Profit And Loss Sharing Research Articles

Beyond-money framing and customer decision to patronise Islamic banking: an experimental study

PurposeThe recent growth of Islamic bank (IB) assets in Indonesia has been mainly driven by government interventions rather than the organic development on the demand side. A novel approach to attract new consumers, increase market share and accelerate its development is the need of the hour. This study aims to propose beyond-money framing that promotes the Shari’ah and social dimensions of IB’s products on top of its contemporary marketing strategy. This paper examines whether this technique can advance IBs selection.Design/methodology/approachThis paper uses the (online) laboratory experiment involving 192 high- and low-literate participants from Generation Z (Gen Z). Using difference tests and Logit regression, this paper examines the impact of beyond-money framing on customers decision-making.FindingsBeyond-money framing has a significant impact in influencing customers decisions to select profit-and-loss sharing (PLS) products offered by IBs. The effect of the framing accelerates in the high-literate customers.Research limitations/implicationsThe contract examined is only the PLS one (mudharabah). Respondents are also restricted to Gen Z. This study does not separate the effect of Shari’ah and social aspects from beyond money framing.Practical implicationsTo attract new customers, IBs should emphasise their products’ social and Shari’ah features rather than relying solely on a low-price strategy.Originality/valueTo the best of the authors’ knowledge, this paper is the first study proposing the framing strategy for IBs and examining its impact on IB’s product acceptance in Indonesia.

To What Extent Collateral in PLS Financing Brings Maṣlaḥah? An Analytical Comparison from Islamic Law Outlook with Maqāṣid al-Sharī’ah Index

This study aims to compare the level of maṣlaḥah regarding the existence of collateral in Profit and Loss Sharing (PLS) financing from Islamic banking customers and employees standpoints. This is crucial as PLS financing becomes the main characteristic product of Islamic banks, but it emerges as an unfavorable product due to the high financial risk. The existence of collateral plays a pivotal role in this situation to realize maṣlaḥah. This is an explanatory study with a quantitative approach and survey method, considering 400 respondents, particularly 200 Islamic banking customers and 200 Islamic banking employees, who were conveniently obtained at certain time intervals for a one-shot. An Independent sample t-test is used to calculate the comparison level of maṣlaḥah among these two groups. At the same time, Rasch Model analysis is also used to measure the data based on the demographic characteristics of respondents. The result discovers that although there is a slightly different level of maṣlaḥah between Islamic banking customers and employees in PLS finance practice regarding collateral, it still significantly brings benefit, as it aligns with the concept of ta’widh to prevent financial risk. This finding contributes to Islamic banks as a guideline to understand how to operate and enhance the market share of this financing product based on the Rasch Model Analysis.

PEMBIAYAAN BAGI HASIL: ANALISIS PENGARUH FAKTOR INTERNAL DAN FAKTOR EKSTERNAL BANK SYARIAH

The rapid development of the Islamic banking industry in Indonesia is evident in the substantial share of profit and loss sharing (PLS), particularly when compared to other nations. However, on regional scale, PLS as a primary product of Islamic banks has yet to assert dominance of disbursed financing. Analysis of internal and external factors that influence PLS of Islamic banks in Indonesia will be the focus of the research. The Error Correction Model method was chosen to determine the effects in the short and long term. Time series analysis was carried out in the time period January 2015 to December 2022. This research found that internal factors, Third-Party Funds had a positive and significant effect on PLS in the short and long term. Then Allowance for Impairment Losses in the short term does not have a significant effect but in the long term it has a negative and significant effect. Interestingly, PLS is not sensitive to CAR and economic growth. This research shows the resilience of Islamic banks in facing the crisis caused by the Covid-19 pandemic. PLS grew higher in the period after the Covid-19 Pandemic compared to before the Covid-19 Pandemic. The implications of these findings encourage Islamic banks to develop products and services, tighten risk management in the long term, and expand the market share of Islamic banks.

