Sharing contracts' marginalisation,adverse selection and markup calculation

This paper proposes a new approach to explain the dominance—in the Islamic banking market—of markup contracts at the expense of sharing ones. We show that the dual pricing practised in this market produces an additional—or artificial—dimension of adverse selection, which is causing the sharing contracts' marginalization. We suggest specialized use of two Islamic contractual categories as a device for eliminating artificial adverse selection. We suggest also an endogenous calculation of the markup, that is independent of the interest rate, based on the financing cost unification. This approach allows the deduction of default and liquidity risk premiums.