Why is Mudaraba not Practiced by Islamic Banks How can Islamic Banks Apply Mudaraba Financing Method through Models

Abstract

A partnership agreement known as a mudaraba is one in which one party contributes finance and the other contributes labor or skills to a joint venture. A pre-determined ratio is used to divide the gains, and the capital provider bears the losses. Due to its compliance with the principles of risk-sharing, profit-sharing, and interest prohibition, mudaraba is one of the principal sources of financing in Islamic banking. However, due to a number of difficulties and limitations, including moral hazard, adverse selection, agency issues, a lack of standardization, legal ambiguity, and regulatory concerns, mudaraba is not frequently used by Islamic banks. The purpose of this study is to investigate the factors that contribute to Islamic banks' limited use of mudaraba and to suggest some models that could help with its implementation in various fields and situations. The paper uses a qualitative methodology based on a review and analysis of the literature. The study concludes that Islamic banks can implement mudaraba using a variety of models, including deposit, investment, project, social, and hybrid mudaraba. The paper also makes some recommendations for boosting the viability and efficacy of mudaraba financing, including enhancing governance, creating a legal framework, promoting standardization and disclosure, boosting supervision and monitoring, and raising awareness and education.