Financial Risk Management in Syariah Contracts: a Review of Current Literature

Abstract

: Theoretically, the musyârakah, mudhârabah and murâbahah systems are the most ideal concept of profit loss sharing business. Musyârakah and mudhârabah are business contracts recognized since the beginning of Islamic history. In Musyârakah contract, each contracting parties are considered equal in their rights in doing business contract. This writing attempts to elaborate the latest views on financial risk in banking products. At the practical level, the writer concludes that musyârakah and mudhârabah constitute minor portion than murâbahah in the overall Syari'ah banking transactions. These products of Syari'ah banking tend to lead to moral hazard and adverse selection and thus agency theory and information asymmetrical explain the inherent problem well. In addition, the concept of profit-loss sharing according to the writer is still controversial which is also vulnarable to moral hazard