Iman Sugema_abstract_1332009

Iman Sugema
Toni Bakhtiar
Jaenal Effendi
International Center for Applied Finance and Economics (InterCAFE)
Institut Pertanian Bogor
Kampus IPB Baranangsiang, Jl. Padjajaran, Bogor 16144
Korespondensi dengan penulis:
Iman Sugema : Telp.+62 251 837 7896
In this paper we attempted to answer a fundamental question whether banking system based on a profit-loss sharing (PLS) could improve welfare than an interest based banking system by developing a rigorous theoretical modeling. In the framework of production technology we firstly showed that under production certainty and competitive market both PLS and interest based systems were efficient and right. However, under an uncertain situation due to a productivity shock, we proved that only the PLS system was right. We verified our result by quantifying the effects on income distribution for both lender and borrower. Two indicators, namely the standard error of distribution and gain ratio were considered. We showed that the conventional credit market led to a serious income distribution problem where lenders did not enjoy the variability in income and did not bear any risk, but in contrast, borrowers bore all the risk. On the other side, PLS system shared the risk between lenders and borrowers. In the end of the analysis, we proposed an instrument that would improve the performance of a PLS system from lenders perspective by introducing a so-called risk pooling mechanism.
Key words: profit-loss sharing, Islamic banking, income distribution, risk pooling agent.

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