IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/19697.html
   My bibliography  Save this paper

A critical analysis of Mudarabah & a new approach to equity financing in Islamic finance

Author

Listed:
  • Shaikh, Salman Ahmed

Abstract

Financial intermediation serves a valuable purpose, but it can also be structured using equity modes of financing. This can relieve the financee and increase diversity of entrepreneurial undertakings as in debt based commercial financing, there is little room for diversity with obligatory and stipulated servicing of debt. Using Islamic equity modes of financing poses the challenge of the agency problem and moral hazard. The extent of this agency problem in Mudarabah and its impact on economic payoffs between counterparties is analyzed in this study with a simulation model. Based on review of alternate solutions proposed, the author presents two possible covenants which could make Mudarabah mode of financing more acceptable and widely usable in financial intermediation. This would also further the egalitarian objectives of an Islamic economic order.

Suggested Citation

  • Shaikh, Salman Ahmed, 2011. "A critical analysis of Mudarabah & a new approach to equity financing in Islamic finance," MPRA Paper 19697, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:19697
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/19697/1/MPRA_paper_19697.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Muhammad Faheim Khan, 2003. "Guaranteeing Investment Deposits in Islamic banking System ضمان الوديعة الاستثمارية في النظام المصرفي الإسلامي," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 16(1), pages 45-52, January.
    2. Mr. Abbas Mirakhor & Mr. Mohsin S. Khan, 1991. "Islamic Banking," IMF Working Papers 1991/088, International Monetary Fund.
    3. Shaikh, Salman Ahmed, 2010. "Proposal for a New Economic Framework Based On Islamic Principles," MPRA Paper 23000, University Library of Munich, Germany.
    4. Abdel-Fattah A.A. Khalil & Colin Rickwood & Victor Murinde, 2002. "Evidence on agency-contractual problems in mudarabah financing operations by Islamic banks," Chapters, in: Munawar Iqbal & David T. Llewellyn (ed.), Islamic Banking and Finance, chapter 4, Edward Elgar Publishing.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fuad Al-Fasfus, 2019. "Reasons of the Difference of Murabaha Accounting Standards in Islamic Banks," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(1), pages 28-36, January.
    2. Abdullah Ibrahim Nazal & Fuad Al-Fasfus, 2018. "Impact of Liquidity Rules on Shareholders’ Returns in Jordan Islamic Bank," International Journal of Business and Management, Canadian Center of Science and Education, vol. 13(6), pages 225-225, April.
    3. Wesal M. Aldarabseh, 2019. "The Interest in Islamic Finance Contracts in Saudi Arabia as Viewed by Google Trends," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(9), pages 1-12, September.
    4. repec:dau:papers:123456789/9551 is not listed on IDEAS
    5. EL Fakir, Adil & Fairchild, Richard & Tkiouat, Mohamed, 2019. "A hybrid profit and loss sharing model using interest free-debt and equity financing: An application of game theory as a decision tool," The North American Journal of Economics and Finance, Elsevier, vol. 49(C), pages 352-360.
    6. Kaouther Jouaber & Meryem Mehri, 2012. "A Theory of Profit Sharing Ratio under Adverse Selection: The Case of Islamic Venture Capital," Post-Print hal-01525795, HAL.
    7. Adil EL Fakir & Mohamed Tkiouat, 2016. "Single or Menu Contracting: A Game Theory Application of the Hersanyi Model to Mudaraba Financing," International Journal of Economics and Financial Issues, Econjournals, vol. 6(1), pages 221-230.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sandrine Kablan & Ouidad Yousfi, 2015. "Performance of Islamic Banks across the World: An Empirical Analysis over the Period 2001-2008," International Journal of Empirical Finance, Research Academy of Social Sciences, vol. 4(1), pages 27-46.
    2. Adam B. Elhiraika, 1998. "Macroeconomic Instability, Financial Repression and Islamic Banking in Sudan," IIUM Journal of Economics and Management, IIUM Journal of Economis and Management, vol. 6(2), pages 61-86, December.
