Information asymmetry, contracts and the development of Islamic banks: theory and application in Yemen.

Summary The functions of Islamic banks do not differ too much from those of the universal banks existing in Germany or Japan. However, they do not resort directly to monetary borrowing but only through goods and services. Thus, they do not impose a fixed interest rate (Riba) on their clients, but their financing is done, on the one hand, through goods and services against fixed repayments (Murabaha, Ijara) and, on the other hand, through financing contracts based on profit and loss sharing (Musharaka, Mudaraba). These banks do not limit themselves to the role of financial intermediaries, they also carry out direct investment operations. The various operations of Islamic banks are carried out in accordance with Islamic law (Sharia). The majority of Islamic banks exist in an unfavorable environment, characterized by bureaucracy, corruption, etc. These problems aggravate the asymmetry of information and property rights, which puts Islamic banks in a difficult uncompetitive situation before conventional banks in particular, because Islamic banks incur more risk in investment operations. This explains the recourse of these banks to short-term financing (quasi-debt) such as Murabaha, instead of Musharaka and Mudaraba contracts (quasi-equity). Despite all this, Islamic banks are growing considerably and are a real competitor to conventional banks in countries that are populated by a majority of Muslim people, including Yemen, thanks to the effect of the religious factor.