MAQASID AL-SHARIA IN THE DISTRIBUTION OF PROPERTY

There is a prohibition of rotating property on people (Q.S. 59:7) so that the discussion of sharia maqasid on distribution becomes essential to research. This paper aims to know the definition and function of the maqasid of shari'ah in concluding the law. Second, to understand the thoughts of scholars towards maqasid shari'ah. Third, to know the implementation of the shari'ah maqasid on the distribution of property. This article uses a qualitative approach. This article is library research. The results showed that sharia maqasid is an important concept in the study of Islamic law by paying attention in maintaining faith (din), soul (nafs), mind ('aql), progeny (nasl) and wealth (maal) for humankind. Thoughts of scholars toward sharia maqasid were the main goal (universal value) to be achieved from legal provisions both in general and in particular. Sharia maqasid on the distribution of property creates a turnover of wealth among humans fairly and evenly. Distribution of property can be done through various means including nafaqah, zakat, inheritance, will, waqf, infak, alms, qardul Hasan, feeding the poor, qurban, aqiqah, helping others, fulfilling the rights of neighbours, fulfilling guest rights and Profit, and Loss Sharing (PLS), in addition, the distribution of property can also be done through the delivery of state property to citizens who are considered in need.

Lack of Profit-and-Loss Sharing Contracts in Moroccan Islamic Banks: An Investigation During the Coronavirus Pandemic

Purpose — The purpose of this paper is to examine the challenges and barriers to implementing profit-and-loss sharing (PLS) contracts in Moroccan Islamic banks (IBs). Design/Methodology/Approach — The paper presents the results of exploratory qualitative research based on face-to-face interviews with local managers of Moroccan IBs in the Rabat–Casablanca region. The investigation was carried out in September 2020, during the Coronavirus (COVID-19) pandemic. Findings — The findings reveal that various challenges, mainly institutional and operational, as well as the implications of the COVID-19 pandemic have been the main barriers to implementing PLS contracts in Moroccan IBs. Originality/Value — The findings are supported by field research targeting the managers who are directly concerned with the commercialisation of PLS contracts. Moreover, the present paper discusses the subject within the Moroccan context, where Islamic banking is a relatively recent phenomenon. Research Limitations/Implications — Given the limited number of IBs in Morocco and the COVID-19 lockdown measures, bank managers in the Rabat–Casablanca region were considered. Consequently, only 14 managers agreed to contribute to the present research. The findings depend on the experience of the respondents on the topic of the research; therefore, other factors and challenges may exist. Practical Implications — The present paper may remind scholars and practitioners of the importance of PLS instruments, especially under the pressure of COVID-19. It is an attempt to explain the challenges faced by these agreements and to make some recommendations in the hope that they will see the light of day in the Moroccan market.

Keadilan Ekonomi Islam dan Implementasinya

This paper attempts to answer two questions: what is justice in Islamic economics and what is the manifestation of justice in Islamic economics. This research is library research, by using a qualitative approach which produces descriptive data in the form of written words. The data analysis technique used in this research is hermeneutics. The research results show: First, Islamic economics is based on the idea of distributive justice. The concept of justice in the Islamic economic system is distributive justice, namely treatment of someone according to the services they have performed. With distributive economic justice, everyone will get their rights according to the contribution they make, and at the same time everyone must also be free from exploitation of other people. In other words, Islamic economic justice requires a state of 'neither tyrannizing nor being wronged'. Second, the philosophical value of Islamic economic justice can be applied to various economic activities: products, distribution, consumption, finance, business, development, and so on. The practice of justice in Islamic economics can also be found in the rationality of profit and loss sharing (PLS). One of the characteristics of the Islamic economic system is the distribution of profit and loss. Stakeholders share profit and loss using a PLS system. Muḍarabah and musyarakah are two instruments of distribution in economic activities that provide justice.

