ABSTRACT
It is observed that exorbitant dominance of murabaha financing has remained unchanged over the years. This is alarming as per the explanation of major Islamic finance literature. It is rational for the greater stability of a financial system that Islamic banks simply should not be encouraged to accept high risk because bankruptcy of a single bank can lead a country-wide bank run which in turn, through its ripple effect, may trigger financial and economic crisis. One may insist that banks' limited liability and the existence of 'quasi' flat rate deposit insurance could encourage banks to assume more risk which is termed in the literature as 'moral hazard'. Islamic banks may show similar conservative behavior in financing small and medium enterprises. It is reported in many studies that firms at their infant stage find it difficult to access the capital market for their necessary financing.
