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In this paper we analyze investment behavior under profit‐and‐ loss sharing contracts in an environment of asymmetric information. Under certain restrictive assumptions, PLS contracts are characterized with over investment, where the equilibrium level of investment exceeds the first best (full information) level. A zakat tax on profit is shown to restore efficiency.

The evolution of property right institutions and their consequence on investment decisions are central issues in the political economy of development. Effective and well‐defined property rights are deemed essential in providing the preconditions for economic growth. The importance of property right arrangements stems from the fact that they impact and alter the distribution of income. Economists are, therefore, in agreement that market transactions are more efficient when property rights are enforced. According to North and Thomas (1973), observed variations in economic performance across countries were related to the presence (or absence, for that matter) of property right institutions. Recently, Beseley (1995), and Feder and Feeny (1991), have argued that economic development and well‐established property right institutions are positively correlated. Meanwhile, there are two arguments in the literature in favour of establishing property rights institutions. First, assigning ownership of valuable assets and designating the parties bearing the rewards and costs is expected to strengthen market forces. In particular, the private control over assets and the ability to reap the rewards from exploiting these assets create incentives for investment and production. Second, enforcing contractual agreements is expected to provide economic agents with the incentives to use resources effectively and efficiently. When property rights are poorly defined, contracts become hard to enforce and fraud and corruption go unpunished. Bureaucrats responsible for formulating government policies will use their positions to influence the allocation of resources whereby, business managers find themselves forced to buy favours. The need to pay substantial bribes will, therefore, reduce the entrepreneur's incentives to invest and impose a significant burden on economic growth. Empirical evidence based on cross‐country comparisons does indeed suggest that corruption has large, adverse effects on private investment and economic growth. Mauro (1996) showed that when a country improves its standing on the corruption index, say, from 6 to 8 (0 being the most corrupt, 10 the least) it will experience a 4 percentage point increase in its investment rate and a 0.5 percentage point increase in its annual per capita GDP growth rate. These large effects suggest that policies that establish institutions to curb corruption could have significant payoffs. Political corruption will also undercut the government's ability to raise revenues from issuing licenses and permits, and lead to ever‐higher tax rates being levied on fewer and fewer taxpayers. This, in turn, reduces the government's ability to provide essential public goods, including the rule of law. When institutions are weak, bribes can alter outcomes of the legal and regulatory process by inducing the government either to fail to stop illegal activities (such as drug dealing or pollution) or unduly favour one party over another in court cases or other legal proceedings. Furthermore, theoretical and empirical studies have shown that corruption and political control usually raise transaction costs, uncertainty, and are associated with free‐rider problems. These costs will, therefore, constitute a dead‐weight loss to the society. Unless political and economic reforms are made, these inefficiencies will certainly hamper growth and development.

Constructs a simple neoclassical growth model in which financial factors play an important role. The model demonstrates that the injunction against fixed interest payments induces the monetary authority in the Islamic economy to develop and innovate alternative financial instruments that do not have fixed nominal values and do not bear predetermined rates of return. The model also proves that financial innovation is welfare enhancing, while inflation reduces welfare and hampers growth. The model further proves that the government in an Islamic economy can effectively coordinate its fiscal and monetary policies to finance the budget using the Zakat and seigniorage.

The purpose of the study is to explore contributions made in Islamic economics methodology, particularly in the use of mathematical models used to build Islamic economic theories.

The methodology adopted is a survey by means of literature review.

Overuse of mathematical models in economics has it apparent weakness in simplifying complex realities and use of impracticable assumptions. But, that notwithstanding, they have a role to play in the development of Islamic economics. Empirical analysis in Islamic economics has weaknesses, including the very fact that moral phenomenon in Islamic economics is difficult to quantify, but its contribution, just like mathematics, is needed to develop the field. Islamic economics adopt mathematical models that do not cause obstacles in achieving the aim of Islamic economics, which is Falah. Where it is harmful, it is discarded. Islamic economics has yet to have a universally accepted research methodology; instead, numerous methodologies are used today. The poor use of mathematics in Islamic economics by new researchers, among other factors, may be due to young researchers’ poor background in mathematics.

The paper is unique in looking at the topic of Islamic economic methodology from the angle of application of mathematical models.

An important Islamic imperative is prevention of concentration of wealth among a few so that wealth circulates widely to enhance shared prosperity. In contemporary economic discourse, inequality and concentration of wealth have emerged as among key causes of instability and crisis. Unfortunately, although Islamic finance has emerged as a Shari’ah-compliant industry, it does not seem to be connected with the Islamic concern about inequality and concentration of wealth. This paper aims to explore the issues of inequality and concentration of wealth in the context of Islamic finance.

