•  
  •  
 

Abstract

Islamic Banking is based on the Islamic financial system. It is a banking system whose fundamental rules and regulations are established on Shariah laws i.e., Islamic jurisprudence originated from the Quran and Sunnah of the Prophet Muhammad peace be upon him. Its functions must comply with Shariah rules and must not violate any Shariah principle. The Islamic finance system is based on Profit-loss sharing financing namely, Musharakah and Mudharabah but there are numerous issues and challenges faced by Islamic bank during the implementation of Musharakah and Mudharabah financing contracts. The various paper has been revealed some of the internal and external factors in this context, but the study is still unexplored in Pakistan. This paper aims to highlight those obstacles factors that affect the application of Musharakah and Mudharabah financing by Islamic Banks in Pakistan. This paper is based on the critical analysis of the related literature on the concepts of Profit-loss sharing based financing by Islamic Banks. The finding suggests 4 (four) main factors which hinder the application of Musharakah and Mudharabah by Islamic bank in Pakistan namely high risk, lack of awareness, Regulatory constraint and Low rate of return. Finally, this paper concludes by making recommendations that may be adopted by Islamic banks and regulators to facilitate the promotion of Musharakah and Mudharabah Financing.

References

Abdouli, A. H. (1991). Access to Finance and Collaterals: Islamic Versus Western Banking Journal of King Abdulaziz University: Islamic Economics, 3 (1), 55-62.

Abdul-Rahman, A. et al. 2014. Failure and Potential of Profit-Loss Sharing Contracts: A Perspective of New Institutional, Economic (NIE) Theory. Pacific-Basin Finance Journal, 28, 136-151.

Aggarwal, R. K., and T. Yousef. 2000. Islamic banks and investment financing. Journal of Money, Credit and Banking, 32(1), 93-120.Ahmad, K. (2000). Islamic Finance and Banking: The challenge and prospects. Review of Islamic Economics, 9, 57-82.

Ahmad, M. 1947. Economics of Islam: A Comparative Study. Lahore: Muhammad Ashraf.

Ahmad, W. 2008. Islamic Banking in the United Kingdom: Opportunities and Challenges. Kingston Business School: Kingston University, London.

Akram. 1994. An Introduction to Islamic Economics. International Institute of Islamic Thought (IIIT).

Algaoud, L. M., and M. K. Lewis. 2007. Islamic critique of conventional financing. Handbook of Islamic Banking, 38.

Ascarya, A., and D. Yumanita. 2006. The Lack of Profit and Loss Sharing Financing in Indonesian Islamic Banks: Problems and Alternative Solutions.

Asghar, A., and T. Afza. 2013. The Efficiency of Modaraba and Leasing Companies in Pakistan. Middle East Journal of Scientific Research, 17 (3), 305-314.

Bacha, O. I. 1997. Adapting Mudarabah Financing to Contemporary Realities: A Proposed Financing Structure. The Journal of Accounting, Commerce & Finance, 1 (1).

Baele. L., M. Farooq, and S. Ongena. 2014. Of Religion and Redemption: Evidence from Default on Islamic Loans. Journal of Banking and Finance, 44 (6), 141-159.

Bashir, A. H. M. 1996. Investment Under Profit-Sharing Contracts: The Adverse Selection Case. Managerial Finance, 22(5/6), 48-58.

Beng Soon Chong and Ming-Hua Liu. 2009. Islamic Banking: Interest-Free Or Interest-Based?. Pacific-Basin Finance Journal, 17, 125–144.

Cheltenham, UK. Northampton, MA, USA: Edward Elgar.Khan, T. 1996. Practices and Performance of Mudarabah Companies: A case study of Pakistan’s Experience. Jeddah: Islamic Research and Training Institute, Islamic Development Bank, 37.

Dar, H. A., & Presley, J. R. (2000). Lack of profit loss sharing in Islamic banking: management and control imbalances. International journal of Islamic financial services, 2(2), 3-18.

ElGindi, T., M. Said, and J. W. Salevurakis. 2009. Islamic Alternatives to Purely

Capitalist Modes of Finance: A Study of Malaysian Banks from 1999 to 2006. Review Of Radical Political Economics, 41 (4), 516-538

Farooq, M., and M. M. Ahmed. 2013. Musharakah Financing: Experience of Pakistani Banks. World Applied Sciences Journal, 21 (2), 181-189.

Farooq, U. et.al. (2010). Profile Analysis of the Customers of Islamic Banking in Peshawar, Pukhtunkhwa. International Journal of Business and Management, 5 (11): 106-117.

Fink, A. 2019. Conducting Research Literature Reviews: from The Internet to Paper. Sage Publications.

