• M. Ishaq Bhatti Department of Accounting, Economics, Finance and Data Analytics, La Trobe University, Bundoora, Australia
  • Suren Basov Department of Economics, University of Melbourne, Australia
Keywords: Social norms, Incentives, Trust, Booms, Recessions, Islamic banks, Shariah law.


The interaction of social norms and incentives is a subject of growing interest in economic literature. Basov and Bhatti (2013) pointed out that invoking a social norm is both a blessing, since it allows mitigating moral hazard problem, and a curse, since it restricts the class of admissible contractual arrangements. In this paper, we reiterate this point using particular example of the effects of restrictions imposed on contracts by Shariah law on the optimal risk-incentive trade-off. We show that extra rigidity imposed by Shariah law leads to a greater reluctance to invest into daring new ideas, which are profitable in expectation, but may also result in significant losses. A shared set of social norms between the lender and the entrepreneur allows mitigating adverse consequences of the excess rigidity through creation of good will and may even lead to an improved performance. The adverse consequences may vary according to the stages of business cycle. As a result, recessions can have negative long-term effects and longer booms may be followed by longer recessions. We also hypothesize that turning a social norm into a law will deprive it of the ability to generate good will, while leaving the negative aspects intact. We find a tentative support of this hypothesis by comparing relative performance of Islamic banks in three regions: South East Asia (primarily, Malaysia), Middle East, and the UK.

Author Biography

M. Ishaq Bhatti, Department of Accounting, Economics, Finance and Data Analytics, La Trobe University, Bundoora, Australia

M. Ishaq Bhatti is a Professor of Finance and Financial Econometrics/Statistics and the founding director of Islamic Banking and Finance Programme at La Trobe University (LTU). Currently, he is a graduate research coordinator for the department of Economics, Finance & Marketing in the School of Business. Previously, he has taught at Monash, Griffith, International Islamic University, University of Alberta and he visited Rider, Magberg, Hitotsubashi, Auckland and Middle Eastern Universities including Kuwait & Sultan Qaboos University, Professorship at UAE University, King Abdulaziz and Minhaj University's Deanship of International Chair. He is an author of more than 130 articles, 8 books, contributed to encyclopedias and a member of the editorial board of various International journals, including European Journal of Finance. His major areas of research, scholarship and teaching are in data analytics, Quantitative and Islamic finance, Econometrics and Statistics. He regularly co-organises International conferences, including Minhaj University ( since 2018 and 11th Foundation of Islamic Finance conference ( He taught more than 20,000 undergraduate and postgraduate students in his academic career since 1987, specializing in large classes of up to 500 students in multi campuses setting via blended teaching/learning mode. His contribution to teaching excellence has been recognised with several teaching awards at the School, Faculty, University and National levels - including ALTC award 2010, PVC awrad 2019. His teaching specialization include: (i) friendly culture-valued teaching with interesting data analytics examples and classroom experiments to make the understanding of statistical data analytics a fun and interesting. (ii) His Skeleton-layout interactive teaching method explain complex data analytics and statistical concepts easily. His courses taught include: (i) Basic Statistics and Data analytics (ii) Statistics for Business and Finance, (iii) Econometrics (iv) Quantitative Methods for Business (v) Islamic Finance, Islamic capital markets and Investment. In 2021 he is teaching (i) Introduction to Quantitative Analysis - (ECO1IQN) and (ii) ECONOMETRICS OF FINANCIAL MARKETS - (FIN5EME). He was a member of the team who won Presidential Fellow of Higher education commission (HEC) Pakistan, Turkey Central Bank Training 2013, Islamic Development Bank, and the Australian Research Council Discovery Grant jointly with Suren Basov and Saudi capital Market - Islamic Mutual Fund project with Naseem Al Rahahleh of King Abdulaziz University, Saudi Arabia. He appeared in local Australian and International media outlets including The Australian, The Age, Brisbane time, Economist, 'The New York times' -(, ABC & SBS-Radio, Bloomberg and National TV of Uzbekistan and Indonesia. He served as an Advisory Board member of the National Zakat Foundation (NZF) of Australia and worked for Zakat@ICV and NILS-No interest loan Qard Hassan- Islamic social and micro finance. He is currently editing Routledge's 'Islamic Business and Finance' book series link below:,forthcoming In this series he edited 27 books as of 12 October 2021. - ORCID info: - Researchgate site: -Google site:

How to Cite
Bhatti, M. I., & Basov, S. (2022). INCENTIVES, SOCIAL NORMS, AND BUSINESS CYCLE: AN EXAMPLE OF BUSINESS LOANS PROVISION BY ISLAMIC BANKS. Journal of Islamic Monetary Economics and Finance, 8(3).