This paper addresses a number of queries: Are Islamic banks, as the dominant component of the industry, helping to improve inequality and concentration of wealth and thus offer a better framework to deal with instability and crisis? Is the ownership structure of Islamic banks conducive to meeting the Islamic imperative regarding inequality and concentration of wealth? Using secondary data, this research illuminates the pertinent issues in light of the experience of Bahrain as one of the hubs of Islamic banking and finance.

The paper finds that the ownership pattern of Islamic banks in Bahrain lends credence to the entrenched, not-so-unexpected concentration of wealth.

This study is based on data of one country. Further studies on other countries will help illuminate the relevant patterns and issues.

Inequality and concentration of wealth are among central economic issues in contemporary economic discourse. Because of the significant impact of such inequality and concentration, societies need to be more aware of these impacts and devise ways to address it.

Inequality and concentration of wealth have fundamental social implications, as the issues of poverty, deprivation, exploitation, etc. are inseparable from concentration of wealth (accompanied by concentration of power), and widening wealth gap can cause or induce major socio-political upheaval.

Although inequality and concentration of wealth are robust fields of inquiry, this might be the first work addressing the issue of concentration of wealth in the context of Islamic finance in general and Islamic banking in particular.

This paper aims to examine the effect of capital structure on Islamic banks’ (IBs) performance to provide guidance to finance managers for raising capital funds. As newcomers to the markets, IBs are facing a trade-off. They can either use high capital ratios which increase the soundness and safety of the bank and lower the required return by investors, or depend on deposits and Islamic bonds which are considered cheaper sources of funds due to their tax rebate. An IB’s management must carefully decide the appropriate mix of debt and equity, i.e. capital structure, to maximize the value of the bank.

Using a sample of 85 IBs covering banking systems in 19 countries, the study uses a two-stage least squares method to examine the performance determinants of IBs to control the reverse causality from performance to capital structure.

After control of the macroeconomic environment, financial market structure and taxation, results indicate that IBs’ performance (profitability) responds positively to an increase in equity (capital ratio). The result is consistent with the signaling theory which predicts that banks expected to have better performance credibly transmit this information through higher capital. Optimal capital structure results of the IBs found a non-monotonic U-shaped relationship between the capital-asset ratio and profitability, supporting the efficiency risk and franchise value hypotheses.

Due to limitations for market data, the study uses book accounting ratios. Future research where market data are available could use performance measures, such as Tobin’s Q in performance determinants models.

The non-monotonic relationship found between IBs’ return on equity and capital ratios suggests that equity issuances for IBs’ with low capital ratios (lower than the turning point of 37.41 per cent) are expensive and have a negative effect on their profitability. On the other hand, managers of well-capitalized IBs (banks with capital ratios beyond 37.41 per cent) are advised to rely on equity when faced by a decision to raise capital, as the capital ratio starts to affect their profitability positively.

Islamic banking literature has been silent on IBs’ capital structure and its relevance; this study will try to fill in the existent gap.

This study aims to discuss the determinants of Islamic banks’ efficiency. It tries to explore the source of Islamic banks’ inefficiencies to propose solutions to guarantee an acceptable level of technical efficiency of such banks in Gulf Cooperation Council (GCC) countries.

To achieve this objective, the authors use a parametric approach, especially, the stochastic frontier approach, using production function and panel data analysis. The authors apply a package Frontier 4.1 for the estimation process, which is composed of two principal steps. In the first step, the authors estimate Islamic banks’ efficiency scores in different GCC countries based on an output distance function. In the second step, the analysis highlights the impact of managerial-specific education on Islamic accounting and finance, scarcity of Sharīʿah scholars, the board independence and chief executive officers’ (CEOs) duality on GCC Islamic banks’ efficiency.

This study’s results document that managerial-specific education on Islamic accounting and finance and the board of directors’ composition, especially, the board’s independence, can largely explain the technical efficiency scores of Islamic banks in GCC countries. Especially, the authors find evidence that managerial-specific education is negatively associated with the inefficiency term. The coefficient of the Sharīʿah scholar’s variable has a positive sign indicating that the more there are Sharīʿah experts, the more the bank is efficient. In addition, CEOs’ duality seems to have no significant effect on GCC Islamic banks’ efficiency.

GCC Islamic banks need to improve the presence of independent members on the board of directors. In addition, these banks are invited to count more on Sharīʿah auditors and educated staff characterized by a high level of competency in the domain of Islamic banking and finance.

To the best of the authors’ knowledge, this is the first study that highlights the effect of managerial-specific education in Islamic accounting and finance and scarcity of Sharīʿah scholars on Islamic banks’ efficiency.