Islamic Finance Essay Example | Topics and Well Written Essays - 2000 words

Islamic Finance - Essay Example Agency cost is referred to internal cost of a company, which arises due to conflict of interest between the management and shareholders. The shareholders expect that the management should run the company in such a manner that it increases the shareholder’s value. However, it is observed that the management concentrates on maximizing the wealth of the company and does not take into consideration the interest of the shareholders. This creates a difference between the management and stakeholders. The same problem was observed in the Islamic banks; though the PLS system aimed at increasing the wealth of the investors but it failed to fulfil the expectation of the shareholders (Dar and Presley, 2000). The main rule of PLS system is that the banks provides part of its profit, obtained from investment, to the investor instead of interest. As a result, if the banks fail to earn any profit on the investments, the investors do not get any bonus (Dar and Presley, 2000). The same situation is observed when the company is small to afford high profit and even earn a considerable amount. If a new company invests in the bank, it has the right to earn the profit but the scheme had already dried up the earnings of the financial institutions. This indicates that the company as an investor is not at all profitable and the banks have failed to implement PLS appropriately. This has created misunderstanding between the management of the banks and the investors (small companies) as the payment under this scheme cannot be taken as granted (Abduh and Omah, 2012). When the banks failed to offer higher return on the scheme such as Murabaha financing despite good performance, it is subject to elements of uncertainty. These uncertainties are vague demand for goods and services, business environment that surrounds the world. Moreover, the banks are seen to suppress the profit as the