Failure and potential of profit-loss sharing contracts

A perspective of New Institutional, Economic (NIE) Theory

Aisyah Abdul Rahman, Radziah Abdul Latiff, Ruhaini Muda, Muhammad Azmi Abdullah

Research output: Contribution to journalArticle

20 Citations (Scopus)

Abstract

This paper theoretically evaluates why profit-loss sharing (PLS) contracts in Islamic banking fails and its potential for improvement within the scope of the New Institutional Economic Theory (NIE). The objective of the evaluation is to draw conclusive theoretical arguments of whether Islamic banking institutions in Malaysia should act as either financial intermediaries or entrepreneurs. Further, we analyze this issue from the perspective of agency theory, financial intermediation theory and entrepreneurship theory with four economic agents in the Islamic banking sector, namely entrepreneurs, depositors, shareholders, and the Islamic banks. Specifically, the first three economic agents represent the asset (equity-based financing), liability, and equity of the Islamic banks, respectively; while the latter is the Islamic banks, which act as a separate legal entity. Finally, we suggest that PLS contracts would best be positioned if Islamic banks play the role of genuine entrepreneurs.

Original languageEnglish
Pages (from-to)136-151
Number of pages16
JournalPacific Basin Finance Journal
Volume28
DOIs
Publication statusPublished - 2014

Fingerprint

Islamic financial institutions
Profit
Economic theory
New institutional economics
Entrepreneurs
Islamic banking
Economics
Equity
Liability
Banking sector
Entrepreneurship
Shareholders
Agency theory
Malaysia
Financing
Financial intermediation
Assets
Evaluation
Financial intermediaries

Keywords

  • Islamic bank
  • New Institutional Economic
  • Profit loss sharing

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Failure and potential of profit-loss sharing contracts : A perspective of New Institutional, Economic (NIE) Theory. / Abdul Rahman, Aisyah; Abdul Latiff, Radziah; Muda, Ruhaini; Abdullah, Muhammad Azmi.

In: Pacific Basin Finance Journal, Vol. 28, 2014, p. 136-151.

Research output: Contribution to journalArticle

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