Profit And Loss Sharing Research Articles

Fundamental Requirements for Building an Islamic Venture Capital Model

The aim of this paper is to demonstrate the fundamental requirements for building an Islamic Venture Capital. There is an extremely high youth unemployment rate in Islamic Countries. This is due to few numbers of SME companies and inability of governmental sector to offer jobs for all youth. Also Conventional banks finance big companies with long history of operation and refuse to finance new companies. So this new companies do not have any institution to support them. Islamic banks have inability to make a lot an adequate profit and loss sharing (PLS) financing, because the nature of Islamic banks as depository institutions. There is a need for different type of institutions that can play this role and offer PLS financing on a wide scale. The Western practice of VC had some violation to Shariah , so we have to develop a model of venture capital that is fully compliant with the Shariah principles. The paper discuss Venture Capital Investments and its Compatibility with Islamic Principles of Investment. Also we discuss Similarities and difference between Islamic Banks and VC investments to confirm that Islamic bank can’t be used as a replacement of VC investment. Moreover the paper explains the current financing methods Used by VC investments and their compatibility with Shariah Rules. We proposed structure for an Islamic Venture Capital Model. the paper highlighted the challenges facing VC in Islamic countries and providing an approach to overcome these challenges. Finally, the paper explores the importance of governmental support to VC investments in the Islamic countries.

Mathematical assessment on the robustness of PLS mechanism against adverse selection and moral hazard problems

Most of conventional banks conduct their banking and financial systems under interest scheme, which is vulnerable to asymmetric information problems. This paper provides a mathematical assessment on the robustness of profit and loss sharing (PLS) based contract against asymmetric information problems. In particular we show that PLS scheme has an inherent mechanism to overcome adverse selection and moral hazard problems. Specifically, it will be shown that PLS contracts is relatively immune to the problems. This is due to the so called incentive compatible mechanism provided by PLS contracts. We also propose a risk-pooling mechanism to seize the risk exposure. Mathematics Subject Classification: 91B02, 91B28, 91B44

Mudarabah Financial Sharing ( MFS )

Mudarabah Financial Sharing (MFS) provides an opportunity for depositors to participate in commercial (buy and sell) projects. This method is a financial subsystem of Rastin Profit and Loss Sharing (PLS) banking system and in this connection, the instructions, organizations; working procedures, electronic bases, contracts and related forms are highly similar to Rastin PLS base system. The basis for determining rate of return in this kind of sharing is the yield rate in real sector economy and bank receives commission for providing capital management services for depositors as an agent or attorney, and works as an intermediary of funds to allocate depositor’s funds into Mudarabah commercial activity of entrepreneur. Bank distributes the outcome of the project to depositors and agent/entrepreneur (Mudarib). MFS uses the financial innovations of “Mudarabah Certificate” and “Periodic Mudarabah Certificate”. Depositor receives a Mudarabah Certificate when joins to a special Mudarabah project that can be transacted in Rastin Certificate Market. Profit or loss share is paid to the latest holder of certificate after the end of project. Profit share settlement between the Mudarabah Certificate holder and Mudarib (agent or entrepreneur of the project) will be based upon neoclassic theory of shares of factors of production, and specifically on the Euler theorem of income distribution.

Rastin Profit and Loss Sharing ( PLS ) Base System

The rate of return in Rastin PLS Banking is calculated upon the basis of real actual profit obtained from real economy; and prefixed interest rates are eliminated. The Base System of Rastin PLS Banking constitutes the main processes and general regulations of Rastin PLS Banking. On behalf of depositor, bank invests his deposit in one of Rastin PLS products and receives a Rastin Certificate for the related project. Bank allocates the depositors’ financial resources to entrepreneur of the project and supervises his activities; and finally distributes the profit/loss of the project according to the compiled regulations and instructions and receives commission from both sides for offering this capital management service. In Base System of Rastin PLS Banking, Partnership (Musharakah) Certificate is used in finitude projects and Subscripted (Pazireh) Certificate is used for infinitude projects.

