Agency Theory in Explaining Islamic Financial Contracts

Abstract

In this paper, we explore the concept of agency theory in a conventional perspective, to understand the types of agency problems emerging in the contractual relationship context. However, many agency contracts that have been observed are incomplete. Completeness in the contractual agency relationship contributes to th e reduction of the monitoring cost of contracting parties and there is a scarcity of literature which has fueled the effort to discuss agency relationship in Islamic financial contracts and agency problems. For such contract to succeed, the paper provides an initial baseline to understand how Tawhid epistemology elements can be used to facilitate and deter different goals, different levels of information, also the opportunism behavior in Islamic financial contracts.