Mudarabah and its Applications in Islamic Finance: An Analysis

Abstract

Mudarabah is an arrangement of a silent partnership comprises of capital and labor. It may be concluded between investment account holder as providers of funds and the Islamic bank as a mudarib. The Islamic bank becomes interested to receive the amounts from investment account holders and to share the profit generating from them based on a pre-agreed ratio, while the losses, if any, will be borne by the funds provider, except the case of a verified misconduct, negligence or violation of the conditions by the Islamic bank. A mudarabah arrangement could also be concluded between the Islamic banks, as the funds providers, on behalf of itself or on behalf of investment account holders, and the businessmen as well as other craftsmen, like farmers, traders and so forth. The significant relevance of a mudarabah arrangement may be actualized in the combination of financial and managerial assets between the parties. Mudarabah is applicable to the general of specific investment, project funding, bridge financing, working capital and small and medium financing, interbank investment, structured products, investment deposits, and so on. The capital is entrusted to the manager promotes mutual concern among the partners and channels funds to the productive use. The manager in the position of trustee should act in fully integrity and is expected to perform in the best manner to reach at the desired goal of the capital provider who has invested his capital without having any control in the management of the venture.