FRACTIONAL RESERVE BANKING : SEBUAH REPRESENTASI EKONOMI SEMU (TINJAUAN EKONOMI ISLAM)

This article tries to explain that fractional reserve banking is a system full of risks, even threatening the stability of the economy. Its implications led to many phenomena of the crisises, the most obvious exampleis the occurrence of the great depression in the 1930's. Related to this, Islam considers that fractional reserve banking is a great dengarous system, so that it has been considered contrary to the principles and values which brought by Islam. Concretely Islamic Bank offers a very better system with the system profit and loss sharing (PLS). Its implication is very positive, the stability of the economy is relatively stable and can stimulate the investment climate without the fragile aspects of liquidity, because the 100% reserve banking is in a must.

The entrepreneurial role of profit‐and‐loss sharing modes of finance: theory and practice

PurposeThe purpose of this paper is to find out whether profit‐and‐loss‐sharing (PLS) modes of finance have become viable financial alternatives for entrepreneurship and enterprise development or whether they are still merely an academic endeavour.Design/methodology/approachThe method employed in this study is a combination of extensive examination of existing literature and critical analysis of the outcomes of several relevant studies in order to establish the convergent/divergent relationship between theory and practice in Islamic finance.FindingsBased on available bank level and country level data, the paper presents evidence that the divergence between the theoretical perspective and the practical implementation of PLS modes of finance is widening to an alarming level. The paper argues that this divergence by no means can be attributed to the construct and the disposition of the PLS instruments; it is rather the product of the negative attitude and the lack of proper infrastructure of the majority of Islamic financial institutions (IFIs) – and their (reluctance) to accommodate entrepreneurship through the genuine implementation of PLS instruments.Practical implicationsThe findings of this study draw attention to the visible shortage in practical research pertaining to the application of the principles of PLS modes in financing entrepreneurial activities. The study suggests that the relevance, the direction and the resilience of future research undertakings should be focused on bridging the increasing gap between the prescribed role of PLS instruments and the actual performance of IFIs in promoting socio‐economic development through the creation of a vibrant entrepreneurship sector.Originality/valueThe paper points out that while PLS models dominate the theoretical literature on Islamic finance, and whereas the majority of mainstream Muslim scholars and financial authorities overwhelmingly judge PLS models as being compelling financial options and practical developmental tools, the reality of Islamic finance paints a different picture. The paper emphasizes the need for IFIs to conform to their own charters and assume a leading developmental role in order to realize al‐Shariah objectives (maqasid al Shariah). The paper identifies key research areas that warrant the attention of keen researchers with interest in the field of Islamic finance and entrepreneurship development.

Perkembangan Bank Syariah PAsca UU 21 Tahun 2008

<em>Islamic banking system still grows continuously over time in various countries, including Indonesia. Although it was a bit late, if it was compared to another, Islamic banking system began to develop in Indonesia in the early 1990’s. At that time, Islamic banking, however, was still running with its all characteristics based on the rule without adequate law. Islamic banking began to be recognized legally as the legalization of UU Perbankan 1992, and it was followed by its deregulation in 1998, and Islamic banking in Indonesia finally got its full legality after legalization of UU Perbankan Syariah in 2008. UU Perbankan Syariah as a new law certainly has significance for the development of Islamic banking in Indonesia. Based on the BI statistics, Islamic banks, especially Bank Umum Syariah after legalization of UU Perbankan Syariah, has been growing significantly, among in the number of banks, total assets, and total financing. Unfortunately, the growth of PLS (profit and loss sharing) doesn’t occupy a significant position in total financing of Islamic banks, whereas PLS is core system in Islamic banking.</em>

