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Can Islamic banking ever become Islamic?

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  • Azmat, Saad
  • Skully, Michael
  • Brown, Kym

Abstract

This paper attempts to explain the dominance of asset side debt contracts in Islamic banks, even though many consider alternative Islamic joint venture (IJV) contracts to be the ideal Islamic financing mode. Theoretical models based on asymmetric information are used to argue that adverse selection and moral hazard alone cannot explain this phenomenon. The model is augmented with risk averse depositors to show that the emergence of asset side IJV could be deterred by Islamic banks' liability side. This paper suggests that for IJV, affiliated venture capital and private equity might prove more successful institutions than banking.

Suggested Citation

  • Azmat, Saad & Skully, Michael & Brown, Kym, 2015. "Can Islamic banking ever become Islamic?," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 253-272.
    • Handle: RePEc:eee:pacfin:v:34:y:2015:i:c:p:253-272
    DOI: 10.1016/j.pacfin.2015.03.001
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    References listed on IDEAS

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    More about this item

    Keywords

    Islamic banks; Moral hazard; Islamic joint venture finance;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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