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Islamic Financial Institutions and Participatory Finance Constraints: The Case of Pakistan

Azam Ali, Tanveer Kishwar and Muhamed Zulkhibri ()
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Azam Ali: State Bank of Pakistan
Tanveer Kishwar: Jinnah University for Women, Karachi, Pakistan

No 2018-2, Policy Papers from The Islamic Research and Teaching Institute (IRTI)

Abstract: Islamic financial contracts are designed to facilitate financing according to Islamic norms. Islamic financing in its first stages used only the partnership modes of Musharakah and Mudarabah. Later it is realized that, to avoid moral hazards, yet compete successfully with conventional banks, it is necessary to use all permissible Islamic modes and consequently, trade and leasing techniques were developed. This paper aims to identify the constraints faced by Islamic financial institutions in the adoption of participatory finance i.e., Musharakah and Mudarabah financing. The two basic categories of financing are: 1) profit-and-loss-sharing (PLS), also called participatory finance, i.e. Musharakah and Mudarabah and 2) purchase and hire of goods or assets and services on a fixed-return basis, i.e., Murabahah, Istisna', Salam and Ijarah also called non-participatory finance. This paper suggests that innovation and creativity is necessitated more than ever to promote participatory modes of financing and to make it the preferred choice for meeting the increasingly sophisticated and diversified financial needs.

Keywords: Participatory Finance; Impact Analysis; Islamic Banks; Pakistan (search for similar items in EconPapers)
JEL-codes: A13 B41 E50 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2018-05-08
New Economics Papers: this item is included in nep-hme, nep-isf and nep-mac
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