Profit and Loss Sharing Contract Will it Replace The Conventional Approach?

Author: Reza Gholami, Aisyah Abdul-Rahman, Nor Ghani Md Nor & Fathin Faizah Said
Publisher: UKM Press 
ISBN: 9789672516101
Weight: 
Pages: 150
Year: 2021
Price: RM30

This book investigates whether the Profit and Loss Sharing Contract (PLSC) co-existing Interest Based Contract (BC) may dominate in the future. By assuming the relative profit (of borrowers and lenders involved in PLSC or IBC) as the engine of the evolution, the focal point of this book is addressing how these contracts evolve by considering the state of the economy (SOE), asymmetric information in PLSC (the borrower misreporting, dishonesty and moral hazard problem) and IBC lender's default risk via the Evolutionary Stable Strategy (ESS) model. Solving the model, discussing the equilibrium points and their stability, and testing the results with empirical evidence show that PLSC improves in co-existing with IBC when economic stress is high. This happens when agents try to share the risks by using PLSC. Furthermore, sharing ratio and interest rate play important role in the PLSC improvement Policymakers need to focus more on the PLSC sharing ratio proportionate to interest rate and the SOE simultaneously to improve the PLSC and increase the share of Islamic contracts in international finance.