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

Hasan, Zubair (2008): Islamic banks:Profit sharing, equity, leverage lure, and credit control. Published in: JKAU: Islamic Economics , Vol. 23, No. 1 (January 2010): pp. 129-146.

Abstract

This paper deals with three basic issues in Islamic banking: First, how the profit sharing ratios in mudarabah 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 a brief explanation as an answer to the first question. The response to the second is negative but is 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.

• Item Type: MPRA Paper
• English Title: Islamic banks:Profit sharing, equity and credit control
• Language: English
• Keywords: Islamic banking; Two-tier mudarabah; Profit sharing ratio; Division of profit; Leverage lure
• Subjects: D - Microeconomics > D6 - Welfare Economics > D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B22 - Macroeconomics; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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