Can Islamic banking ever become Islamic?

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    Abstract

    This paper attempts to explain the dominance of asset side debt contracts in Islamic banks, even though many consider alternative Islamic joint venture (IJV) contracts to be the ideal Islamic financing mode. Theoretical models based on asymmetric information are used to argue that adverse selection and moral hazard alone cannot explain this phenomenon. The model is augmented with risk averse depositors to show that the emergence of asset side IJV could be deterred by Islamic banks liability side. This paper suggests that for IJV, affiliated venture capital and private equity might prove more successful institutions than banking.
    Original languageEnglish
    Pages (from-to)253 - 272
    Number of pages20
    JournalPacific Basin Finance Journal
    Volume34
    DOIs
    Publication statusPublished - 2015

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