What is Wrong with Islamic Economics?

What is Wrong with Islamic Economics?

Analysing the Present State and Future Agenda

Studies in Islamic Finance, Accounting and Governance series

Muhammad Akram Khan

What is Wrong with Islamic Economics? takes an objective look at the state of the art in Islamic economics and finance. It analyses reasons for perceived stagnation and also suggests a way forward.

Chapter 18: Problems of profit–loss sharing

Muhammad Akram Khan

Subjects: asian studies, asian economics, economics and finance, asian economics, financial economics and regulation, islamic economics and finance, money and banking


The theory of Islamic banking visualizes profit–loss sharing (PLS) as an ideal form for financing. Several Muslim scholars have expressed dissatisfaction in the contemporary practice of Islamic banks because they do not follow profit–loss sharing as a dominant mode of finance. They have adopted other modes of finance, like mark-up (murabaha), leasing (ijara), cash advances for the purchase of agricultural produce (salam) and cash advances for the manufacture of assets (istisna’). These modes of finance provide a fixed return on banks’ capital and are in compliance with Islamic law. We shall examine the practice of Islamic banks in the subsequent two chapters. In this chapter we aim to show that the pristine theory of Islamic banking that recommends PLS as an ideal form of financing has several insurmountable obstacles. Insistence on PLS may also defeat the very purpose for which Islamic banking was started in the first instance.

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