Challenges of profit-and-loss sharing financing in Malaysian Islamic banking

There are challenges faced by the profit-and-loss sharing (PLS) financing in Islamic banking institutions in Malaysia. 

there were four major obstacles to PLS financing such as

  1. high risk of investment
Musharakah and mudharabah financings could be classified as high risk investments. These concepts of financing are difficult to be implemented due to their high probability of failure; as a result of various factors such as the entrepreneurs’ lack of skills and experience in doing business.

      2. difficulty in selecting appropriate partners

The selection process poses a big challenge to Islamic banks in providing financing that are based on musharakah and mudharabah. The Islamic bank needs to find the right partner as to ensure the shared business is generating profit because Islamic financial institutions are not charitable organizations that grant free capital, instead they need to be profitable so that they can remain competitive.The selection is difficult because it requires the study of various aspects of risk.

    3. demand comes from low credit worthiness customers

In general, the demand for musharakah and mudharabah contracts is largely requested by clients who are lacking in capital to grow and still in the early stage of their businesses. Clients interested in musharakah and mudharabah financing are not companies that have a long business track record and strong credit standing. Those who seek musharakah and mudharabah financing are usually from small and medium industries that are still new in the business.  Small and medium companies are exposed to high risk of failure because of the unknown business potential. If the demand for musharakah and mudharabah financing is made by big corporations that have solid business track record, definitely more of such financings could be offered. However, the demand from the high-risk small and medium companies is not a valid reason for Islamic banks to refuse to provide musharakah financing; and thus, eliminate the spirit of Islamic banks of being fair to all

     4. lack of capital security.   


 The safety of the capital has to be ensured in any investment made. Without any capital guarantee, the Islamic banking usually will not want to offer mudharabah or musharakah contract to clients. Guarantee is extremely important in protecting the capital in the event of fraud and mismanagement by the partners  However, not all partners can afford to provide capital guarantees since those requesting for financing are clients who lack the capital. This is a big challenge for Islamic banks in providing financing through musharakah and mudharabah if the Islamic banks’ mindset is still based on the framework of financial intermediaries.

reference 
Challenges of profit-and-loss sharing financing in Malaysian Islamic banking by  Aisyah Abdul Rahman and Shifa Mohd Nor
http://www.ukm.my/geografia/v2/index.php?cont=v&item=2&art=733&ver=loc

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