Impact of Inflation on Mudarabah Profits: Some Observations

Abstract

The depreciation of currency and its use as unit of account jeopardises the ability of mudarabah (profit sharing) to do justice to the rabb-al-mal (capital owner) and it results in transfer of most of the gains (real) and in some cases even part of the capital to the mudarib (entrepreneur). In addition to moral hazards, it is an important cause of non prevalence of profit sharing mode of finance. It adversely affects musharakah and it has reduced the availability of qard hasan to almost nil. The viability of these modes of finance is vital for ensuring the full utilisation of Islamic finance. If mudarabah contract is modified so that it provides for sharing of real profit in agreed proportions (instead of nominal profits), inflation would not affect profit sharing and both mudarib (entrepreneur) and rabb-al-mal share real profit in agreed proportion.

Keywords: Mudarabah, Inflation