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Concept of islamic finance
Explain the Islamic banking principles of sharing losses
The importance of ethics to a bank
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Recommended: Concept of islamic finance
The internal causes that are attributed to an absence or lack thereof of PLS modes of finance are those factors that are within an Islamic financial institution. Whilst many reasons have been cited including a lack of human resources and management issues, it is evident that a recurring them of information asymmetry, would be identified as the optimal cause as to why Islamic banks refrain from using profit and loss sharing contracts as a means of finance. The information asymmetry concern arises when one party in a transaction is ignorant to vital information, which could result in the second party taking advantage of the former parties lack of knowledge. Thus, the presence of such asymmetry results in three usual negative factors, these are; adverse selection, moral hazards, and agency costs. These will be explained further below.
Adverse selection:
Just like any other financial institution, Islamic banks are compelled to take into account the issue of risk management. Thus, it is imperative to this debate to discuss the issue of agency or contract enforcement problem within Islamic finance; one of the most discussed risks faced by Islamic banks today. Due to an apparent ‘low level of transparency’, it is argued that PLS contracts are inherently vulnerable to agency problems such as entrepreneurs. This can primarily be attributed to the fact that Islamic banks as investors, fear borrowers will in some cases withhold crucial information. Due to a lack of exhaustive information on borrowers, banks are unable to discriminate against risky borrowers. This is commonly referred to information asymmetry. In conventional banking, lenders charge elevated interest rates to negate the higher inherent risk in lending. However, due to a lac...
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Brouwer, M. 2005. Managing uncertainty through profit sharing contracts from medieval Italy to Silicon Valley. Journal of Management & Governance, 9 (3-4), pp. 237--255.
Dar, H. A. and Presley, J. R. 2000. Lack of profit loss sharing in Islamic banking: management and control imbalances. international journal of Islamic financial services, 2 (2), pp. 3--18.
Dar, H., Harvey, D. and Presley, J. 2014. Size, Profitability, and Agency in Profit- and Loss-sharing in Islamic Banking and Finance. [report] Cambridge, Massachusetts: Proceedings of the Second Harvard University Forum on Islamic Finance.
Febianto, I. 2012. Adapting Risk Management for Profit and Loss Sharing Financing of Islamic Banks. Modern Economy, 3 (1).
Ul Haque, N. and Mirakhor, A. 1986. Optimal Profit-sharing Contracts and Investment in an interest-free Islamic Economy. IMF Working Paper.
Brickley, J 1996, Incentive Conflicts and Contractual Restraints: Evidence from Franchising, Journal of Law & Economics, p. 173.
Berk, J., & DeMarzo, P. (2011). Corporate finance: The core, second edition. (2nd ed.). Boston, MA: Prentice Hall.
The Body Shop International case is an interesting case study into the miscommunication of owners and stockholder interests with regard to financial conditions. Anita Roddick, the founder of The Body Shop had no financial experience and thought that all she needed to do was expand her business and the financing would take shape as she developed her business. While Anita’s product concept of a natural skin-care line was good; her lack of experience in financial matters took its toll on her business.
Every action or proposal needs to balance equity and efficiency needs in order to deliver optimal dividends to its targeted audience. Given the fact that resources are relatively scarce compared to the innumerable needs, businessmen, economists, administrators among other leaders reckon that every proposals needs the equity-efficiency balance in order for set goals and objectives to be achieved. This paper seeks to describe the role of equity and efficiency trade off in proposals.
James G. Skakoon, W. J. King and Alan Sklar (2007). The Unwritten Laws of Business. /: Tantor Media.
The data provided by the Near East Bank for the purposes of this study not only included 10 years of data (2004-2013) but also rendered all figures in 2013 USD. To facilitate calculation, these figures were then rendered into millions of USD. For reasons of privacy, the Near East Bank did not send identified data, as private banks in TRNC are not obligated to disclose their financial data to any party other than the Central Bank of TRNC itself.
Contemporary management of the business. 7 ed. of the book. New York, NY: McGraw-Hill. McComb, S., Schroeder, A., Kennedy, D., & Vozdolska, R. (2012).
