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Banking Stability System: Does it Matter if the Rate of Return is Fixed or Stochastic?

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  • Hassan Ghassan

Abstract

The purpose is to compare the perfect Stochastic Return (SR) model like Islamic banks to the Fixed Return (FR) model as in conventional banks by measuring up their impacts at the macroeconomic level. We prove that if the optimal choice of investor share in SR model {\alpha}* realizes the indifference of the financial institution toward SR and FR models, there exists {\alpha} less than {\alpha}* such that the banks strictly prefers the SR model. Also, there exists {\alpha}, {\gamma} and {\lambda} verifying the conditions of {\alpha}-sharing such that each party in economy can be better under the SR model and the economic welfare could be improved in a Pareto-efficient way.

Suggested Citation

  • Hassan Ghassan, 2018. "Banking Stability System: Does it Matter if the Rate of Return is Fixed or Stochastic?," Papers 1807.11102, arXiv.org.
    • Handle: RePEc:arx:papers:1807.11102
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    References listed on IDEAS

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    1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    2. Siddiqi, Mohammad Nejatullah, 2004. "Riba, Bank Interest and the Rational of its Prohibition (Research Paper)," Occasional Papers 205, The Islamic Research and Teaching Institute (IRTI).
    3. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    4. repec:bla:kyklos:v:24:y:1971:i:2:p:240-56 is not listed on IDEAS
    5. Pietro Balestra & Mauro Baranzini, 1971. "Some Optimal Aspects In A Two Class Growth Model With A Differentiated Interest Rate," Kyklos, Wiley Blackwell, vol. 24(2), pages 240-256, May.
    6. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
    7. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
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    Cited by:

    1. Ghassan, Hassan B. & Krichene, Noureddine, 2017. "Financial Stability of Conventional and Islamic Banks: A Survey," MPRA Paper 82372, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • P5 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems

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