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2016 | OriginalPaper | Chapter

10. Business Loans, Trust, and Contract Restriction Faced by Islamic Banks

Authors : Suren Basov, Ishaq Bhatti

Published in: Islamic Finance in the Light of Modern Economic Theory

Publisher: Palgrave Macmillan UK

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Abstract

In this chapter we consider the effect of social norms on economic performance, using an example of an Islamic bank providing a business loan to an entrepreneur. We show that the ability to rely on a social norm mitigates the moral hazard problem, but introduces rigidities that prevent an optimal response to adverse economic consequences, thereby improving performance during booms, but handicapping it during recessions.

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previous chapter The Multidimensional Screening Model
next chapter Loans Provision and Adverse Selection Within Orthodox Religious Communities
Footnotes
1
Since all profit realizations in our model are non-negative, Islamic law does not impose any connection between α and δ.
 
2
One can justify this assumption by assuming that religious borrowers have finite γ, when dealing with an Islamic bank, but that everyone is opportunistic, i.e. has infinite γ, when dealing with a conventional bank.
 
Literature
Al-Tamimi, H.A.H., A.S Lafi, and M.H. Uddin. 2009. Bank image in the UAE: Comparing Islamic and conventional banks. Journal of Financial Services Marketing 14: 232–244.CrossRef
Mussa, M., and S. Rosen. 1978. Monopoly and product quality. Journal of Economic Theory 18: 301–317.CrossRef
Metadata
Title
Business Loans, Trust, and Contract Restriction Faced by Islamic Banks
Authors
Suren Basov
Ishaq Bhatti
Copyright Year
2016
Book
Islamic Finance in the Light of Modern Economic Theory

Print ISBN: 978-1-137-28661-1

Electronic ISBN: 978-1-137-28662-8

Copyright Year: 2016

DOI
https://doi.org/10.1057/978-1-137-28662-8_10