Evaluating The Social And Development OrientedPerformance Of Meezan Bank

Islamic banking with its unique feature of profit and loss sharing (PLS) is promoted under the Islamic economic paradigm with a promise to internationalise the aspiration of Muslim around the globe to be authentic and true to their tradition. Consequently, provide the capital base to achieve economic development in the Muslim world with the overall objective of human well being and social justice according to maqâsid al Shari'ah. Our study of Meezan bank in Pakistan shows that only a negligible portion of financing activities of the bank is strictly PLS based. Furthermore, financing across different industries are contributing to financialisation of the economy rather than real economy

TEORI BAGI HASIL (PROFIT AND LOSS SHARING) DAN PERBBANKAN SYARIAH DALAM EKONOMI SYARIAH

Profit sharing (Mudharabah) is a monetary instrument of Islamic finance as interest is a monetaryinstrument of conventional economics. Both have extreme one another paradigm. Results have a theoreticalbasis for the profit and loss sharing (PLS). PLS theory was built as a new offer on the outside of the systemwhich tend not to reflect the interest of justice (injustice / dzalim) due to discrimination against the sharingof risks and profits for economic actors. Profit-loss sharing means profits and or losses that may arise fromeconomic activities / business borne together. In the instrument for the results are not fixed and there is a certainreturns as interest, but do profit and loss sharing based on the real productivity of the product. Therefore thesystem to better reflect the outcome of justice. Profit sharing as a monetary instrument has been frequentlyapplied in studies of Islamic economics, both from the supply side (financing) or the supply side economicsand/or demand-side economics.

The Behavior of Conventional and Islamic Bank Deposit Returns in Malaysia and Turkey

This paper examines the empirical behavior of conventional bank deposit rates and the rate of return on retail Islamic profit-and-loss sharing (PLS) investment accounts in Malaysia and Turkey, using monthly data from January 1997 to August 2010. The analysis shows that conventional bank deposit rates and PLS returns exhibit long-run cointegration and the time-varying volatility of conventional bank deposit rates and PLS returns is correlated and is statistically significant. The pairwise and multivariate causality tests show that conventional bank deposit rates Granger cause returns on PLS accounts. These findings have policy implications in terms of price stability and financial stability.

Murabaha Financing vs. Lending on Interest

It is frequently argued and claimed that Islamic Banking and Finance (IBF) is an “asset based” industry i.e., all forms of financing within the industry should involve some asset(s). It is further argued that the real or fundamental form of financing in Islamic doctrine is based on PLS (Profit and Loss Sharing) concept or arrangement, which is almost insignificant in practice. The bulk of financing deals executed in IBF industry are based on secured forms of financing (akin to conventional debt form of financing) particularly the famous Murabaha Financing devised by contemporary Islamic legalists.The financial outlook of Islamic Murabaha Financing and conventional debt/loan financing is the same; there is no difference from professional’s or banker’s point of view, then what makes them different principally i.e., where does the difference lies for the Islamic permissibility of the former one and the impermissibility of the other. I have argued that the difference is not financial at all but economic in nature.

The Behavior of Conventional and Islamic Bank Deposit Returns in Malaysia and Turkey

This paper examines the empirical behavior of conventional bank deposit rates and the rate of return on retail Islamic profit-and-loss sharing (PLS) investment accounts in Malaysia and Turkey, using monthly data from January 1997 to August 2010. The analysis shows that conventional bank deposit rates and PLS returns exhibit long-run cointegration and the time-varying volatility of conventional bank deposit rates and PLS returns is correlated and is statistically significant. The pairwise and multivariate causality tests show that conventional bank deposit rates Granger cause returns on PLS accounts. These findings have policy implications in terms of price stability and financial stability.

Islamic Banking and Economic Development

This paper theoretically investigates the effectiveness of Islamic banking & finance concepts and concludes that in addition to the traditional prohibitions, Islamic banks should be aware of the immoral defrauding and selfish sales behaviour that took place in Western financial institutions, which only protected banks’ interests and the bonuses paid to management. In addition and through discussing developed countries banking practices in the 19th century, it has been concluded that the Islamic PLS (profit and loss sharing) contracts would have helped accelerate economic growth by its force of directing funds into profitable industries that increases banks’ cash flows and market confidence.

