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

Zubair Hasan

MPRA Paper from University Library of Munich, Germany

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

Keywords: Key words: Islamic banking; Two-tier mudaraba; Profit sharing ratio; Division of profit; Leverage lure (search for similar items in EconPapers)
JEL-codes: G21 G24 G38 (search for similar items in EconPapers)
Date: 2008-09-14, Revised 2008-11
New Economics Papers: this item is included in nep-acc and nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Forthcoming in Synposium on Islamic banking and Finance, Melbourne University Australia (2009): pp. 1-18

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Related works:
Working Paper: Islamic banks:Profit sharing, equity, leverage lure, and credit control (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:11737

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