Dividend signaling hypothesis and short-term asset concentration of Islamic interest-free banking

The phenomenon of asset concentration in short and medium term investments is found to exist in the Islamic interest-free banking system. This paper finds that the dividend signaling hypothesis is able to explain this phenomenon. Managers of Islamic banks are likely to prefer investing in instruments with more certain returns in order to maintain a stable dividend payout. This results in the concentration of short and medium term mark-up based investments. The results of this paper show that dividends in Islamic banks are stable. One major source of this stability is bank earnings. Short and medium term investments are also found to be more important in generating income than long term investments.