Incentive Structure of Financing a Project: An Islamic Finance Approach

Authors

  • Fayaz Ahmad Lone Prince Sattam Bin Abdulaziz University
  • Abdul Quadir BITS Pilani Hyderabad

Abstract

Financing is an important component in any project. Without finance, it is impossible to run any project as it is considered the lifeblood of the business. But due to the presence of predetermined rate of interest, economists have provided alternative approach for financing the project. In this paper a model using Profit and Loss Sharing (PLS) system and comparison of it with the conventional financing model is developed. Thrust in this paper is towards establishing a new theoretical reasoning why PLS system is less frequently used in Islamic banking in terms of net worth of the borrower. It has been argued that agency problem like moral hazard is still acute in PLS system. An idea has been discuss to solve this problem using game theoretic tool.

Keywords: Entrepreneur, Financing, Project, PLS, Model

JEL Classifications: D92, L26

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Author Biography

Fayaz Ahmad Lone, Prince Sattam Bin Abdulaziz University

College of Business Administration

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Published

2017-01-13

How to Cite

Lone, F. A., & Quadir, A. (2017). Incentive Structure of Financing a Project: An Islamic Finance Approach. International Journal of Economics and Financial Issues, 7(1), 87–91. Retrieved from https://econjournals.com/index.php/ijefi/article/view/3324

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