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Principal-agent preferences in imperfect markets: theoretical analysis on Murabahah and Ijarah

This paper aims to determine the optimal contract for the principal and the agent in imperfect markets, when murabahah and ijarah are used. The financial contracting enforceability approach is employed to determine the contract that maximizes the value of the firm subject to agents’ constraints w...

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Main Authors: Ajmi, Hechem, Abd. Aziz, Hassanuddeen, Kassim, Salina, Mansour, Walid
Format: Article
Language:English
Published: Bank Indonesia Institute 2019
Subjects:
HG3368 Islamic Banking and Finance
Online Access:http://irep.iium.edu.my/77575/1/77575_Principal-agent%20preferences%20in%20imperfect%20markets.pdf
http://irep.iium.edu.my/77575/
https://jimf-bi.org/index.php/JIMF/article/view/1050/749
https://doi.org/10.21098/jimf.v5i1.1050
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spelling my.iium.irep.775752020-12-22T03:41:03Z http://irep.iium.edu.my/77575/ Principal-agent preferences in imperfect markets: theoretical analysis on Murabahah and Ijarah Ajmi, Hechem Abd. Aziz, Hassanuddeen Kassim, Salina Mansour, Walid HG3368 Islamic Banking and Finance This paper aims to determine the optimal contract for the principal and the agent in imperfect markets, when murabahah and ijarah are used. The financial contracting enforceability approach is employed to determine the contract that maximizes the value of the firm subject to agents’ constraints when the shock is low and high, and regarding market frictions. Furthermore, this approach allows us to assess the level of market frictions that agents may bear in case of low shock and high shocks. Findings reveal that the simulated values of the market frictions’ parameters for both contracts increase when moving from the low shock to the high shock. Such evidence implies that the agent is more likely to cheat and hide significant information about the project when the shock is high. As a response to this higher risk, the simulated values of the profit margin parameters for the principal rise also when the shock is high in order to compensate for the increase of market frictions and mitigate conflicts of interest. By comparing both contracts based on the simulated optimal values of the firm, it is noticeable that the gap between both contracts is very tight, which can be attributed to their common debt-based financial arrangements. However, the results show that ijarah allows the principal and the agent to generate the highest value in case of low shock and high shock, comparing to murabahah. Therefore, ijarah seems to be more attractive for the principal and the agent than murabahah. Bank Indonesia Institute 2019-03-15 Article PeerReviewed application/pdf en http://irep.iium.edu.my/77575/1/77575_Principal-agent%20preferences%20in%20imperfect%20markets.pdf Ajmi, Hechem and Abd. Aziz, Hassanuddeen and Kassim, Salina and Mansour, Walid (2019) Principal-agent preferences in imperfect markets: theoretical analysis on Murabahah and Ijarah. Journal of Islamic Monetary Economics and Finance, 5 (1). pp. 117-144. ISSN 2460-6146 E-ISSN 2460-6618 https://jimf-bi.org/index.php/JIMF/article/view/1050/749 https://doi.org/10.21098/jimf.v5i1.1050
institution Universiti Islam Antarabangsa Malaysia
building IIUM Library
collection Institutional Repository
continent Asia
country Malaysia
content_provider International Islamic University Malaysia
content_source IIUM Repository (IREP)
url_provider http://irep.iium.edu.my/
language English
topic HG3368 Islamic Banking and Finance
spellingShingle HG3368 Islamic Banking and Finance
Ajmi, Hechem
Abd. Aziz, Hassanuddeen
Kassim, Salina
Mansour, Walid
Principal-agent preferences in imperfect markets: theoretical analysis on Murabahah and Ijarah
description This paper aims to determine the optimal contract for the principal and the agent in imperfect markets, when murabahah and ijarah are used. The financial contracting enforceability approach is employed to determine the contract that maximizes the value of the firm subject to agents’ constraints when the shock is low and high, and regarding market frictions. Furthermore, this approach allows us to assess the level of market frictions that agents may bear in case of low shock and high shocks. Findings reveal that the simulated values of the market frictions’ parameters for both contracts increase when moving from the low shock to the high shock. Such evidence implies that the agent is more likely to cheat and hide significant information about the project when the shock is high. As a response to this higher risk, the simulated values of the profit margin parameters for the principal rise also when the shock is high in order to compensate for the increase of market frictions and mitigate conflicts of interest. By comparing both contracts based on the simulated optimal values of the firm, it is noticeable that the gap between both contracts is very tight, which can be attributed to their common debt-based financial arrangements. However, the results show that ijarah allows the principal and the agent to generate the highest value in case of low shock and high shock, comparing to murabahah. Therefore, ijarah seems to be more attractive for the principal and the agent than murabahah.
format Article
author Ajmi, Hechem
Abd. Aziz, Hassanuddeen
Kassim, Salina
Mansour, Walid
author_facet Ajmi, Hechem
Abd. Aziz, Hassanuddeen
Kassim, Salina
Mansour, Walid
author_sort Ajmi, Hechem
title Principal-agent preferences in imperfect markets: theoretical analysis on Murabahah and Ijarah
title_short Principal-agent preferences in imperfect markets: theoretical analysis on Murabahah and Ijarah
title_full Principal-agent preferences in imperfect markets: theoretical analysis on Murabahah and Ijarah
title_fullStr Principal-agent preferences in imperfect markets: theoretical analysis on Murabahah and Ijarah
title_full_unstemmed Principal-agent preferences in imperfect markets: theoretical analysis on Murabahah and Ijarah
title_sort principal-agent preferences in imperfect markets: theoretical analysis on murabahah and ijarah
publisher Bank Indonesia Institute
publishDate 2019
url http://irep.iium.edu.my/77575/1/77575_Principal-agent%20preferences%20in%20imperfect%20markets.pdf
http://irep.iium.edu.my/77575/
https://jimf-bi.org/index.php/JIMF/article/view/1050/749
https://doi.org/10.21098/jimf.v5i1.1050
_version_ 1687393069197950976
score 13.211869

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