Document Type : Science - Research (Islamic Risk Management Tools)

Authors

• MOHAMMAD ANDALIB ¹
• ahmad SHAABANI ²

¹ isu, tehran, iran

² Faculty Member, Faculty of Islamic Studies and Economics, Imam Sadiq University

Abstract

Asymmetric information is one of the fundamental issues in financial systems, manifesting through two phenomena: “adverse selection” and “moral hazard.” In participatory contracts of Islamic banking, due to the nature of profit-and-loss sharing, these phenomena are intensified, increasing the risk of default. In this context, emerging technologies, particularly Web3, can provide tools to manage this risk by enhancing transparency, enabling smart contracts, and supporting decentralized identity verification. The present study aims to assess the feasibility of reducing default risk caused by adverse selection in participatory contracts using Web3 technology.

The research employed a mixed-method approach. In the first phase, the Delphi method and expert consultation with banking and academic specialists were used to identify the main factors of adverse selection and potential Web3 mechanisms to mitigate it. In the second phase, a structured questionnaire was distributed among a group of experts, and data were analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM). This approach allowed evaluation of relationships among variables and assessment of the conceptual model’s effectiveness.

Results indicated that Web3 can effectively reduce default risk through several mechanisms. The most significant include enhancing information transparency during credit assessment, automating obligations via smart contracts, establishing decentralized digital identity and credit history, tokenizing collateral and assets, and reducing monitoring and control costs. These findings confirm that Web3-based technologies can complement traditional risk management tools, mitigating information asymmetry and providing a conducive environment for expanding participatory contracts in Islamic banking.

From a theoretical perspective, this study contributes to the literature on information economics and risk management in Islamic contracts. Practically, it offers a framework for banks and policymakers, suggesting that the intelligent application of Web3 can be an effective solution to reduce defaults, increase trust between contracting parties, and improve resource allocation efficiency in the Islamic banking system.

Keywords

• Adverse selection
• Default risk
• Participatory contracts
• Web 3 technology
• Structural equation modeling (SEM)

Main Subjects

• Islamic Risk Management Tools