Exploring Moral Hazard and Adverse Selection in Profit Sharing Contract

Purpose: The aim of this study is to review relevant articles on the problem adverse selection and moral hazard in profit-sharing contracts Islamic Banks. Adverse problems are that occur contracts, so they impact low porti contract financing compared margin-based fee-based contracts. Theoretical framework: profit sharing an bank has two potential problems, namely arise due asymmetric information. Asymmetric information can limited owned by banks as owners funds (shahibul maal) regarding business be run customers (mudharib). This mainly causes agency problem. If agent negligent making decisions with negative consequences does not want take responsibility for his actions, classified a hazard. Moral form self-interest, side effects, fraud, opportunism, behaviour agents who commit willful mistakes, negligence breach contract. Meanwhile, arises when principal cannot observe agent's characteristics because before signed. Design/methodology/approach: uses qualitative approach reviewing previous discussion. aligned practices Furthermore, discussions deepened through forum group experts practitioners banks. Findings: results show conflicts include principal-agent principal-principal hazards. reveal signalling screening measures applied overcome while monitoring actions switching debt problems. Research, Practical & Social implication: implications draw up clear complete mudharib reduce committed mudharib. In case, also ask submit comprehensive financial reports their performance. must pay attention efforts prevent selection. Originality/value: value provides new literacy conflict will faced applying other parties managers