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Demand For And Supply Of Mark-Up And Pls Funds In Islamic Banking: Some Alternative Explanations

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  • KHAN, TARIQULLAH

    (Research Division, Islamic Research and Training Institute)

Abstract

Profit and loss-sharing (PLS) and bai’ al murabahah lil amir bil shira (mark-up) are the two parent principles of Islamic financing. The use of PLS is limited and that of mark-up overwhelming in the operations of the Islamic banks. Several studies provide different explanations for this phenomenon. The dominant among these is the moral hazard hypothesis. Some alternative explanations are given in the present paper. The discussion is based on both demand (user of funds) and supply (bank) side considerations. The central conclusion is that mark-up is consistent with firms’ preference to re-invest profits in their own growth. It implies that PLS instruments which can allow profit retention by the user of funds and redeem consequently, could be more popular, particularly among risk-averse start-up firms.

Suggested Citation

  • Khan, Tariqullah, 1995. "Demand For And Supply Of Mark-Up And Pls Funds In Islamic Banking: Some Alternative Explanations," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 3, pages 1-46.
    • Handle: RePEc:ris:isecst:0106
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    References listed on IDEAS

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    1. Berger, Allen N. & Udell, Gregory F., 1990. "Collateral, loan quality and bank risk," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 21-42, January.
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    Cited by:

    1. Mustapha Ziky & Raja Daouah, 2019. "Exploring Small and Medium Enterprises¡¯ Perceptions Towards Islamic Banking Products in Morocco," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(10), pages 106-117, October.
    2. Khaled, Shafi A., 2018. "Risk, Return, and Profit-Loss Shared Lending under a Zero-Interest Financial System," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 26, pages 1-30.
    3. Ali, Azam & Kishwar, Tanveer & Zulkhibri, Muhamed, 2018. "Islamic Financial Institutions and Participatory Finance Constraints: The Case of Pakistan," Policy Papers 2018-2, The Islamic Research and Teaching Institute (IRTI).
    4. Veelaiporn Promwichit & Shamsher Mohamad & Taufiq Hassan, 2014. "PLS Based Financing for SMEs: Returns to IFIs," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 10(2), pages 61-75, April.
    5. Javed Ahmed Khan & Shariq Nisar, 2004. "Collateral (Al-Rahn) as Practiced by Muslim Funds of North India الرهن كما تتعامل به الصناديق الإسلامية في شمال الهند," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 17(1), pages 17-34, January.
    6. Shafi A. Khaled & A. Wahhab Khandker, 2015. "Profit-Loss Sharing Contract Formation Under Zero Interest Financial System عقد المشاركة من الأرباح والخسائر في ظل نظام مالي بدون ربا," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 28(2), pages 75-107, July.
    7. Seif. I. Tag El-Din, 2008. "Income Ratio, Risk-Sharing,and the Optimality of Mudarabah نسبة الدخل، والاشتراك في الخطر وأمثلية المضاربة," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 21(2), pages 37-59, July.
    8. Meslier, Céline & Risfandy, Tastaftiyan & Tarazi, Amine, 2020. "Islamic banks’ equity financing, Shariah supervisory board, and banking environments," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    9. Khaled, Shafi A. & Khandker, A. Wahhab, 2014. "Portfolio Determination of A Zero-Interest Financial System Entity," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 22, pages 217-232.
    10. Tastaftiyan Risfandy & Wahyu Trinarningsih & Harmadi Harmadi & Irwan Trinugroho, 2019. "Islamic Banks’ Market Power, State-Owned Banks, And Ramadan: Evidence From Indonesia," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 64(02), pages 423-440, March.
    11. Al-Jarhi, Mabid, 2004. "Islamic Finance: An Equitable and Efficient Option," MPRA Paper 55765, University Library of Munich, Germany.
    12. Khaled, Shafi A. & Khandker, A.Wahhab, 2017. "Determination of Mark-Up Rate under Zero-Interest Financial System: A Microeconomic Approach," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 25, pages 15-34.

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