Demand trade-off between PLSs and markups in the presence of a conventional banking relationship: The case of Moroccan companies

Theoretical explanations based on information asymmetry constitute the dominant paradigm of the near disappearance of PLSs (profit and loss sharing). This assumption implicitly implies a hypothesis on the power of contractual choice exclusively monopolized by Islamic banks. The theoretical positioning in this study to explain the arbitrage between PLSs and markups is based on a lack of demand. In this sense, this paper attempts to verify the demand trade-off of Moroccan companies between PLSs and markups. A logistic regression was used to establish several findings. The evidence suggests that past banking relationships with conventional banks and debt maturity both favor the commercialization of markups. On the other hand, financial quality of firms has no direct impact on the choice between PLSs and markups. This assertion implies that it is incorrect to assume that sole entrepreneurs undertaking high-risk projects choose to be funded by PLSs. Combining that with the fact that companies that agree to be funded by PLSs agree to share profits, private information and decision-making power, it can be said that PLSs can have a good chance of thriving in Morocco if Islamic banks provide a favorable climate for their marketing.

Does PLS in Islamic banking limit excessive money creation?

PurposeBank lending is the major source of monetary expansion. Bank-led money creation is a key issue in both conventional and Islamic financial systems. The purpose of this paper is to examine the issues related to Islamic banking money creation. In this conceptual paper, the authors investigate the involvement of profit and loss sharing (PLS) in money creation and especially how can PLS limit money creation “out of nothing.” In this regard, the authors examine the potential of the PLS principle in tackling the excessive money creation phenomenon.Design/methodology/approachThis study uses a normative approach regarding Islamic bank money creation that fits Sharia directives. In fact, this study discusses “what ought to be,” that is, the values and norms of PLS money creation that impede excessive money creation.FindingsOverall, Islamic banks create money differently compared to conventional ones. Especially, by avoiding a purely financial intermediary, money creation under the PLS principle sustains a strong relationship with the real economy and leads to a lower money multiplier. Therefore, PLS mechanisms allow financing through real assets and not credit assets “out of nothing.” This could prevent excessive money creation from causing harmful effects on indebtedness and financial instability.Practical implicationsPLS offers a valuable resolution for banking system money creation through the optimization of Islamic bank financing by facilitating the separation of the monetary function from the credit one. This reform thought reinforces the stability value of money allowing it to fully perform its functions with reference to the directives of Sharia. This especially allows the integrity and purchasing power of money, the reduction of the gap between the evolution of both real and financial economies and, consequently, the indebtedness and crisis. It is recommended to promote PLS financing by reforming institutional and regulatory constraints.Originality/valueThis study addresses the contemporary issue of money creation by Islamic banks through the PLS approach. The conceptual framework of this paper highlights the reformist role of PLS in limiting money creation through Mudarabah approach within fractional reserve banking.

Non-Usury Business Model in Islamic Banking Practice (Waqf, Profit and Loss Sharing, Zakat)

<p><strong><em>One of the concepts that can be offered to solve the problem of the global economic crisis is the Islamic economic system, the application of which is integrated into the existing economic system. The Islamic Finance Institution in Indonesia has a great opportunity to be developed. Profit and Loss Sharing (PLS) can be used as an alternative solution to replace the interest system. The purpose of this study is to discuss the islamic banking practice model with capital from waqf, with PLS operational system, and followed with charity zakat activities. The writing methodology applied in this study is a descriptive method with a qualitative approach. The concept of the Islamic Bank model is found whose capital comes from productive waqf funds, so that the system can be full non-usury and its activities can be full ratio for profit and loss sharing (PLS). Savings are organized without interest (0%) and deposits with a profit-sharing ratio. Bank operations are taken from a small percentage of bank capital as a waqf fund manager. The bank's profits from business revenue sharing are partly regulated as zakat and the other part is for business development and situational reserves. It is necessary to think of Islamic economic experts to realize enabling conditions, in the form of supporting regulations, increasing the competence and professionalism of the nazir, as well as sufficient education/literacy. This paper can be a bridge to review Islamic banking practices in the future. </em></strong></p>

THE BEHAVIOR OF BANKERS TOWARDS PROFIT AND LOSS SHARING CONTRACTS: A Modified Theory of Planned Behavior Approach

