Moral Hazard in Mudharabah Financing: Evidence from Bank Syariah Indonesia

Abstract

Abstract

This study examines the phenomenon of moral hazard in mudharabah financing, which remains a critical challenge in Islamic banking practices, particularly within Bank Syariah Indonesia. Although mudharabah is theoretically designed as a profit-sharing financing instrument that upholds the principles of fairness and transparency within Islamic Finance, in practice it is still exposed to information asymmetry that creates opportunities for opportunistic behavior by customers. Previous studies have largely overlooked the micro-level dynamics of moral hazard at the branch level using a contextual qualitative approach, especially in socio-economic settings such as Palopo. This study aims to analyze the forms, determinants, relational patterns, impacts, and mitigation strategies of moral hazard in mudharabah financing. A qualitative case study approach was employed at Bank Syariah Indonesia, Palopo Branch, with data collected through in-depth interviews, observation, and documentation, and analyzed using thematic analysis guided by Agency Theory. The findings reveal that moral hazard manifests in forms such as profit underreporting, financial statement manipulation, and misuse of funds, driven by information asymmetry, limited monitoring, low financial literacy, and strong trust-based social relations. The impacts include financing inefficiency, declining trust, and a strategic shift toward lower-risk financing instruments. This study contributes by developing a contextual model of moral hazard in branch-level Islamic banking operations and provides important implications for strengthening governance in profit-sharing financing systems.