    3. Martin Čihák & Heiko Hesse, 2010. "Islamic Banks and Financial Stability: An Empirical Analysis," Journal of Financial Services Research, Springer;Western Finance Association, vol. 38(2), pages 95-113, December.
    4. Hussein, Kassim, 2010. "Bank level stability factors and consumer confidence – a comparative study of Islamic and conventional banks’ product mix," MPRA Paper 21800, University Library of Munich, Germany.
    5. Shaikh, Salman ahmed, 2014. "Towards a Sustainable Islamic Microfinance Model in Pakistan," MPRA Paper 68748, University Library of Munich, Germany.
    6. Nabi, Mahmoud Sami, 2012. "Profit Sharing, Income Inequality and Capital Accumulation," MPRA Paper 49830, University Library of Munich, Germany.
    7. saleem, shahid, 2007. "Role of Islamic banks in economic development," MPRA Paper 7332, University Library of Munich, Germany.
    8. Kablan, S & Yousfi, O, 2011. "Efficiency of islamic and conventional banks in countries with islamic banking," MPRA Paper 32951, University Library of Munich, Germany.
    9. Abbas Mirakhor & Iqbal Zaidi, 2006. "Foreign Currency Deposits and International Liquidity Shortages in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(1), pages 49-85.
    10. Mohammad Aslam & Toseef Azid & Shahnawaz Malik, 2000. "Attitude towards Interest-free Financing among Small Traders and Farmers in Multan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 39(4), pages 663-672.
    11. Hadeel Abu Loghod, "undated". "Do Islamic Banks Perform Better than Conventional Banks? Evidence from Gulf Cooperation Council countries," API-Working Paper Series 1011, Arab Planning Institute - Kuwait, Information Center.
    12. Omar Masood & Ghulam Shabbir Khan Niazi & Noryati Ahmad, 2011. "An analysis of the growth and rise of smaller Islamic banks in last decade," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 3(2), pages 105-116, June.
    13. repec:dau:papers:123456789/9551 is not listed on IDEAS
    14. Farhoush, Azadeh, 2007. "Leasing als shariakonformes Finanzierungsinstrument," Leasing - Wissenschaft & Praxis, Universität zu Köln, Forschungsinstitut für Leasing, vol. 5(2), pages 45-81.
    15. Haque, Nadeem ul & Mirakhor, Abbas, 1999. "The Design of Instruments For Government Finance in An Islamic Economy," MPRA Paper 56028, University Library of Munich, Germany.
    16. Asmadi Mohamed Naim & Muhammad Nasri Md. Hussein & Mohamad Noor Habibi Long & Mahyuddin Abu Bakar, 2016. "Shariah Appraisal of the Concepts of Daman, Taqsir, and Taaddi in Trust-Based Contracts (Uqud al-amanat) التقييم الشرعي لمفاهيم الضمان والتقصير والتعدي في العقود القائمة على الثقة," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 29(1), pages 3-20, January.
    17. Abdul Hamid Ahmad Abu Sulayman, 1998. "The Theory Of The Economics Of Islam (Ii)," IIUM Journal of Economics and Management, IIUM Journal of Economis and Management, vol. 6(2), pages 87-113, December.
    18. Ahmed, Habib, 2011. "Shari’ah Governance Regimes for Islamic Finance: Types and Appraisal - I regimi di governance conformi alla shari’ah nella finanza islamica: tipologia e valutazione," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 64(4), pages 393-412.
    19. Azmat, Saad & Skully, Michael & Brown, Kym, 2015. "Can Islamic banking ever become Islamic?," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 253-272.
    20. Ms. Faezeh Raei & Mr. Selim Cakir, 2007. "Sukuk vs. Eurobonds: Is There a Difference in Value-at-Risk?," IMF Working Papers 2007/237, International Monetary Fund.
    21. H. Askari & Z. Iqbal, 1995. "Opportunities in emerging Islamic financial markets," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 48(194), pages 255-282.

    More about this item

    Keywords

    Interest free economy; Islamic Economic System; Mudarabah; Agency Problem; Moral Hazard; Adverse Selection;
    All these keywords.

    JEL classification:

    • L38 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Policy
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:19697. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.