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

Hassan Ghassan

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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 investor share in SR model {\alpha}* realizes the indifference of the financial institution toward SR and FR models, there exists {\alpha} less than {\alpha}* such that the banks strictly prefers the SR model. Also, there exists {\alpha}, {\gamma} and {\lambda} verifying the conditions of {\alpha}-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.

Date: 2018-07
New Economics Papers: this item is included in nep-isf
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Published in Journal of Islamic Economics, Banking and Finance 8-3:9-20, 2012

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Working Paper: Banking Stability System: Does it Matter if the Rate of Return is Fixed or Stochastic? (2012) Downloads
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