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Erschienen in:

2016 | OriginalPaper | Buchkapitel

11. Loans Provision and Adverse Selection Within Orthodox Religious Communities

verfasst von : Suren Basov, Ishaq Bhatti

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

Verlag: Palgrave Macmillan UK

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Abstract

In this chapter we investigate the wisdom of restricting business loans to the members of a club, which can be interpreted as a community united along social, cultural or religious principles. Members of the club can be more trustworthy, which will help to mitigate moral hazard problems, but may also possess lower levels of human capital. If human capital is imperfectly observable, this will create an adverse selection problem. We discuss this trade-off, developing a multidimensional screening model of loan provision. As a particular application of the general model we consider business loans provision by Islamic banks.

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Vorheriges Kapitel Business Loans, Trust, and Contract Restriction Faced by Islamic Banks

Nächstes Kapitel Shariah Compliance and Risk-Incentive Trade-Offs

More generally, the requirement is that the losses should be shared proportionally to the investment. Assuming the entrepreneur has no own funds implies α = 0.

For a discussion of how this constraint can be incorporated in the problem, see Basov and Bhatti (2011).

For an arbitrary utility function \(v(\cdot )\) the certainty equivalent is defined as a solution to v(CE) = Ev(x).

Basov, S. 2005. Multidimensional screening, Series: Studies in Economic Theory, vol. 22. Berlin: Springer-Verlag.

Basov, S., and S. Danilkina. 2010. Multitasking, multidimensional screening, and moral hazard with risk neutral agents. The Economic Record 86(s1): 80–86.CrossRef

Basov, S., and M.I. Bhatti. 2011. Social norms and economic performance: An example of business loans by Islamic banks. SSRN Electronic Journal, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1968702.

Picard, P. 1987. On the design of incentive contracts under moral hazard and adverse selection. Journal of Public Economics 33: 305–332.CrossRef

Titel: Loans Provision and Adverse Selection Within Orthodox Religious Communities
verfasst von: Suren Basov
Ishaq Bhatti
Verlag: Palgrave Macmillan UK
Buch: Islamic Finance in the Light of Modern Economic Theory
Print ISBN: 978-1-137-28661-1

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

Copyright-Jahr: 2016
DOI: https://doi.org/10.1057/978-1-137-28662-8_11