The Investigation of Moral Hazard Problem along with Offering of a Practical Model for Decreasing It in Musharakah Contracts

Although it has passed about three decades from the theoretical and executive scheme of interest-free banking in Iran, but still has not been seen any desire from banking system to implement real Musharakah contract. Studies have shown that one of the main reasons of this attitude is moral hazard. On the other hand, the financial institutions, which perform Musharakah contract, have some problems in appropriate implementation of this contract because of high supervision cost and the fact that they do not believe in the positive influence of supervision on declining banks debts in this kind of financing in one hand and they can not achieve their expected returns in the other hand. In the first section of this paper we attempted to elaborate literature of moral hazard which is related to principle-agent literature in agency theory. Then we have explored the situations which the moral hazard problem occurs in Musharakah contract between bank and firm via the presentation of a practical model. Finally, some strategies like using a supervision committee, continuous inspection, etc. are suggested for a bank to decrease probability of moral hazard. The goal of this paper was to smooth situations for using more and more Musharakah contracts in money and financial markets by creating new approach to Musharakah-based contracts in monetary and financial researches.