A MARKOV CHAIN MODEL FOR ISLAMIC MICRO-FINANCING

Djaffar Lessy (), Fouad Khoudjeti (), Marc Diener () and Francine Diener ()
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Djaffar Lessy: Université de Nice Sophia Antipolis and IAIN Ambon, France and Indonesia,
Fouad Khoudjeti: Dutch Ethical Finance, Nederland
Marc Diener: Université de Nice Sophia Antipolis, France
Francine Diener: Université de Nice Sophia Antipolis, France

Journal of Islamic Monetary Economics and Finance, 2019, vol. 5, issue 4, 763-784

Abstract: This paper introduces a Markov chain model for Islamic micro-financing, especially mudarabah and murababah contracts. Mudarabah and murabahah are two Islamic micro-financing contracts that have enormous potential in creating a balance between the monetary and sharia sector because the two products are moving to manage the business sector, which undoubtedly adds value to the economic movement directly. On the other hand, both contracts have the potential to cause problems in their implementation, notably the asymmetric information that consists of adverse selection and moral hazard. We propose the Markov chain model as a solution for the Islamic banks to reduce the risk due to adverse selection and moral hazard in mudarabah and murabahah contracts. In our model, we also propose a mechanism to avoid strategic default in a mudarabah contract. We observed two different probabilities of an applicant to become a beneficiary to find the solution to the problems. The results of this study reveal that the bank could decrease the probability of an applicant to become a beneficiary to reduce the adverse selection and moral hazard in mudarabahand murabahah contracts.

Keywords: Markov Chain; Mudarabah; Murabahah; Adverse Selection; Moral Hazard (search for similar items in EconPapers)
JEL-codes: C02 C61 C63 D82 E51 G21 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:idn:jimfjn:v:5:y:2019:i:4d:p:763-784

DOI: 10.21098/jimf.v5i4.1081

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