Explanation for failure of profit and loss sharing banking

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Ezzati Morteza

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Journal Paper

Paper Information

Journal: Islamic Economics Year:2023 | Volume:23 | Issue:91 Page(s): 115-142

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Information Journal Paper

Title

Explanation for failure of profit and loss sharing banking

Author(s)

Ezzati Morteza | Issue Writer Certificate

Keywords

Profit and loss sharing

Belief

Interest

Profit

Usury

Islamic Banking

Abstract

This paper presents an explanation for why Profit and loss sharing banking not successful. Profit and loss sharing banking is an idea called non-interest banking or Islamic Banking. Although extensive studies have been conducted on it for more than 5 decades and many banks have been established and operated under the name of Islamic Bank or similar, this method still faces major challenges. For this method of banking, many problems have been stated. Due to these problems, most of the Islamic banks have tried to use other contracts and leave the Profit and loss sharing. But no theoretical explanation has been provided for this replacement. The purpose of this article is to provide a causal explanation for the non-development of this idea. The method of theoretical explanation is based on the basics of logic by presenting it in a diagrammatic and graphical way. The result is that based on rationality, the preferences of banks and beneficiaries of Profit and loss sharing contracts in all cases, at least for one party, create less benefits than contracts with fixed Interest, and this is the main factor for avoiding these contracts and moving towards fixed Profit contracts. Nevertheless, if religious faith causes people to accept non-usurious contracts with a higher percentage of cost, then also in this case believers prefer non-usurious (not cooperative) contracts.

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