City Research Online

Abstract

Profit and loss sharing (PLS) finance is highly emphasized in the literature of Islamic banking due to higher ethical objectives of Sharia. However, its limited practice at Islamic banks is an unsettled problem in the industry. While various studies explained the reasons for lack of PLS finance application, there is little research on its practical implementation. This thesis investigates the feasibility of PLS finance for its wider adoption by exploring various aspects of its demand and supply sides. It consists of three main research studies.
The first study empirically examines the importance, constraints, and applicability of PLS finance in the context of market forces, using a survey-based research method. The findings indicate strong support for Sharia and economic importance for PLS finance and identifying riskiness as a core constraint. Additionally, the research suggests that a policy of debt-limit intervention could enhance the applicability of PLS finance.
The second study explores various aspects of risk management for PLS finance, including risk type, role of creditworthiness, risk mitigation tools and agency problems. This study employs a case study method of a defaulted Sukuk complemented by a survey on risk management practices for PLS. The results reveal the absence of an effective risk management framework for PLS finance used by lenders, despite having diverse risk type and complex agency problems.
The final study investigates the role of PLS finance within an optimal debt-equity mix in firms. A theoretical model is applied to test the hypotheses related to tradeoff, pecking order and agency theories. The results reveal a surprisingly distinct role for PLS finance compared to other modes of financing in the capital structure theory, which has significant policy and academic implications.

Publication Type:	Thesis (Doctoral)
Subjects:	B Philosophy. Psychology. Religion > BP Islam. Bahaism. Theosophy, etc H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
Departments:	Bayes Business School > Bayes Business School Doctoral Theses Bayes Business School > Finance Doctoral Theses

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