The Global Financial Crisis, Risk Management and Social Justice in Islamic Finance

The most salient values of the Islamic financial system are fairness and socio-economic justice. The exuberance of Islam’s uncompromising commitment to the well-being of humankind goes beyond its caring for existing generations to ensuring a sustainable future for generations to come. This is evident by giving utmost priority to the environment and preserving earth’s valuable–yet limited–endowments and resources, and by limiting public borrowings to available resources hence freeing future generations from the burden of debt. The Islamic system of production and finance based on profit-and-loss sharing (PLS) is more efficient and equitable in distribution of wealth and income. Allocation of funds under risk sharing will be based on the viability and expected profitability of the proposed entrepreneurial undertakings rather than on the creditworthiness of competing entrepreneurs. Furthermore, risk sharing offers both entrepreneurs and investors incentives to be truly engaged in productive economic activities, wherein entrepreneurs will be encouraged by the prospect of seeing their ideas transformed into business entities, and financers will be obliged to assess the risk involved more cautiously, and effectively monitor the use of funds by the entrepreneurs. The appropriate implementation of such partnership contracts increases the likelihood of business success, injects more discipline into the financial market by reducing excessive lending, and ultimately will have positive implications for the socio-economic well-being of society at large.

PERILAKU PERMINTAAN UANG DALAM SISTEM MONETER GANDA DI INDONESIA

The cotemporary dual monetary system is characterized by an interest system in conventional system and the profit-and-loss sharing (PLS) system in Islamic system, where each of them has a different behavior in influencing the money demand and the monetary stability. This study analyses the components of money demand under both the conventional and Islamic financial system in Indonesia, using a Vector Auto Regression (VAR) and Vector Error Correction Model (VECM) methods.The results show that in Islamic system, PLS return negatively correlated with all Islamic demand for money components (currency, Wadiah demand deposit, Mudharabah saving deposit, and Mudharabah time deposit). While in conventional system, interest is negatively correlated with the demand for currency, the demand deposit, and the saving deposit, but positively correlated with the demand for time deposit. The Islamic demand for money stabilizes quiclier to respons the shock from other variables compare to conventional system. Moreover, the interest rate contributes 20%-29% in the conventional demand for money variation, while in PLS system the return almost has no role on Islamic money demand variation. Our research also shows that the savings deposits in Indonesia have the characteristics of the demand deposits, hence preferably included in M1 instead of in M2.These findings suggest the monetary authority to gradually shift their mindset from the conventional monetary operation to the dual monetary operation and explore further the possibility of using PLS return as the “policy rate” benchmark to achieve the principal objectives in maximizing distributive social welfare and justice, as well as minimizing inefficiency.JEL Classification: C32, E31, E41, E52Keywords: Permintaan Uang Konvensional, Permintaan Uang Islam, Sistem Keuangan/Perbankan Ganda, VAR/VECM

Islamic banking: Interest-free or interest-based?

A unique feature of Islamic banking, in theory, is its profit-and-loss sharing (PLS) paradigm. In practice, however, we find that Islamic banking is not very different from conventional banking. Our study on Malaysia shows that only a negligible portion of Islamic bank financing is strictly PLS based and that Islamic deposits are not interest-free, but are closely pegged to conventional deposits. Our findings suggest that the rapid growth in Islamic banking is largely driven by the Islamic resurgence worldwide rather than by the advantages of the PLS paradigm and that Islamic banks should be subject to regulations similar to those of their western counterparts.

The case against interest: Is it compelling?

