MORAL HAZARD IN ISLAMIC FINANCIAL INSTITUTIONS: MISUSE OF CUSTOMER FUNDS BY MANAGEMENT AND ITS IMPACTS

Abstract

Sharia financial institutions operating based on Islamic principles face serious challenges in the form of moral hazard, particularly in the misuse of customer funds by management. This study analyzes the phenomenon of moral hazard in the context of Islamic financial institutions, focusing on the behavior of leaders who exploit information asymmetry for personal gain. The results show that moral hazard in Islamic financial institutions occurs through several mechanisms, including manipulation of financial reports, diversion of funds for high-risk investments without customer approval, and use of funds for personal needs of management. Factors triggering moral hazard include weak internal control systems, minimal transparency in operations, and lack of customer understanding of Islamic investment mechanisms. The impact is significant, both economically and socially. Economically, fund misuse causes financial losses for customers, a decline in public trust, and destabilization of the Islamic financial system. Socially, these actions damage the reputation of Islamic financial institutions as a more ethical alternative to conventional systems and erode public trust in Islamic values in business practices. Addressing these issues requires strengthening governance systems, implementing stricter oversight mechanisms, increasing operational transparency, and educating customers about Sharia-compliant investment products and risks. Furthermore, enforcing strict sanctions against perpetrators of moral hazard and harmonizing regulations between supervisory authorities are key to maintaining the integrity of Sharia-compliant financial institutions