Optimal Profit-Sharing Contracts and Investment in an Interest-Free Islamic Economy

31 Pages Posted: 15 Feb 2006

See all articles by Nadeem Ul Haque

Nadeem Ul Haque

Pakistan Institute of Development Economics

Abbas Mirakhor

International Centre for Education in Islamic Finance (INCEIF)

Date Written: November 5, 1986

Abstract

In an Islamic financial system, interest is replaced by a profit-sharing system in which risks are shared between lenders and borrowers. Concerns have been expressed that in such a system investment will decline. This paper formulates investment behavior in a profit-sharing system as a principal-agent problem and investigates the relevant issues under conditions of uncertainty and moral hazard. A major conclusion of the paper is that the assertion of investment decline cannot be justified and that, under certain conditions, a profit-sharing system may lead to an increase in investment.

Suggested Citation

Ul Haque, Nadeem and Mirakhor, Abbas, Optimal Profit-Sharing Contracts and Investment in an Interest-Free Islamic Economy (November 5, 1986). IMF Working Paper No. 86/12, Available at SSRN: https://ssrn.com/abstract=884580

Nadeem Ul Haque (Contact Author)

Pakistan Institute of Development Economics ( email )

Quaid-i-Azam University Campus, P.O. Box. 1091
Islamabad, Capital 44000
Pakistan
+92-51-9217879 (Phone)
+92-51-9210886 (Fax)

HOME PAGE: http://www.saneinetwork.net/structure/st_comm/NadeemUlHaque.asp

Abbas Mirakhor

International Centre for Education in Islamic Finance (INCEIF) ( email )

Kuala Lumpur
Malaysia