This paper aims at determining the psychological factors of bankers in implementing Profit and Loss Sharing (PLS) financing contracts in Islamic banks. The phenomenon of low occurrence of PLS financing motivated the researcher to write this paper. The theory of modified planned behavior is used to explain the research problem. The research data were obtained from 139 employees of Islamic banks in Indonesia and processed using SEM-PLS. The results show that trust has an effect on attitudes; subjective attitudes and norms affect intentions; perceived behavioral control has no effect on intention and behavior; intention influences behavior; and the perception of inefficiency has a negative effect on the relationship between intention and behavior. This paper contributes to the elaboration of the psychological factors affecting the behavior of bankers in implementing PLS. The implications of this paper for designing the strategies to improve the bankers' behavior in PLS financing are: the management must boost the bankers' confidence for the PLS financing benefits; the stakeholder’s social pressure is needed; the authority of bankers in implementing PLS financing needs to be increased; the bankers' access to the partner’s financial reports needs to be expanded; and the regulators need to give appreciation to Islamic banks that have a larger PLS portfolio.

Islamic banking, efficiency and societal welfare: a machine-learning, agent-based study

PurposeThis paper models the benefits of Islamic banking on the efficiency of the banking sector and on societal happiness. This paper aims to examine how the adoption of Islamic banking to various degrees affects economics outcomes.Design/methodology/approachThis study uses machine-learning tools to build a happiness function and integrate it in an agent-based model to test for the direct and indirect welfare effects of implementing Islamic banking principles.FindingsThis study shows that even though Islamic banking systems tend to reduce economic activity, financial stability and societal happiness is improved. Additionally, a banking sector using Islamic principles across all its members is better equipped to handle banking crises because contagion to both economic activity and societal welfare is greatly reduced. At the same time, adoption of the profit-and-loss sharing (PLS) paradigm by banks may also slow down economic growth.Research limitations/implicationsThe findings extend existing literature on the advantages of Islamic banking, by quantifying the welfare benefits of the PLS paradigm on happiness and financial stability.Originality/valueTo the best of the authors’ knowledge, this paper is the first to combine agent-based modelling with machine learning tools to examine the benefits of the Islamic banking model on financial stability, social welfare and unemployment.

Lender’s position in the profit and loss sharing Islamic finance: an analytical perspective of Izutsu’s hypotheses on “Islam” and “Hilm”

PurposeThere is a growing debate as to how Islamic financial institutions can increase the expansion of profit and loss sharing (PLS) finance instead of widely practiced markup finance. This paper aims to seek to argue that protecting lenders right is to be ensured if we expect to see the rise of PLS finance of Islamic banks.Design/methodology/approachThe paper draws upon the theorical contribution of Toshihiko Izutsu, who shows the derivation of the modern term Islam from its pre-Islamic root of hilm. Izutsu argues that a halim (Muslim or mu’min) possesses power and becomes altruist for fellow Muslim. This research takes this view to illustrate that Islamic lenders should be bestowed with economic and financial power for the expansion of PLS finance.FindingsThe authors show that Islamic financial system does not furnish required institutions conducive for expansion of PLS finance. The authors further argue that the practice of PLS should be based on an effective power retained by the lender to discipline the borrower, which is currently lacking in a typical PLS contract.Practical implicationsThe retention of the power by the lender does not necessarily breach maqasid al-shari’ah, so far as the power is managed upon the concept of hilm. This philosophical speculation, in the authors’ view, would contribute to bridge a gap between Islamic pragmatists and perfectionists’ view toward expansion of PLS finance.Originality/valueAlthough Izutsu’s explanation provides an important tool to argue that the altruistic behaver of halim can encourage the supply of participatory finance, this provision has not been adequately argued in the literature.

Exploring Determinants of Saving and Financing Aspects in Islamic Banks: An Insight from Indonesia

Savings and financing are two significant products of Islamic banking in Indonesia. This study examines the relationship between these two products and key macroeconomic factors. The data was gathered from the Central Bank of Indonesia (BI), the Financial Services Authority (OJK), and the Indonesia Statistics Bureau (BPS). The profit-sharing rate (PSR) and profit and loss sharing (PLS) were examined using a mixture of the addition and balanced average approaches, whereas the relationships among the variables were analyzed using Pearson’s and Spearman’s rank correlation coefficient tests. The findings show a statistically significant correlation between the investigated variables. It was discovered that interest rates, inflation, the consumer price index, the currency rate, and the stock price index all influence savings and financing. There was a negative association between savings and inflation, but there was no relationship between savings and profit-sharing ratios. These findings have policy development implications for Islamic banking in Indonesia in terms of savings and financing options.

