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Incentive Structure of Financing a Project: An Islamic Finance Approach

Author

Listed:
  • Fayaz Ahmad Lone

    (College of Business Administration, Prince Sattam Bin Abdulaziz University, Saudi Arabia,)

  • Abdul Quadir

    (Department of Economics and Finance, Birla Institute of Technology and Science, Pilani, Hyderabad, India)

Abstract

Financing is an important component in any project. Without finance, it is impossible to run any project as it is considered the lifeblood of the business. But due to the presence of predetermined rate of interest, economists have provided alternative approach for financing the project. In this paper a model using profit and loss sharing (PLS) system and comparison of it with the conventional financing model is developed. Thrust in this paper is towards establishing a new theoretical reasoning why PLS system is less frequently used in Islamic banking in terms of net worth of the borrower. It has been argued that agency problem like moral hazard is still acute in PLS system. An idea has been discuss to solve this problem using game theoretic tool.

Suggested Citation

  • Fayaz Ahmad Lone & Abdul Quadir, 2017. "Incentive Structure of Financing a Project: An Islamic Finance Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 87-91.
    • Handle: RePEc:eco:journ1:2017-01-13
    as

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    References listed on IDEAS

    as
    1. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 663-691.
    2. Shaban, Mohamed & Duygun, Meryem & Fry, John, 2016. "SME's lending and Islamic finance. Is it a “win–win” situation?," Economic Modelling, Elsevier, vol. 55(C), pages 1-5.
    3. Kassim, Salina, 2016. "Islamic finance and economic growth: The Malaysian experience," Global Finance Journal, Elsevier, vol. 30(C), pages 66-76.
    4. Mailath, George J. & Samuelson, Larry, 2006. "Repeated Games and Reputations: Long-Run Relationships," OUP Catalogue, Oxford University Press, number 9780195300796.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Hechem Ajmi & Salina Kassim & Hassanuddeen Abdul Aziz & Walid Mansour, 2019. "A Literature Review of Financial Contracting Theory from the Islamic and Conventional Overviews: Contributions, Gaps, and Perspectives استعراض أدبيات نظرية التعاقد المالي من المنظور الإسلامي والتقليدي," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 32(2), pages 25-42, January.

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    More about this item

    Keywords

    Entrepreneur; Financing; Project; Profit and Loss Sharing; Model;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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