Financing Schemes and Lost Profit Sharing in Islamic Banking : Challenges and Opportunities

Abstract

A profit and lost sharing system is an agreement between a financier (shahibul mal) and a capital manager (mudharib) to run a particular economic business with a profit sharing and risk loss scheme. At this time a lot of literature encourages PLS schemes as the main mode of Islamic banking system, but in practice it is avoided. The research aims to theoretically evaluate the causes of PLS ​​contracts in Islamic banking fail to be fully accepted and be excellent for investors in Islamic Banking. The results showed that the use of PLS ​​(mudharabah and musharakah) schemes in Islamic (sharia) Banking in Indonesia, Malaysia, Pakistan, Turkey and Morocco did show a low percentage of total financing. There are internal factors and external factors that hinder the development of PLS ​​schemes. Internal factors include moral hazard concern from partners, low trust in partners, weak monitoring systems, weak capabilities and collateral from partner companies. While external factors include; public literacy on Islamic banking products, government support, and supervision from regulators. Some of these factors arise because of a misunderstanding of the PLS system. Therefore, it is necessary to reprogram the perception of Shahibul mal and mudarib in the PLS scheme. This research is expected to contribute to the development and improvement of PLS ​​schemes in Islamic Banking.