Banking Stability System: Does it Matter if the Rate of Return is Fixed or Stochastic?

Ghassan, Hassan Belkacem (2012): Banking Stability System: Does it Matter if the Rate of Return is Fixed or Stochastic? Published in: Journal of Islamic Economics, Banking and Finance , Vol. 8, No. 3 (July 2012): pp. 9-20.

Abstract

The purpose is to compare the perfect Stochastic Return (SR) model like Islamic banks to the Fixed Return (FR) model as in conventional banks by measuring up their impacts at the macroeconomic level. We prove that if the optimal choice of share’s investor in SR model α* realize the indifference of the financial institution toward SR and FR models, there exists α<α* such that the banks strictly prefers the SR model. Also, there exists α, gamma and λ verifying the conditions of α-sharing such that each party in economy can be better under the SR model and the economic welfare could be improved in a Pareto-efficient way.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banks, Stochastic Return, Fixed Return, α-sharing, Mean Preserving Spread.
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services; P - Economic Systems > P5 - Comparative Economic Systems

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