Articles on Islamic Finance
Agency conflict arises when the various parties have different incentives or objectives in a mutual relationship. This article discusses Islamic economics perspective on the agency conflicts.
The question arises that if people are generally risk averse, are interest based investments and lending not the safest option to these people in which except from default risk, people are safe from fluctuations in payoffs and there is less uncertainty in payoffs. This article discusses how Islamic economic framework incorporates diversity in risk preferences.
Islamic finance industry assets are now worth more than $2.6 trillion by 2019. The industry has shown resilience and double digit growth even in the face of global economic slowdown. After substantial double digit growth in assets, customer base and profits, Islamic banks are expected to embrace the vision to provide an egalitarian financial system which is inclusive for all and avoid the pitfalls which the conventional banking based on interest could not avoid.
To some scholars, it seems that practiced Islamic banking is yet to incapsulate the ideals of Islamic economic principles. These scholars caution against mimicking conventional banking products and using the same paradigm to make these products somehow conform to Islamic legal framework.
Time value of money is the problem for the investor to avoid keeping his/her money idle and to avoid forgoing the use of money that may bring positive value to his/her investment. However, it does not mean that the investor can demand an arbitrary increase as the cost of using money without taking the risk of a productive enterprise.
Opportunity cost is a useful concept in economics. This article tries to explain how this concept is used to justify interest. Then, the article also highlights the problem with this approach.
In Mudarabah, only the Rabb-ul-Maal bears all the financial losses as the sole financial investor. If an Islamic bank enters into a Mudarabah contract as a Rabb-ul-Maal, only the Islamic bank would have to bear all the losses. Â Disparity in payoffs if loss occurs in Mudarabah is one of the major reasons why Mudarabah is hardly used as a mode of finance in corporate financing.
