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Islamic Economics: The Emergence of a New Paradigm

John R. Presley and John G. Sessions
The Economic Journal
Vol. 104, No. 424 (May, 1994), pp. 584-596
Published by: Wiley on behalf of the Royal Economic Society
DOI: 10.2307/2234633
Stable URL: http://www.jstor.org/stable/2234633
Page Count: 13
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Islamic Economics: The Emergence of a New Paradigm
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Abstract

We illustrate the potential impact of the Islamic doctrine on western economic relationships by focusing on the prohibition of interest (riba) in Islamic economics. We show that the alternative method of financier remuneration (i.e. mudarabah profit-and-loss sharing) will, under certain conditions, enhance capital investment on account of its ability to act as an efficient revelation device. By applying ideas developed in the western contract literature, we show that a mudarabah contract between the manager of a project and a syndicate of investors may permit a more efficient revelation of any informational asymmetries between the two.

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