Studi Literatur Skema Pembiayaan Lembaga Keuangan Mikro Syariah


 Financing schemes carried out by Islamic microfinance institutions continue to face challenges with the development of these institutions. A unique financing scheme with a prohibition on interest-based financing. The literature study used in this study used data in the form of Scopus indexed articles. Data containing content related to financing schemes for Islamic financial institutions was selected with a total of 18 articles. Furthermore, the stages of research are carried out as described in the research methodology. The findings of this study describe two main financing schemes carried out by Islamic financial institutions, namely: The first scheme is Profit and Loss Sharing (PLS) with mudharabah, musyarakah, muzara'ah and muzaqat contracts. The second scheme is non-PLS, which includes murabahah, bai' salam, ijarah and qard al-hasanah. Other findings in this study describe Islamic MFI financing schemes in several countries such as: in Indonesia there are two financing principles in Islamic MFIs, namely equity financing using PLS mechanisms such as: mudharabah and musyarakah. The second principle is debt-based financing using a non-PLS mechanism. While in Bangladesh the Grameen Bank model was developed, but it is considered not to meet Islamic sharia because it still uses interest. Furthermore Kalanjiam financing scheme in India which is quite successful. Finally, in Latin America and Africa, the village bank model has been successfully implemented in accordance with sharia in Jabal al Hoss, Syria.
 Keywords: LKMS, Financing, Literature Study

Tantangan Regulasi Keuangan Bagi Perkembangan Perbankan Islam:


 The literature study of this article aims to analyze the challenges that must be considered by financial regulators, especially for Islamic financial institutions (Islamic banking). Literature study through content analysis by discussing the book Intermediate Islamic Finance by Nabil Maghrebi, Abbas Mirakhor, and Zamir Iqbal Wiley publisher in 2016 and 30 articles from emerald and direct science publisher which is the world's best journal publisher with a scopus index. The results of the content search found seven challenges in financial regulation, namely the calculation of profit and loss sharing (PLS) still referring to the interest system, the practice of implementing contracts overshadowed by conventional contracts, capital and minimum liquidity regulations still referring to general regulations, regulatory indicators in assessing efficiency still referring to in the general (conventional) model, weakness of regulations requiring Islamic financial institutions in and supervision, weakness of regulatory control in implementing good corporate governance, weaknes of sharia law courts dealing with violations of sharia law. Financial regulations have not fully sided with Islamic banking (sharia). Financial regulations must continue to be adjusted and rearranged so that Islamic banking can develop and develop in a healthy manner with conventional banking and be resilient in the face of crises.
 Key words : challenges, finance regulation, islamic banking

Equity Financing, Debt Financing, and Financial Performance in Islamic Banks

This research aims to determine the effect of bank size (SIZE), profitability (ROA), efficiency (EFF), non-performing finance (NPF), interest (INTR), and inflation (INFL) on profit and loss sharing (PLS) financing (equity financing), and sale-purchase (SP) financing (debt financing) Islamic banks in Indonesia. Furthermore, monthly Islamic bank data in June 2014 to July 2020 was used. The autoregressive distributed lag (ARDL) method was used to determine the short and long-term effects of the independent variables on the financing variable. The results showed that ROA and EFF have a positive effect on MRF but ROA and EFF have a negative effect on MDA and MSF. NPF has a positive effect on MDF, but has a negative effect on MRF. Meanwhile, SIZE has a negative effect on MDF, MDA, MRF, and MRA. The INTR has a negative effect on MDA, MRF, and MRA. The implication of this research is that financialperformance has more influence on debt financing compared to equity financing of Islamic banks in Indonesia.

