The University of Wisconsin - Madison

This thesis, in three essays, discusses the absence of interest in Islamic financial transactions as the central feature of Islamic economics. Profit and loss sharing arrangements where risk is shared between lender and borrower replace traditional Western financial methods of lending. Moral hazard problems were believed to eventually cause a decline in the savings and investment rate. The author uses incentive theory in the first essay to formulate profit and loss sharing contracts between investors and for both moral hazard and adverse selection.

Iran has been the one Muslim nation to declare its intention to establish political and economic institutions according to strict Islamic principles.