Editing Islamic banking and finance (section)

====Profit and loss sharing and its problems====
{{main|Profit and loss sharing#Promises and challenges}}

While profit-loss-sharing modes (or at least ''mudarabah''), were originally envisioned as "the basis of a riba-free banking"<ref name=CMPCM/> – with fixed-return financial models only filling in as supplements – a number of studies, (of banks in Saudi Arabia and Egypt,{{#tag:ref|Saudi Arabia and Egypt Islamic banking by Suliman Hamdan Albalawi, publishing in 2006,<ref name=BSiICSAE>{{cite web|last1=Albalawi|first1=Suliman Hamdan|title=Banking System in Islamic Countries: Saudi Arabia and Egypt. A Dissertation Submitted to the School of Law and the Committee on Graduate Studies of Stanford University |url=https://www.law.stanford.edu/sites/default/files/biblio/108/144947/doc/slspublic/AlbalawiSuliman2006JSD.pdf |website=law.stanford.edu |access-date=10 April 2015 |date=September 2006}}</ref>|group=Note}} Malaysia,{{#tag:ref|In Malaysia, another study found the share of musharaka financing declined from 1.4% in 2000 to 0.2% in 2006,<ref>Z. Hasan, "Fifty years of Malaysian economic development: Policies and achievements", ''Review of Islamic Economics'', 11 (2) (2007))</ref><ref name=Asutay_2007:173/>|group=Note}} and of large Islamic banks in general){{#tag:ref| a study from 2000 to 2006 by Khan M. Mansoor and M. Ishaq Bhatti,<ref name=Khan_Bhatti_2008:49>Khan M. Mansoor and M. Ishaq Bhatti. 2008. ''[http://iugc.yolasite.com/resources/Reference%20Book%20HA%20-%20Developments%20in%20Islamic%20Banking.pdf Developments in Islamic banking: The case of Pakistan] {{Webarchive|url=https://web.archive.org/web/20181222165032/http://iugc.yolasite.com/resources/Reference%20Book%20HA%20-%20Developments%20in%20Islamic%20Banking.pdf |date=22 December 2018 }}''. Houndsmills, Basingstoke: Palgrave Macmillan, p.49</ref>{{sfn|Khan|2013|pp=322-323}} survey by F. Khan of the largest Islamic banks published in 2010 found PLS use ranging from between 0.5% and 21.6%.<ref name="Khan 2010b 811">{{cite journal |last1=Khan |first1=F. |title=How "Islamic" is Islamic Banking? |journal=Journal of Economic Behavior & Organization |volume=76 |issue=3 |year=2010b |page=811|doi=10.1016/j.jebo.2010.09.015 }}</ref>|group=Note}} have shown fixed-return products now far exceed profit-loss-sharing (PLS) modes in [[assets under management]].{{sfn|Khan|2013|p=275}}

Explanations (offered by two authors, Humayon A. Dar and J.R. Presley), for why PLS instruments – namely ''mudaraba'' and ''musharaka'' financing – have declined to almost negligible proportions include:
# There is an inherent disincentive for the bank's client to report profit, because the more it declares, the more of the client's money will go to the financing bank, and the less it will get to keep.<ref name=Darand_Presley_2000-01_5-6/>
# Property rights in most Muslim countries are not properly defined, creating more difficulties for profit-loss sharing financing than for the fixed payment kind.<ref name=Darand_Presley_2000-01_5-6/>
# The competitors of Islamic banks – conventional banks – are firmly established and have centuries of experience. Islamic banks are not yet sure of their policies and practices and feel restrained in taking unforeseen risks.<ref name=Darand_Presley_2000-01_5-6/> 
# PLS is not suitable or feasible in many cases such as short-term resource requirement, working capital needs, non-profit-generating projects such as in the education and health sectors.<ref name=Darand_Presley_2000-01_5-6/>
# Conventional finance has tax advantages over the sharia compliant sort in some countries were interest is considered a business expenditure and given tax exemption, while profit (the return of PLS investment) is taxed as income.<ref name=Darand_Presley_2000-01_5-6/>
# There were no secondary markets for Islamic financial products based on PLS (at least as of 2001).<ref name=Darand_Presley_2000-01_5-6/> 
# Mudaraba, one of the forms of PLS, provides limited control rights to shareholders of the bank and "creates an imbalance in the governance structure" of PLS. "Shareholders like to have consistent and complementary control system, which is missing in the case of mudaraba financing."<ref name="Darand_Presley_2000-01_5-6">Dar, Humayon A. and J.R. Presley (2000–01. ''[http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.196.5571&rep=rep1&type=pdf Lack of profit loss sharing in Islamic banking: Management and control imbalance].'', Economics research paper 024. Leicester: Loughborough University. 5–6)</ref>{{sfn|Khan|2013|pp=323-324}}
# Depositors/investors of banks have proven highly resistant to accepting periodic losses (the L in PLS) that inevitably arise in investment.<ref name=imf-2015/> (The sharing of banking losses with bank customer/investors had been advanced as a reason why Islamic financial institutions would be more stable than conventional banks.){{sfn|Khan|2013|p=330}}<ref name="Bahru-5-5-15"/> As of at least 2004, no bad debt has translated into losses for depositors in an Islamic bank, and "no Islamic bank has ever written-down the value of its depositor's accounts when it has written-down the value of its non-performing assets"<ref name="El-Hawary et al 2004 16-7">{{cite book |last1=El-Hawary |first1=D. |last2=Grais |first2=Wafik |last3=Iqbal |first3=Zamir |year=2004 |title=Regulating Islamic Financial Institutions: The Nature of the Regulated |publisher=World Bank |series=World Bank Policy Research Working Paper #3227 |location=Washington DC |pages=16–7 |url=http://documents.worldbank.org/curated/en/918931468761945251/pdf/wps3227islamic.pdf |access-date=7 June 2017}}</ref> for fear of losing depositors.

Aside from disadvantages to lenders, one critic of Islamic banking, Feisal Khan, argues that widespread use of PLS could have severe harm to economies by preventing [[central bank]]s from expanding credit – buying bonds, commercial paper, etc. – to prevent [[liquidity crisis]]es that arise from time to time in modern economies.{{sfn|Khan|2015|pp=160–161}}