Gafoor Abdul ALM. (1995) Interest-Free Banking. Berkanlaan 76, Netherlands: Appentec Publications,37-41.

Haque, N. U., and A. Mirakhor. 1986. Optimal Profit-Sharing Contracts And Investment In An Interest-Free Islamic Economy. International Monetary Fund Working Paper, WP/86/12.

Hooker, S. 2013. More than a Matter of Faith: The Factors that Shape Islamic Banking, Department of Political Science Carleton College Northfield,

Hooker, S. 2013. More than a matter of faith: The factors that Shape Islamic banking. Department of Political Science Carleton College Northfield, Minnesota.

Islam, T. 2005. Mechanics of Islamic banking. Islamic Banking: How Far Have We Gone

Iqbal, M., and D. T. Llewellyn. 2002. Islamic Banking and Finance: (New Perspectives on Profit-Sharing & Risk), Edward Elgar, Cheltenham, UK, Northampton, MA, USA.

Jouaber, K., M. Mehri. 2012. Agency Problems in Venture Capital Contracts: Islamic Profit Sharing Ratio As A Screening Device. Available At SSRN:

http://ssrn.com/abstract=2181416 or http://dx.doi.org/10.2139/ssrn.2181416.

Khalil, A. F. A. A., C. Rickwood, and V. Murinde. 2002. Evidence On Agency-Contractual Problems In Mudarabah Financing Operations By Islamic Banks. In M. Iqbal and D. T. Llewellyn (Eds.), Islamic Banking and Finance: New perspectives on profit-sharing and risk (57-92).

Khan, T. 1995. Demand For And Supply Of Mark-Up And Pls Funds In Islamic Banking: Some Alternative Explanations, IRTI, IDB, Jeddah, KSA.The Economist. 2001. Forced Devotion Series: Finance and Economics. February, 17, 76-77.

Khattak, N., and K. Rehman. 2010. Customer satisfaction and awareness of the Islamic banking system in Pakistan. African Journal of Business Management, 4, 662-671.

Kuypers, A. 2011. How is Dealt with The Agency Problem and What is The Role of The Board of Directors In It? http://arno.uvt.nl/show.cgi?fid=129369.

MacMillan et. al. 2008. Development in Islamic Banking: The Case of Pakistan.

Shinsuke, N. 2012. A Critical Overview Of The History Of Islamic Economics: Formation, Transformation, And New Horizons. Asian And African Area Studies, 11(2), 114-136.

Mirakhor, A., and I. Zaidi. 2007. Profit-and-Loss Sharing Contracts in Islamic Finance. In Hassan, M. K., & Lewis, M. K. (Eds.), Handbook of Islamic Banking (49-63): Edward Elgar Publishing.

Mishkin, F. S., and S. G. Eakins. 2011. Financial Markets and Institutions (7 ed.). Prentice-Hall.

Muneeza, A., and R. Hassan. 2011. Legal Obstacles in Shari'ah Corporate Governance of Islamic Financial Institutions in Malaysia. Journal of King Abdulaziz University: Islamic Economics, 24(2).

Mutalip, A., and A. Lutfi. 2009. Islamic Venture Capital and Private Equity: Legal Issues and Challenges. Global Financial Services and Islamic Banking, Azmi & Associates.Pakistan Islamic Finance Report. 2016. Innovation at Asia’s Crossroads

Qureshi, A. I. 1996. Islam And The Theory of Interest (1st ed.). Lahore, Pakistan: Muhammad Ashraf Publishers.

Rahman, T. 1999. Mudarabah and the Pakistan Perspective. Jeddah: Islamic Research and Training Institute-IDB.Rosly, S. A, & Zaini, M. A. M. (2008). Risk-return analysis of Islamic banks' investment deposits and shareholders' fund. Managerial Finance, 34(10), 695-707.

Saad Abul Sattar Al-Haram. 1990. Islamic Finance: The Experience Of The Sudanese Islamic Bank In Partnership (Musharakah) Financing As A Tool For Rural Development Among Small Farmers In Sudan.

Wilson, R. 2003. Regulatory Challenges Posed by Islamic Capital Market Products and Services. University of Durham, UK: IOSCO task force on Islamic capital market. Centre for Middle Eastern and Islamic Studies.

Yousef, T. M. 2004. The Murabaha Syndrome in Islamic Finance: Laws, Institutions and Politics. In C. Henry & R. Wilson (Eds.), The politics of Islamic finance. Edinburgh: Edinburgh University Press.

Zafar, S., and E. Nor. 2019. Determinants of ROI in Mudarabah & Musharakah Contracts in Pakistan: An Appraisal. International Journal of Business and Society, 20 (3), 1112-1129.

Download

Share

COinS