Islamic Economics Studies Bi-quarterly Journal

The Role of System Memory in Proper Implementation of PLS Banking Contract in Islamic Banking System

Document Type : Research Paper

Authors

1 PhD in Economics, Allameh Tabataba'i University, Tehran, Iran.

2 Assistant Professor, Faculty of Economics, Allameh Tabataba’i University, Tehran, Iran.

3 Professor, Faculty of Social Science & Economics, Alzahra University, Tehran, Iran.

Abstract

Despite the prominent role of profit-loss sharing (PLS) contracts in theoretical literature of Islamic banking, the share of these contracts in Islamic banks is still very small. Studies identify the agency problem as the most important barriers to use such contracts in practice. Using a repeated game model, in this paper we show how the existence of a system memory (keeping the history of investment proposals and projects, agents´performance and their ratings) in Islamic banks might alleviate the asymmetric information problem and facilitate the implementation of PLSs.

Keywords

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Islamic Economics Studies Bi-quarterly Journal
Volume 13, Issue 1 - Serial Number 25
March 2020
Pages 219-252