Mudaraba in Islamic Finance: Principles and Application
Business Journal For Entrepreneurs, Vol. 16, No. 4, pp.105-112, 2003
Posted: 2 Aug 2009
Date Written: 2003
This paper highlights the workings of Islamic banking and finance in general, and Mudaraba as a finance instrument in particular. Historically Mudaraba was practiced by Arabs long before the advent of Islam, and is therefore considered by many scholars to be the most authentic form of Islamic contract.Yet Mudaraba constitutes a very small percentage of all Islamic financing arrangements. Mudaraba is based on the profit-and-loss sharing system where theoretically the financier and entrepreneur share in the profit and losses of the venture. The paper concludes that Mudaraba is seen as a risky option for financiers and therefore in practice Islamic banks tend to spread the risk of losses and use Mudaraba as a profit-sharing and loss-absorbing instrument.
Keywords: Islamic banking, Profit-and-loss sharing, Mudaraba
JEL Classification: F23, G21
Suggested Citation: Suggested Citation