Mapping the Knowledge Landscape of Profit and Loss Sharing in Islamic Finance

Abstract

The two-tier Modaraba theory encourages Islamic banks to deal with participatory modes of financing at both the liabilities and asset levels, allowing for a fair and equitable wealth distribution. The proponents of the theory take it to the extent that they term other modes of financing, such as Murabaha or Ijara to be abominable or less preferable. According to them, these other modes of financing do not promote the same level of equality and fairness and lead to social injustice and inflation and hence are against the Maqasid al-Sharia. On the other hand, practitioners focus on maximizing profit while adhering to Islamic principles and legal requirements with lesser heads to social justice or risk sharing. This gap between theory and practice had been observed contentiously, leading to criticisms of Islamic finance. This study presents the potential determinants of these opposite poles of ideology and discusses the antecedents. It has been suggested that the application of this theory should be promulgated in the wide perspectives of religio-cultural norms that shape the acceptance of risk sharing within a society otherwise the Islamic banking industry may face the issue of financial stability.