Ethics in Islamic Banking with Emphasis on the Theory of Asymmetric Information: Application of Bayesian Games

Ethics in Islam are based on Islamic norms. Adherence to these principles can promote behavioral patterns in Islamic banking and improve interaction of banks with each other or with other organizations, clients, and employees. Islamic banking introduces new products and resources and also a different ideology which create challenges in the competitive environment of banking. Besides, Islamic banking has expanded dramatically in the international banking market. This paper studies the problem of asymmetric information in banking from the perspective of Islamic Economics and does modeling the relationship between the lending applicant and the bank in the form of a dynamic game of incomplete information. This study discusses the major risks in Islamic banking products and points out the importance of regulations and ethical codes. It is necessary to consider problems arising from adverse selection and moral hazard due to the different structure of Islamic banks and financial institutions. Adherence to the principles of Islamic ethics can prevent the negative effects of adverse selection and moral hazard.