A critical analysis of Mudarabah & a new approach to equity financing in Islamic finance
AbstractFinancial 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.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 19697.
Date of creation: 01 Jul 2011
Date of revision:
Interest free economy; Islamic Economic System; Mudarabah; Agency Problem; Moral Hazard; Adverse Selection;
Find related papers by 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, Technological Change, and Growth - - Economic Development - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-01 (All new papers)
- NEP-ARA-2011-10-01 (MENA - Middle East & North Africa)
- NEP-CMP-2011-10-01 (Computational Economics)
- NEP-CWA-2011-10-01 (Central & Western Asia)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Shaikh, Salman Ahmed, 2010. "Proposal for a New Economic Framework Based On Islamic Principles," MPRA Paper 23000, University Library of Munich, Germany.
- Abbas Mirakhor & Mohsin S. Khan, 1991. "Islamic Banking," IMF Working Papers 91/88, International Monetary Fund.
- Mehri, Meryem & Jouaber, Kaouther, 2012. "A Theory of Profit Sharing Ratio under Adverse Selection: The Case of Islamic Venture Capital," Economics Papers from University Paris Dauphine 123456789/9551, Paris Dauphine University.
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