New Perspectives on Profit Sharing and Risk
Edited by Munawar Iqbal and David T. Llewellyn
Chapter 6: How informal risk capital investors manage asymmetric information in profit/loss-sharing contracts
Iqbal 02 chap 5 9/11/01 3:09 pm Page 111 6. How informal risk capital investors manage asymmetric information in profit/loss-sharing contracts Mohammad Abalkhail and John R. Presley 1. INTRODUCTION Islamic banks have existed for almost 30 years but the use of profit/loss-sharing methods is not yet widely established. The constraints on the development of these methods are believed to be caused not only by the asymmetric information that the contract involves but also by the nature of banks as short-term finance institutions. It is argued here that the practices of profit/loss-sharing (PLS) contracts in the informal markets could provide lessons for the application of these contracts in Islamic financial institutions. Recently, informal venture capital investors have been recognized as an important source of finance for small and mediumsized enterprises (SMEs) through the application of venture capital financing. Unfortunately, very little research, if any, has been devoted to understanding how these investors fund particular investments in Muslim countries. In the conventional paradigm, capital markets are perfect. Individuals and firms are assumed to be able to obtain as much funding as they want at the market interest rate. The theory also often assumes that capital markets are informational efficient, when prices perfectly reflect all the available information (Stiglitz, 1985). Fama (1970) introduced a model of capital markets in which he assumed the existence of three types of efficiency: strong form, semi-strong form and weak form. The strong form exists when the value of a firm is a reflection of all information...
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.