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/ http://irep.iium.edu.my/77575/ http://irep.iium.edu.my/77575/ http://irep.iium.edu.my/77575/1/Prof.%20Hassan%20-%20%20Principal%20Agent%20Preferences_Ijarah%20Murabahah.pdf

id	iium-77575
recordtype	eprints
spelling	iium-775752019-12-27T08:23:19Z 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/Prof.%20Hassan%20-%20%20Principal%20Agent%20Preferences_Ijarah%20Murabahah.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 http://jimf-bi.org/index.php/JIMF/article/view/1050 https://doi.org/10.21098/jimf.v5i1.1050
repository_type	Digital Repository
institution_category	Local University
institution	International Islamic University Malaysia
building	IIUM Repository
collection	Online Access
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/ http://irep.iium.edu.my/77575/ http://irep.iium.edu.my/77575/ http://irep.iium.edu.my/77575/1/Prof.%20Hassan%20-%20%20Principal%20Agent%20Preferences_Ijarah%20Murabahah.pdf
first_indexed	2023-09-18T21:49:25Z
last_indexed	2023-09-18T21:49:25Z
_version_	1777413668274700288

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

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