Open AccessA Literature Review of Financial Contracting Theory from the Islamic and Conventional Overviews: Contributions, Gaps, and Perspectives
Author(s) -
Hassanuddeen Abdul Aziz
Publication year - 2019
Publication title -
maǧallaẗ ǧamiʹaẗ al-malik ʹabd al-ʹazīz. al-iqtiṣād al-islāmī
Language(s) - English
Resource type - Journals
ISSN - 1018-7383
DOI - 10.4197/islec.32-2.2
Subject(s) - adverse selection , enforcement , constraint (computer aided design) , debt , principal (computer security) , order (exchange) , equity (law) , economics , principal–agent problem , moral hazard , finance , participation constraint , business , microeconomics , incentive , political science , computer science , engineering , mechanical engineering , law , operating system , corporate governance
This paper discusses the financial contracting theory from the conventionaland Islamic perspectives. It provides an overview of the contributions in this field anddiscusses the gaps in the literature. In addition, it proposes two relevant approachesnamely the financial contracting enforceability approach and the adverse selectionanalysis in order to deal with conflicts of interest among economic agents. The firstapproach is meant to assess the contract that maximizes the value of the firm subject tothe enforcement constraint for the agent and the participation constraint for theprincipal. The second approach considers an adverse selection framework in order todetermine the principal’s subjective perception of the risk of default when equity anddebt financings are used. Similarly, it suggests avenues for future research. Firstly, itcalls for a deeper understanding of venture capital as a potential model of mushārakah.Secondly, it puts stress on the importance of examining crowd-funding functioningfrom the principal-agent point of view. Thirdly, it sheds some light on the necessity toyield financial explanation about the excessive use of murābaḥah instead of ijārah. In anutshell, we assume that the alternative approaches can be adopted to provide relevantinsights regarding the proposed future researches.