PROFIT AND LOSS SHARING Definition

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PROFIT AND LOSS SHARING (PLS) is the method utilized in Islamic banking to comply with the prohibition of interest. The Islamic solution, commonly referred to as Profit & Loss Sharing (PLS), suggests an equitable sharing of risks and profits between the parties involved in a financial transaction. In the banking business, there are three parties - the entrepreneur or the actual user of capital, the bank which serves as a partial user of capital funds and as a financial intermediary, and the depositors in the bank who are the suppliers of savings or capital funds. There are two different partnerships of the type mentioned in Islam: the partnership between the depositors and the bank, and the partnership between the entrepreneur (or the borrower) and the bank. Under this proposal, financial institutions will not receive a fixed rate of interest on their outstanding loans, rather, they share in profits or in losses of the business owner to whom they have provided the funds. Similarly, those individuals who deposit their funds in a bank will share in the profit/loss of the financial institution.

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DEBT SECURITY is a security representing a loan given by an investor to an issuer. In return for the loan, the issuer promises to pay interest and to repay the debt on a specified date. Debt security issuers may include corporations, municipalities, the federal government, or a federal agency. See CONVERTIBLE and CONVERTIBLE DEBT.

MONEY SUPPLY is the three categories of money supply (MI, M2, M3) as defined by the U.S. Federal Reserve Board.

M1 The sum of-currency held by the public, plus travelers' checks, plus demand deposits, plus other checkable deposits-i.e., negotiable order of with­drawal (NOW) accounts, automatic transfer service (ATS) accounts and credit union share drafts.

M2 MI plus savings accounts and small-denomina­tion time deposits, plus shares in money market mutual funds (other than those restricted to institu­tional investors) and overnight Eurodollars and repurchase agreements.

M3 M2 plus large-denomination time deposits (over $100,000) at all depository institutions, large­-denomination term repurchase agreements and shares in money market mutual funds restricted to institutional investors.

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