Lender’s position in the profit and loss sharing Islamic finance: an analytical perspective of Izutsu’s hypotheses on “Islam” and “Hilm”

Purpose There is a growing debate as to how Islamic financial institutions can increase the expansion of profit and loss sharing (PLS) finance instead of widely practiced markup finance. This paper aims to seek to argue that protecting lenders right is to be ensured if we expect to see the rise of PLS finance of Islamic banks. Design/methodology/approach The paper draws upon the theorical contribution of Toshihiko Izutsu, who shows the derivation of the modern term Islam from its pre-Islamic root of hilm. Izutsu argues that a halim (Muslim or mu’min) possesses power and becomes altruist for fellow Muslim. This research takes this view to illustrate that Islamic lenders should be bestowed with economic and financial power for the expansion of PLS finance. Findings The authors show that Islamic financial system does not furnish required institutions conducive for expansion of PLS finance. The authors further argue that the practice of PLS should be based on an effective power retained by the lender to discipline the borrower, which is currently lacking in a typical PLS contract. Practical implications The retention of the power by the lender does not necessarily breach maqasid al-shari’ah, so far as the power is managed upon the concept of hilm. This philosophical speculation, in the authors’ view, would contribute to bridge a gap between Islamic pragmatists and perfectionists’ view toward expansion of PLS finance. Originality/value Although Izutsu’s explanation provides an important tool to argue that the altruistic behaver of halim can encourage the supply of participatory finance, this provision has not been adequately argued in the literature.