On the Microfoundation of Islamic Finance

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The book examines the theoretical foundations and empirical practices of Islamic finance, highlighting a significant gap between its ideal principles and actual implementation. It reveals that profit and loss sharing contracts are underutilized in Islamic banking, despite their advantages for entrepreneurs, such as loss insurance. The analysis identifies market inefficiencies, including asymmetric information, which contribute to challenges like adverse selection and moral hazard. Ultimately, it suggests that adhering to the paradigmatic version of Islamic banking could result in higher funding costs compared to conventional banking.