The lack of equity finance – really a problem of moral hazard?

by : Michael Gassner, Editor of IslamicFinance.de

Michael Gassner, Editor of IslamicFinance.de presented on the 3ème Congrès International de la Finance Islamique “Les Banques Islamiques et le Financement des Entreprises: Pratiques et enjeux théoriques” en Marrakech, 25/26 Mai 2015.

The presentation discussed that exponential growth of debt in Islamic finance is ruled out, nevertheless, debt and equity finance exists. The specific significance of equity finance (musharaka, mudaraba) lies in need for solid debt/equity ratio, as Muslims shall never die being in debt. Still Islamic banks barely provide any equity finance and the reason often given are moral hazard costs. This is denied as debt as well as equity has specific moral hazard problems, and if anything, even conventional banks would offer a mixture of debt and equity. Rather the assumed reason appears to be in the regulation (capital weight) and taxation (interest deductibility), which makes equity financing from a bank 2-4 times at least more expensive than debt finance, and thus not worth being offered.

The attached presentation is in French.

The organiser of the conference was the Groupe de recherche en Innovation, Responsabilités et Développement Durable (INREDD, UCA, Marrakech) Et the Bernoulli Center for Economics (BCE, Université de Basel, Suisse).

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