MUDARABAHH: A PARTICIPATORY MODE OF FINANCING UNDER ISLAMIC BANKING AND FINANCE

Abstract

Mudarabah is considered as a perilous partnership contract, in which both the parties agree to the decided portion of the profit from this financed activity.  On the practical side, Mudarabah is a form of an arrangement which consists of capital and labor. Capital is provided by Rab-ul-Maal while services are rendered by Mudarib. This Islamic instrument of equity financing, faces agency problem as well as other ethical hazards. This contract carries some risks related to agency, capital and operational risks, issues adjoining profit and loss sharing. The paper emphasizes the significance of extenuating these risks. What is the rationale behind this exercise that only investor bears the loss? Whether there exists any scale that can measure diligence and care of Mudarib in the exercise of his duties? The reason behind this is that the person who owns capital is not empowered to exercise check on the management and how Mudarib can be ranked trustworthy, what will be remedial mode in situations where Mudarib breaks the trust? Mudarib cannot make profit of the agreed percentage due to market fluctuations, these complexities are the focal point of this paper. The complications relating to agency problems in Mudarabah and their effects on economic relations of opposite parties are also the focus of this research. Major concepts and legitimacy of Mudarabah are also discussed to establish their compliance with Shari’ah and to make it reader friendly. The qualitative research methodology is employed in the accomplishment of this paper for literature review. The researcher reviewed different books, journals and papers of different writers well versed with the knowledge of Islamic finance. The primary objective behind this piece of writing is to highlight the ways and instruments that can resolve key issues associated with Mudarabah and how this participatory mode of financing can be made more valuable and practically acceptable to both investors (Rab-ul-Maal) and Mudarib.