Default Risk Management Strategies in Exchange and Partnership Contracts: A Comparative Analysis in Iran’s Banking System

Document Type : Original Article

Authors

isu, tehran, iran

Abstract

Managing default risk in Islamic contracts, particularly under conditions of information asymmetry, is a major challenge for Iran’s banking system. This study seeks to identify and compare the strengths and weaknesses of default risk management in exchange- and partnership-based contracts, and to propose corrective strategies. The research employs a qualitative design with thematic analysis. Data were collected through semi-structured interviews with 14 experts in Islamic banking, risk management, and Islamic jurisprudence. Participants were purposively selected, and interviews continued until theoretical saturation was reached. Data analysis followed Braun and Clarke’s (2006) six-phase framework.
Findings indicate that structural weaknesses in exchange contracts (institutional, systemic, and technological) foster adverse selection. Overreliance on collateral and the absence of behavioral credit scoring enable high-risk clients to access financing. By contrast, behavioral weaknesses in partnership contracts (human, cultural, and motivational) tend to generate moral hazard, reflected in concealment of financial reporting and difficulties in monitoring the agent’s performance. These results support the theories of asymmetric information and agency, while highlighting the need for a fundamental revision of default risk management in Islamic banking.
Three categories of corrective strategies are suggested: (1) institutional–legal, including revision of regulations for partnership contracts; (2) technological, such as behavioral credit scoring and pilot use of smart contracts; and (3) cultural–organizational, including staff training and incentive systems. These strategies may guide policy-making by the central bank and commercial banks to strengthen default risk management and improve the efficiency of Islamic finance.

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References

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Budget and Finance Strategic Research
Volume 6, Issue 4 - Serial Number 24
Winter Quarterly
February 2026
Pages 89-116

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History

  • Receive Date: 11 September 2025
  • Revise Date: 06 October 2025
  • Accept Date: 09 February 2026

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