Table of Contents

Handbook on Islam and Economic Life

Handbook on Islam and Economic Life

Edited by M. Kabir Hassan and Mervyn K. Lewis

Handbook on Islam and Economic Life is a unique study, one of the first of its kind to consider Islam within a broader economic sphere. Covering a wide breadth of topics and research, it explores how Islam impinges upon and seeks to shape major aspects of economic life including economic organisation, business and management, finance and investment, charity, mutuality and self-help, and government. It concludes by analysing the link between religion and development, the present economic situation in Arab countries and the causes of underdevelopment in Muslim countries.

Chapter 18: Moral hazard in Islamic profit–loss sharing contracts and private equity

Ouidad Yousfi and M. Kabir Hassan

Subjects: asian studies, asian economics, economics and finance, asian economics, islamic economics and finance


The chapter presents a discussion of the financial literature on Islamic private equity (PE) financing modes under moral hazard. We focus on Mudarabah and Musharakah financing methods based on a contractual approach and analyze how and when profit and loss sharing (PLS) financing methods can solve asymmetric information problems under moral hazard relying on agency models. The models show some interesting results. First, Mudarabah financing provides powerful incentive schemes to the entrepreneur. As the Islamic PE fund is not actively involved in the project and the project success depends on the entrepreneur’s effort, it leads to the first best solution. Second, Musharakah financing cannot solve the moral hazard problem. One explanation could be the fact that the project is jointly funded by the two parties and that both of them provide non-contractible efforts. Accordingly, they have to concede a share of their revenue to increase the effort incentive of the other party, which diminishes their own incentive to provide effort.

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.

Further information