Mitigating Asymmetric Information Problem in the Local Loan Markets

The paper tries to investigate the existence of asymmetric information and adverse selection problem in the Islamic banking sector. Primary and secondary data has been collected from 35 banks in 16 developing countries for 8 years period. The data collection procedures include survey, interviews, observations, publications, and existing research reports. The results revealed that there exists significant asymmetric information problem in the banking sector that leads to adverse selection in loan disbursements. The existing methodology of collection, analyzing and verifying information doesn’t mitigate the informational barriers and lead to wrong client selection for the banks. The borrowers also found to misuse the existing process and underestimate the risk-return relationship. Due to the limitation of fund, it was hard to collect and verify data regarding the loan usage by the borrows