Abstract
This paper examines three interlinked issues: First, what is the current state of profit sharing in Islamic banking, that is, is the division of profit between the banks and the depositors satisfactory? Second, can the profit sharing in a two-tier mudaraba contract give the same rate of return to depositors as the bank receives from the investment of their deposits in business? Finally, can the central bank use in some ways the profit sharing ratio along with the rate of interest as an instrument for credit control in a dual banking system? The answer to the fi rst two questions is in the negative. To the third, a tentative response is yes. The paper also suggests a policy tool the central banks can presumably use for controlling credit, more so in view of the recurring financial crises like the one emanating from the US that the world is facing today. The tool may in addition help improve the link between the banks and depositors by adopting an iniquitous distribution of profits.
Highlights
In an earlier article (Hasan, 1985), I had explained the juridical position in mudaraba contracts on the profit sharing ratio (PSR) between the borrowing
The derivation of allows the treatment of the ratio issue at the macro level and helps construction of models to show that profit sharing ratio is a function of the variables identified earlier i.e. the expected rate of profit r on capital K, the proportion of borrowings in it, the market rate of interest ri, and the risk premium We have shown earlier that the sharing ratio for bank would be as under (Hasan, 1985): ı
A perusal of the data on the ratios obtained from the websites of four other Islamic banks including RHB, Standard Chartered Saadiq, Meezan and Dawood revealed the same pattern as of Al Habib shown in Table 1.8 Some interesting common features albeit varying in details of banks’ sharing profits with their depositors are as follows: 7The website does not provide explanation as to why PSR is applied to gross revenue in the first instance, how net profit going to depositors is calculated or what is the basis of assigning relative weights to different types of deposits. 8The remaining four banks have patterns closely similar to that of Habib Bank
Summary
In an earlier article (Hasan, 1985), I had explained the juridical position in mudaraba contracts on the profit sharing ratio (PSR) between the borrowing. (1) To have a look at the sharing ratio theory and the way it is being currently used in Islamic banking This is an addition to my earlier deliberations on the subject and is taken up 2 and 3. (2) To examine if there would not be any difference between the rate of profit a bank may earn on investing customers’ deposits in business on the one hand; and the rate of profit it could allow to them on their money on the other This discussion is in response to a point Siddiqui has raised on my review in defense of Khan and Mirakhor (1989).
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