Islamic banks and investment financing

Most of the financing provided by Islamic banks does not conform to the principle of profit-and-loss sharing. Instead, much of the financing provided by Islamic banks takes the form of debt-like instruments. Also, it appears that much of the 'lending' done by Islamic banks is secured this is in violation of a legal prohibition on collateral. This evidence suggests that the claimed benefits of Islamic banking may be somewhat overstated. Muslim countries currently do not seem to be in a situation in which a ban on interest increases social welfare. Although Islamic banks are or should be based on the profit-and-loss sharing principle, considering the economic environments in which they operate, using only this type of financing may not be possible. Moral hazard problems suggest the need for some sort of debt-like instrument. The use of markup contracts is a rational response to informational problems. Based on current data, it appears that the informational environment will be th