Mudarabah in Islamic Sharia law

Ziada, ZA

Abstract

The objective of this study is to discuss a special form of
transaction and analyse its implementation by Islamic
Investment Institutions.
Being newly developed and still under experimentation,
Mudarabah as an investment instrument in its modern
application has not been the subject of many books or
research papers. Many books and publications elaborated
widely on the subject of the Islamic Banking System but few
of them highlighted the issue of Modern Mudarabah.
Islam recognizes and guarantees private ownership and
allows various types of legal profit-making and investment.
It also obliges Muslims to work hard in order to benefit
themselves from work and also be useful to their societies.
However, Islam has established a set of controls in view of
human tendencies in order to balance between the interests
of the individuals and those of the society and also
between any contracting parties in a similar way to the
role played by the law in Western Ideologies.
While these controls are minimal to allow for a lot of freedom, they are meant to be strict in order to establish
justice and ensure motivation among the people and other
production factors.
Some broad lines of Islamic Philosophy could be traced on
reflecting upon regulations of Mudarabah contracts:
"Mudarabah is an agreement between two parties representing
two factors of production (capital and labour) based on
negotiation and free will (Taradi). Both have the liberty
to increase and improve their constructive power of
negotiation under a set of controls meant to safeguard
social security and motivation."
However the Islamisation process of the economic, financial
and commercial Legal Systems, in the Islamic World can only
be successful if we seek to identify and develop an
instrument which, on the one hand, reconciles the freedom
of the individual with optimal use of resources and on the
other, does not conflict with the Islamic "principles" of
equity and justice.
The basis of relationship between capital and enterprise in
the Islamic context is the equitable sharing of risks and
gains between the provider and user of capital. One of the
instruments for finance identified for switching over from
interest to non-interest basis is Mudarabah "Commendam",
which can be defined as an arrangement in which an
individual or a group of persons, natural or juristic,
entrust capital to an agent or manager who is to trade with it and then return to the owner the principal amount
together with the agreed share of the profit." (ELAMIN:
1988 P.7)
However the application of "Mudarabah" in financing current
Islamic Banking Operations and Islamic Insurance System
"Takaful" is very limited owing to restrictions on
Mudarabah transactions. That is why people in Islamic
communities started to look for Islamic solutions in order
to reshape present Western patterns prevalent in all
economic activities particularly in banking institutions.
Good Islamic frames are to be designed for these
institutions so as to become Islamically acceptable and
Mudarabah could be on&of those frames.
Mudarabah contract formula has been introduced by Dr. M.
Abdullah Al-Arabi in the second conference of Islamic
Research in Al- Azhar to replace the methods of usury,
known as "Ribba" prevailing in the modern banking
activities. Dr. Al-Arabi published the formula in a book
called "The Islamic Formula". In this book he displayed
the concept in a simple way. Consequently other studies
followed. Mr Mohamed Baqr Alsadr published his book
"Iqtisaduna": Our Economics, and "Al-Bank Al-La-Rabawi: The
non-interest bank. At the end of the preliminary period of
study, the implementation of Mudarabah contract formula
found its way to Islamic banks.
In addition to the already existing problems in the field of Fiqh such as mixing up Mudarabah money and transfering
this money to another investor working as per the Mudarabah
formula and the problem of distributing profits between the
first and second investor; other problems were detected.
The result is that despite the fact that Mudarabah formula
provides an Islamic umbrella for banking the activity is
confronted with a progressive tax system already in
existence in the Muslim countries which greatly slashes
profit margin. In such a system of taxation investors'
outgoings are not considered in every transaction and
concequently if profits is to be deposited in the central
bank; this could be detrimental to the entirety of the
investment process. (ELAMIN: 1988 P. 13)
This work is divided into "tHree main chapters and a
conclusion.
In the first chapter I will discuss Mudarabah definition in
the language and "Fiqh" i.e. jurisprudence. The chapter
will also cover the origin and legalisation of Mudarabah
and the different types of companies in the Islamic System.
It will also emphasise types of contractual companies.
In chapter II this work will discuss basic rules necessary
for egendering legitimate Mudarabah which includes
contractual form conditions related to partners, capital
"Ras-Al-Mal", manager and conditions pertaining to
distribution of profit.
Chapter III will explain and discuss the modern practical
implementation of Mudarabah in the fields of banking and Islamic Insurance Companies, especially in the area of
"Takaful" modern life insurance.
It, will try to give answers to the questions of
practical problems raised in previous chapters.
Lastly the conclusion will be a summary of the findings of
the study. It will also pose some recommendations for the
establishment of a proper Islamic Mudarabah System.

• Thesis Type: Dissertation
• Deposit Date: Jul 23, 2021
• Award Date: Jan 1, 1991