaḥah and ijārah to risk-sharing partnerships such as mushārakah and muḍārabah. This diversity is frequently invoked to justify the sector's claim to a distinctive, more equitable model of intermediation. Whether that plurality is reflected in actual bank balance sheets, however, remains an empirical question that has mostly been examined on a single-country or single-region basis. This paper assembles a harmonised cross-country dataset covering seventeen jurisdictions across six regions, drawn from the Islamic Financial Services Board's Prudential and Structural Islamic Financial Indicators (PSIFIs) database, and computes the Herfindahl–Hirschman Index (HHI) for each country's most recently disclosed financing-mode structure. The results show a pronounced and geographically broad concentration on murābaḥah-type instruments, which account for a sample mean of 62.2 percent of total financing (median 68.5 percent, SD 24.9), while the combined share of the two profit-and-loss-sharing (PLS) contracts, mushārakah and muḍārabah, averages only 14.4 percent and has a median of just 1.1 percent. Sixteen of the seventeen countries register an HHI above 2,500, the conventional threshold for a highly concentrated market. Pakistan and Oman stand out as partial exceptions, with mushārakah alone exceeding half of total financing in the former. The paper situates these findings within the debt-versus-equity debate in the Islamic banking literature and discusses their implications for prudential regulation and product-development policy.