Optimization of Banking Contract Structure Based on Incomplete Contracting in non interest banking

Abstract

Contractual incompleteness is essentially related to the “unverifiability” condition and “enforceability” condition. In the complex and uncertain economic environment, financial contract is incomplete. Contractual incompleteness decrease contract effectiveness. We analyze banking contracts with respect to incomplete contract theory. The results show that the banking contracts in Iran are incomplete. Because of high transaction cost, uncertainty, ambiguity, complexity and unenforceable contract, lead not to perfect implementation of commitment. The fact that contracts are incomplete allows for opportunistic behavior of entrepreneur and hold-up bank inside credit contract. Some mechanisms needed for gap filling in incomplete contract. In banking contract this mechanism is designed in relationship banking that help to balanced bargaining power between parties and can reduce problems caused by Contractual incompleteness.

Keywords

• incomplete contract
• hold-up problem
• opportunistic behavior
• banking contract
• relationship banking