Critical Analysis on the Essence of Muḍārabah and Mushārakah and Its Relation to Ḍamān

Asmadi Mohamed Naim

doi:10.32890/mmj.22.2018.9668

Abstract

The study aims to explore the permissibility of guarantee for muḍārabah and mushārakah based contracts and to discuss in detail the essence of muḍārabah and mushārakah, which both contracts contain the concepts of trust and profit sharing. The study conducted the qualitative research approaches which consist of documents analysis, interviews and observations in few phases. The study found that there are few matters that can be listed as genuine essence of muḍārabah and mushārakah. It also found that the majority of scholars were of the view of prohibiting capital guarantee by partners. It also proved that few statements such as Ibn Taymiyah’s statement were quoted out of context and definitely not appropriate to attribute the stance of those who allowed capital guarantee to him by using his statements, as those statements showed something else. However, a third party may undertake to bear the loss of capital due to misconduct or negligence on the part of the manager for both contracts. The rabb al-māl (capital provider) may also take collateral from the muḍārib, provided that the collateral can only be liquidated in the event of negligence or misconduct or violation of contractual terms by the muḍārib.

Highlights

In the wake of the vast development of Islamic finance over the last few decades, much has been said about the limited track record of Islamic financial institutions (IFIs) applying risk sharing principles, especially muḍārabah and mushārakah
One major problem with the profit and loss sharing (PLS) contracts that has been frequently mentioned in the literature is the agency problem, which is said to be inherent to these types of contracts
The objectives of this study are to explore the permissibility of guarantee for muḍārabah and mushārakah based contracts and to discuss in detail the essence of muḍārabah and mushārakah, which both contain the concepts of trust and profit sharing

Summary

Introduction

In the wake of the vast development of Islamic finance over the last few decades, much has been said about the limited track record of Islamic financial institutions (IFIs) applying risk sharing principles, especially muḍārabah and mushārakah. The issues of high risk in general and multi-faceted business risks in particular that are associated with muḍārabah and mushārakah remain obstacles to their implementation. To minimize those risks scholars have suggested a few steps such as proper guidelines on taqṣīr (negligence) and taaddī (transgression). In the words of the State Bank of Pakistan 2008, “The agency problem is one of the major factors for the reluctance on the part of banks to undertake equity based modes of financing, as it gives entrepreneurs the incentive to understate profits.” [Kazarian E.G, 1993; Rickwood and Murinde in Iqbal M.

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Conclusion