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Islamic Banks: Profit sharing, equity, leverage lure and credit control

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  • Hasan, Zubair

Abstract

This paper deals with three basic issues in Islamic banking: First, how the profit sharing ratios in mudaraba contracts are in principle determined? Second, do the actual sharing ratios result in an equitable division of profit between the banks on the one hand and the depositors on the other? Finally, can the central bank use the profit sharing ratio along with the rate of interest for credit control so as to mitigate leverage lure in a dual banking system? The paper provides an explanation as answer to the first question. The response to the second is negative but positive to the third. It suggests a policy tool the central banks can possibly use to prevent the sort of credit turmoil as the world is facing today in 2008 because of leverage lure. The tool may also help improve return to investors and thus establish some equity in the distribution of profits.

Suggested Citation

  • Hasan, Zubair, 2008. "Islamic Banks: Profit sharing, equity, leverage lure and credit control," MPRA Paper 11737, University Library of Munich, Germany, revised Nov 2008.
  • Handle: RePEc:pra:mprapa:11737
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    File URL: https://mpra.ub.uni-muenchen.de/11737/1/MPRA_paper_11737.pdf
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    References listed on IDEAS

    as
    1. Lin, Chung-cheng & Chang, Juin-jen & Lai, Ching-chong, 2002. "Profit sharing as a worker discipline device," Economic Modelling, Elsevier, vol. 19(5), pages 815-828, November.
    2. Zubair Hasan, 2008. "Credit creation and control: an unresolved issue in Islamic banking," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing, vol. 1(1), pages 69-81, April.
    3. Hasan, Zubair, 2005. "Islamic banking at the crossroads: theory versus practice," MPRA Paper 2821, University Library of Munich, Germany.
    4. Hasan, Zubair, 1985. "Determination of Profit and Loss Sharing Ratios in Interest-Free Business Finance," MPRA Paper 3013, University Library of Munich, Germany.
    5. Hasan, Zubair, 2002. "Mudaraba as a mode of finance in Islamic banking: theory, practice and problems," MPRA Paper 2951, University Library of Munich, Germany.
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    Cited by:

    1. Hasan, Zubair, 2012. "Incentive-compatible sukukmusharkah for private sector funding: Comment," MPRA Paper 41916, University Library of Munich, Germany.
    2. Hasan, Zubair Hasan, 2014. "The recent turmoil and monetary policy in a dual financial system with Islamic perspective," MPRA Paper 57133, University Library of Munich, Germany.

    More about this item

    Keywords

    Key words: Islamic banking; Two-tier mudaraba; Profit sharing ratio; Division of profit; Leverage lure;

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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