This book outlines the theoretical foundations of Islamic finance and summarizes empirical studies on current practices in Islamic banking. The main finding is that there is a discrepancy between the paradigmatic version of Islamic finance and the way it is currently implemented. The most substantial deviation is that profit and loss sharing contracts are only used on a low scale in Islamic banking when projects or individuals are funded. The microeconomic analysis of Shariah-conform profit and loss sharing contracts reveals possible reasons for this discrepancy. The payoffs in such...