Profit and Loss Sharing Theory, Challenges and Solutions

Islamic banks and financial institutions established based on "profit and loss sharing" theory four decades ago. While this theory provides increasing in investment and develops bank loans distribution but it has its own challenges and problems in practice. These challenges are: separating Islamic banks interest rates from international interest rates, determining definite profit rate for investment, moral hazard for loan demanders, delay in returning debts, lack of proper ways of government financing and lack of institutional infrastructures. In this paper, it is suggested the effect of profit and loss sharing theory on investment and the development of facilitate distribution, challenges in front of Islamic banking system and their possible solutions.