AbstractThe entire international financial system is now based on interest in spite of its prohibition by four of the world's major religions. However, the Muslim world is now trying to replace the conventional interest‐based system with one where there is greater reliance on profit‐and‐loss sharing (PLS) and where the debt is created not by pure lending and borrowing but by the sale or lease of real assets. The introduction of a new system raises the question of whether the case against interest is so compelling as to justify the difficulties and risks associated with it. This article is an attempt to answer this question. It argues that the main factor underlying the financial crises experienced by a large number of countries around the world over the last few decades is the excessive expansion of debt. The primary reason for this is the lack of adequate discipline in the financial system. The PLS system should help ensure greater discipline by making the bankers more careful in lending and the depositors more vigilant about the health of their banks. Asset‐based debt should further help by not allowing the debt to exceed the growth of the real economy. The introduction of such a discipline carries the potential of helping realize not only greater stability, but also greater efficiency and equity in the financial system. © 2007 Wiley Periodicals, Inc.

MENCARI SOLUSI RENDAHNYA PEMBIAYAAN BAGI HASIL DI PERBANKAN SYARIAH INDONESIA

The lack of the profit and loss sharing (PLS) financing or the domination of the Non-PLS financing, especially murabahah, is a global phenomenon in Islamic banks everywhere. This paper analyses the problem in Indonesia using Analytic Network Process (ANP) methodology, preceeded with a focus group discussion (FGD) and an indepth interview with scholars and practitioners of Islamic banking to fully understand the problem and to develop an appropriate ANP network.The cause of this problem can be grouped into four aspects, namely 1) internal of the Islamic bank; 2) customer; 3) regulation; and 4) government and other institutions. This research finds that the cause of the lack of PLS financing of Islamic banks in Indonesia can be summed up into two main causes from internal and regulation aspects, namely the lack of understanding and quality of human resource (Islamic bankers) and the lack of supportive regulations. The suggested solution is to increase the understanding and the quality of human resource by setting the minimum budget for training and education, implementing the insentive or subsidy system, setting the minimum standard for managers of Islamic banks through periodical fit and proper test, conducting training for short term needs, and encouraging the establishment of Islamic economic and banking education institutions for long term needs. Other suggested solution is to give support through regulation by reviewing the non supporting regulation, such as the collectibility classification of PLS financing, and developing incentive system to increase PLS financing. Moreover, the most effective policy strategy to overcome the problems of Islamic banks is by implementing directed market driven strategy, where policies are intended to direct the development of Islamic banks to stay on its syariahtracks towards the desired development goals.JEL: C49, E58, G21, L22Keywords: ANP, Bank Syariah, Islamic Bank, Bagi Hasil, Profit and Loss Sharing

Islamic Banking: Interest-Free or Interest-Based?

A unique feature of Islamic banking, in theory, is its profit-and-loss sharing (PLS) paradigm. In practice, however, we find that Islamic banking is not very different from conventional banking. Our study on Malaysia shows that only a negligible portion of Islamic bank financing is strictly PLS-based and that Islamic deposits are not interest-free, but are closely pegged to conventional deposits. Our findings suggest that the rapid growth in Islamic banking is largely driven by the Islamic resurgence worldwide rather than by the advantages of the PLS paradigm and that Islamic banks should be similarly regulated as their western counterparts.

A capital adequacy framework for Islamic banks: the need to reconcile depositors’ risk aversion with managers’ risk taking

Conceptually, an Islamic bank has an equity-based capital structure, dominated by shareholders’ equity and investment deposits based on profit and loss sharing (PLS). There is no need for capital adequacy regulations if the Islamic banks are structured as pure PLS-based organizations. However, because of informational asymmetry and risk aversion by investors, there currently exist fixed claim liabilities on the Islamic banking balance sheets. This necessitates the imposition of capital adequacy requirements, which aim at maintaining systemic stability by achieving two fundamental objectives. First, capital regulations should protect risk-averse (assumed unsophisticated) depositors. This requires a minimum equity capital cushion and an optimal assets–liabilities composition. Second, capital regulations should give the right incentives to shareholders to promote prudent behaviour by the banks. This requires analysis of the effect of financial participation by shareholders on Pareto optimality, and analysis ...