An exploratory study on the issues in weightages-based profit distribution mechanism in Islamic banking institutions: the case of Pakistan

Abstract

Purpose This study aims to explore and analyze the issues in weightages-based profit distribution mechanism in Islamic banks from Shari’ah, practical and regulatory perspectives. Design/methodology/approach A qualitative research approach was used in this study based on primary data collected through semi-structured interviews from Shari’ah practitioners and senior industry experts in the field of pool management in the Islamic Financial Services Industry of Pakistan. Findings The current study found that the weightages-based mechanism conforms to the rules of Mudarabah and; therefore, permissible. However, the elements of exploitation, transparency and fairness require further research, as these elements seem to exist in this mechanism. It was also found that there are many loopholes in the regulatory guidelines for pool management in Islamic banking institutions (IBIs) in Pakistan resulting in practical issues. Practical implications The findings of this study may help improve pool management in IBIs, which in turn may cater the objections raised by academicians, customers and industry experts. Moreover, the alternative solution based on the findings of this study can be transformed into a proposal for regulators to take necessary actions against unfair profit distribution and issue further improved guidelines for IBIs in Pakistan. Originality/value To the best of the authors’ knowledge, very limited studies have been conducted on pool management particularly with issues from different perspectives and alternative solutions have been suggested that may act as a proposal for IBIs as well as regulatory authorities.