References:Gallagher, Timothy J. (2009) Financial Management: Principles and Practice, 5th edition. Freeload Press. and Bringham, E. (1986). Fundamentals of Financial Management. New York,N.Y: The Dryden Press
The modern Islamic Finance industry is young, its timeline begin only a few decades ago. However, islamic finance is involving rapidly and continues to expend to serve a growing population of muslims as well as conventional.
Alternatively, when expenses exceed revenue for a defined period, an operating loss shall be recorded. Mudarabah operating loss which is measured during the operating period may be offset against prior or future profits. Loss shall be solely borne by the capital provider except in the event of misconduct, negligence or breach of contract by the manager. The manager may not undertake to bear the loss. The manager may bear the loss at the time the loss is realized without any prior condition or undertaking. A third party may undertake to bear the loss of capital due to misconduct or negligence on the part of the manager. The capital provider may take collateral from the mudarib, provided that the collateral could only be liquidated in the event of negligence or misconduct or violation of term of contract by the Mudarib. Capital loss shall be recognized when the loss occurs prior to the commencement of the business or due to extenuating circumstances beyond the control of the manager and not due to the negligence or misconduct of the manager. The Mudarabah agreement may be mutually reviewed to ascertain whether the capital loss impairs the future performance of the business activity and the partners may decide to restructure the agreement accordingly. Operating loss shall be recognized when the loss occurs during the course of ordinary business. The losses may be carried forward to the next period and subsequently, be set-off against prior or future
Saunders, A., & Cornett, M. M. (2011). Financial institutions management: A risk management approach (7th ed.). New York, NY: McGraw-Hill/Irwin.
Meyer, H. H. (1975). The Pay-for-Performance Dilemma. Organizational Dynamics, 3, 39-50. Print. 8 Feb. 2014.
Functions performed by financial intermediaries can be categorized into three functions; (1) maturity transformation, (2) risk transformation, and (3) convenience denomination. With maturity transformations, intermediaries convert short-term liabilities to long term assets. This conversion is common with banks and other institutions that provide liquidity for entrepreneurs, giving a short term debt a match with a long term loan. Rather than constantly evaluating short term loan options and rolling over the debt balance, a longer term commitment is able to be made that locks in a lower rate to benefit all parties. Additionally, intermediaries can provide risk transformation, which offer the ability to convert risky investments into relatively risk-free by lending to multiple borrowers to spread the risk. By pooling the funds of multiple investors, the intermediary – such as a mutual fund – inherently provides diversification and tolerance against a single investment producing undesirable results. Finally, convenience denomination is provided by an intermediary. With a large quantity of deposits being held at a financial intermediary, they are able to match small deposits with large loans, and larger deposit...
A variety of groups are concerned in bank profitability for various reasons. The bank shareholders would want to know if the value of their investments is high or low. The investors also use current and past performance to predict future price of the banks’ shares traded on the stock exchanged. The management of the bank as trustee of the shareholders is evaluated and compensated on the basis of how well their decisions and planning have contributed to growth in assets and profits of their banks. Employees of bank also are concerned with profits, since their salaries and promotions are frequently tied to the profitability performance of their banks.
Never have I ever climbed a mountain peak. As a child, I imagined myself conducting expeditions in deep-frozen pathways, leading amateur explorers to the top of the world, and instructing rookies in surviving harsh blizzards. Even though slightly altered, my childhood dream has been achieved. I led a team of fellow classmates, in my Strategic Management course, to the success summit of a financial competition. Over the course of a semester, I and my teammates were supposed to create and manage a company of the IT industry, in a computer-simulated environment, along with other four rival teams. I dealt with strategy and financial matters of our virtual enterprise, while my colleagues were working on marketing and manufacturing. During the four months of the exercise, I have experienced finance from various aspects: capital budgeting, through selecting favorable investment for upcoming quarters; debt management, by assessing the necessary amount and efficiency of loans; profitability analysis and dividend policy, which had been used to compile the company’s general performance index. Working in a multinational team, which included an American, a Norwegian and a Moldovan, strengthen my negotiations skills, as well as flexibility and cooperation. But above all, this experience intensified my passion for finance. Of course, a pleasant bonus was the fact that, in the end, our company’s financial performance was six times the performance of second-best team.