By Shafi A. Khaled
Abstract:
Part of a trilogy, this paper deepens microeconomic understanding of profit-loss shared (PLS) financing and contextualizes it by connecting it to the reality of industrially aspiring economies or to Development Economics. Virtual Market Model is its analytic umbrella. While incorporating bureaucratic inefficiency, systemic corruption, human resource training cost, exchange rate, product quality, etc., it focuses on a critical element of a business plan – technology and scale (TS). Doing so simultaneously mitigates adverse selection and moral hazard. Left largely to investor’s discretion, banks may be glossing over TS. Yet they matter in a project’s feasibility and viability. Failing to address these elements builds uncertainty, which in totality has made PLS impractical. So, for lifting a barrier to PLS financing, bankers must attune to TS. Further, playing a prominent, motivational role for investors is PLS’ advantage over MU in reducing break-even cost. Interestingly, this facilitates both viability and feasibility. Thus, adoption of “appropriate” or minimum cost technology becomes possible.
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