An Analysis of the Problem of Asymmetric Information in Partnership Contracts of Interest- Free Banking and the Solutions

An essential feature of interest- free banking is the use of partnership contracts in financing the applicants. The real implementation of these contracts causes the banks to confront some problems, such as adverse selection and moral hazard, which are primarily rooted in the lack of symmetric information between the bank and the applicant. Using a descriptive-analytical method, this study seeks, within the framework of basic research model which comes under the theory of contracts (the aspect of the theory of motivations) to provide a clearer explanation of the problem of information asymmetry in partnership contracts and solve part of it. According to this model, when there is asymmetric information in the contracts, if the contracts serve the purposes of the different applicants with whom the bank deals are made within the framework of the principle of clarification, not only the profit expected by the bank can rise to peak level, but also the problem of adverse selection can be solved by stimulating the applicants by making contracts prepared for each particular one. These contracts, which suggest the probability of obtaining a loan from the limited resources of the banks and amount of repayment for each specific applicant, are extracted from the bank's maximization of the expected profit. In the present study, taking in to account the characteristics and conditions of signing partnership contracts, a model is proposed for these contracts by making some changes in the basic model in three stages with the aim of solving the problem of adverse selection that results from asymmetric information.