Moral hazard and its implications on health insurance sector – overview of impact of COVID-19 pandemic

Kenneth J. Arrow’s disruptive work, 'Medical Uncertainty and Welfare Economics’, published in 1963, was one of the first studies investigating the effects of moral hazard on the healthcare sector. Since then, countless works exploring that subject have been published. The history of research on moral hazard in medical insurance shows that this concept is defined differently in other areas of the economy than healthcare. Purpose – The proposed work is an attempt to understand and conceptualize the moral hazard in health insurance. As uncommon circumstances marked 2020, we now consider health insurance through the impact of the SARS-CoV-2 pandemic. This work discusses the results of an investigation of the impact of moral hazard and its implications on the health insurance sector during COVID-19. Research method – The author designed and conducted a study that presented several metrics involving the distribution of medical expenditures, the effect of price on medical care consumption, the PLS (profit and loss sharing) concept, and their mediating and moderating effect on moral hazard in the insurance sector. Results – There is a statistically significant and very strong relationship with a positive sign (β = 0.79; p <0.001) between the price effect and the moral hazard. The analyses show also that the price effect coexists statistically with the PLS, and the relationship between these variables is moderately strong and positive (β = 0.79; p <0.001). Originality – Insignificant relationship between the PLS and the moral hazard can be seen while the price is entered into the model (β = 0.03; p = 0.450). The lack of mediation could confirm that the price effect plays a major role in a moral hazard.

Financing Entrepreneurship in Post-Covid-19 Era: The Islamic Banking and Finance Option

Entrepreneurship is the bedrock that propels the development and growth of the economy. Unfortunately, access to finance is the major obstacle faced by entrepreneurs. Conventional banking does not support innovative and dynamic ideas driven by entrepreneurs. They are required to pay back loans with interest collected from conventional banks without regard to the success or failure of their venture. Islamic bank has come to the rescue of entrepreneurs through its inventive Profit and Loss Sharing (PLS) products and services. The objective of this study was to highlight features and products of Islamic banking and finance that are suitable for entrepreneurship. The study was a conceptual and adopted method of reviewing existing literature on financing entrepreneurship and its challenges. The authors concluded that Islamic finance provides a better alternative to conventional finance and provides stability and sustainability to entrepreneurs. The study recommended that government should support and encourage entrepreneurs to cooperate with Islamic banks. There should be continuous public education, especially of the youth on skill acquisition through entrepreneurship centers. The study has implications for the government, policymakers and other stakeholders responsible for providing palliatives to the citizens in the post-covid-19 pandemic. Islamic finance is more aligned and supportive of entrepreneurship, especially through its profit and loss sharing financing.

Cyclicality of bank credit growth: Conventional vs Islamic banks in the GCC

Using a panel of 104 banks from the six Gulf Council Countries, we investigate the cyclicality of credit growth with regard to the discrepancies between Islamic banks and conventional banks. We found that Islamic banks are pro-cyclical and have higher credit growth compared to conventional banks. Indeed, the Profit and Loss Sharing (PLS) mechanism helps Islamic banks not to curb their credit growth during adverse economic conditions. We tested the role of the growth rate of market sentiment and found that positive market sentiment leads to higher bank credit growth. Furthermore, we investigate the impact of several bank-specific variables on bank credit growth and discuss to what extent diversification and the investment portfolio reshape the credit growth process.

A BAYESIAN GAME FOR A PROFIT AND LOSS SHARING CONTRACT

This paper presents a Bayesian Game model for a profit-and-loss sharing (PLS) contract. We develop our model into two parts, namely the model for non-social bank and the model for social bank. We propose the model to reduce adverse selection problem in offering a PLS contract. The Bayesian game starts with an incomplete information. Islamic banks do not know exactly what type of agent is applying for a PLS contract, efficient or non-efficient, the information of the bank is incomplete. In Bayesian game, we assume that the Islamic Bank assigns the agent type with a prior probability. Determination of the profit-sharing ratio of the contract will be discussed. We look for the Bayesian Nash equilibrium of the game in our model which is considered a solution. We show that the bank offers an interesting but risky contract to the agent if the bank assigns that the agent is efficient with a high probability, otherwise the bank offers a less risky contract to the agent if the bank assigns that the agent is a non-efficient agent with high probability. The results can be considered by Islamic banks to reduce the adverse selection problem in PLS contract.