The principal-agent problems in the Islamic banking system, especially in profit sharing (mudarabah) contract are severe without effective dissemination of information between the contracting parties. In profit sharing (mudarabah) contract, the realized profit is influenced by information. In this study, we provide suggestion in mitigating the principal-agent problem and increasing the returns of the contracting parties through the shuratic process (mutual consultation). Hence, the objective of this study is to empirically examine the optimal condition of profit sharing ratio (PSR) and shuratic process for profit sharing contract based on a simulation technique for Islamic banking in Malaysia. The results showed that the trend of shuratic process has a positive relationship with the trend of Islamic bank’s net profit. Additionally, the results also indicated that the Islamic bank’s net profit has a positive relationship to the Islamic bank’s profit sharing ratio (PSR) for profit sharing (mudarabah) financing and securities investment activities. On the other hand, there is a negative relationship between the Islamic bank’s PSR from return on financial and securities investment activities and the entrepreneur’s PSR. The results also revealed that there is a positive relationship between the PSR for investment saving accounts and the Islamic bank’s net profit. However, depositors will earn less return from their deposits.
All Science Journal Classification (ASJC) codes
- Computer Science(all)
- Health(social science)
- Environmental Science(all)