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Much of the recent literature on the East Asian crisis of 1997-98 has focused on the sudden capital reversals and the accompanying regional bust. An oft ignored fact is that the bust was preceded by a prolonged boom period. This boom was fuelled primarily by large-scale capital inflows throughout the early 1990s, a significant proportion of which was intermediated via the domestic banking sector. Motivated by this observation, along with the recognition of the importance of the credit (bank lending) transmission channel in the crisis-hit Southeast Asian economies, this paper concentrates on the precrisis capital inflow boom to emerging economies. Copyright © 2003 John Wiley & Sons, Ltd.

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Most of conventional banks conduct their banking and financial systems under interest scheme, which is vulnerable to asymmetric information problems. This paper provides a mathematical assessment on the robustness of profit and loss sharing (PLS) based contract against asymmetric information problems. In particular we show that PLS scheme has an inherent mechanism to overcome adverse selection and moral hazard problems. Specifically, it will be shown that PLS contracts is relatively immune to the problems. This is due to the so called incentive compatible mechanism provided by PLS contracts. We also propose a risk-pooling mechanism to seize the risk exposure.

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