Islamic banks' risk, profitability and risk disclosure

Islamic banks operate in a different manner from conventional banks, particularly in adopting profit loss sharing contracts, resulting in arguably different risks and profitability rofiles. Drawing from the Islamic principle of full disclosure, stakeholder and signalling theories, this research examines whether there is a relationship between risk, profitability measures and the level of risk disclosure. Using a sample of Islamic banks in Asia, the Middle East and Europe for the period between 2006 and 2009, the results from a panel data analysis confirm a positive association between return on equity and risk disclosure. There is modest evidence of a negative association between risk (as measured by leverage and proportion of loan to total asset) and risk disclosure. The results generally support the signalling theory rather than the stakeholder theory. A major policy implication is that risk disclosure should be mandatory as voluntary disclosure cannot be expected.