Islamic Financial Intermediation and Banking 159
Applying the agency theory to profi t/loss - sharing instruments such as
mudarabah has been modeled by Haque and Mirakhor (1989) and Presley
and Session (1994). These models found that under a mudarabah profi t/loss -
sharing contract, it is the managerial effort which picks up the role of polic-
ing the contract. A standard incentive - compatible interest - based contract
TABLE 8.5 Functional components of an Islamic fi nancial intermediary
Assets Liabilities
Cash
100 - percent reserves
Demand deposits
(amanah)Trade Finance Portfolio
Term: short - term
Risk level: very low
Instruments: mudarabah, bay’salam
Short - term investment deposits
(mudarabah)Portfolio of Consumer and Corporate
Assets Financing
Term: short - and medium - term
Risk level: low
Instruments: ijarah, istisna’ mortgages
Restricted Investment deposits for
varying maturities
(mudarabah)Syndicated Investment Portfolio
Term: Medium - to long - term
Risk level: moderate to high
Instruments: mudarabah, musharakah
Restricted and unrestricted
investment deposits.
(mudarabah)Fund Management
Private Equity
Joint Venture
Term: Long - term
Risk level: High
Instruments: mudarabah, musharakah
Wealth Management
(mudarabah, wikala, musharakah)Fund of Funds
Diversifi ed portfolios specializing in market
securities and investments in asset - linked
securities of various risk and maturity
profi les
Investments through deposits or
through tradable securities
(mudarabah, musharakah)Fee - generating Activities
Underwriting
Asset Management
Research
Equity capital (musharakah)
Reserves