Mudarabah in Islamic Sharia law

The objective of this study is to discuss a special form oftransaction and analyse its implementation by IslamicInvestment Institutions.Being newly developed and still under experimentation,Mudarabah as an investment instrument in its modernapplication has not been the subject of many books orresearch papers. Many books and publications elaboratedwidely on the subject of the Islamic Banking System but fewof them highlighted the issue of Modern Mudarabah.Islam recognizes and guarantees private ownership andallows various types of legal profit-making and investment.It also obliges Muslims to work hard in order to benefitthemselves from work and also be useful to their societies.However, Islam has established a set of controls in view ofhuman tendencies in order to balance between the interestsof the individuals and those of the society and alsobetween any contracting parties in a similar way to therole 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 establishjustice and ensure motivation among the people and otherproduction factors.Some broad lines of Islamic Philosophy could be traced onreflecting upon regulations of Mudarabah contracts:"Mudarabah is an agreement between two parties representingtwo factors of production (capital and labour) based onnegotiation and free will (Taradi). Both have the libertyto increase and improve their constructive power ofnegotiation under a set of controls meant to safeguardsocial security and motivation."However the Islamisation process of the economic, financialand commercial Legal Systems, in the Islamic World can onlybe successful if we seek to identify and develop aninstrument which, on the one hand, reconciles the freedomof the individual with optimal use of resources and on theother, does not conflict with the Islamic "principles" ofequity and justice.The basis of relationship between capital and enterprise inthe Islamic context is the equitable sharing of risks andgains between the provider and user of capital. One of theinstruments for finance identified for switching over frominterest to non-interest basis is Mudarabah "Commendam",which can be defined as an arrangement in which anindividual 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 amounttogether with the agreed share of the profit." (ELAMIN:1988 P.7)However the application of "Mudarabah" in financing currentIslamic Banking Operations and Islamic Insurance System"Takaful" is very limited owing to restrictions onMudarabah transactions. That is why people in Islamiccommunities started to look for Islamic solutions in orderto reshape present Western patterns prevalent in alleconomic activities particularly in banking institutions.Good Islamic frames are to be designed for theseinstitutions so as to become Islamically acceptable andMudarabah could be on&of those frames.Mudarabah contract formula has been introduced by Dr. M.Abdullah Al-Arabi in the second conference of IslamicResearch in Al- Azhar to replace the methods of usury,known as "Ribba" prevailing in the modern bankingactivities. Dr. Al-Arabi published the formula in a bookcalled "The Islamic Formula". In this book he displayedthe concept in a simple way. Consequently other studiesfollowed. Mr Mohamed Baqr Alsadr published his book"Iqtisaduna": Our Economics, and "Al-Bank Al-La-Rabawi: Thenon-interest bank. At the end of the preliminary period ofstudy, the implementation of Mudarabah contract formulafound its way to Islamic banks.In addition to the already existing problems in the field of Fiqh such as mixing up Mudarabah money and transferingthis money to another investor working as per the Mudarabahformula and the problem of distributing profits between thefirst and second investor; other problems were detected.The result is that despite the fact that Mudarabah formulaprovides an Islamic umbrella for banking the activity isconfronted with a progressive tax system already inexistence in the Muslim countries which greatly slashesprofit margin. In such a system of taxation investors'outgoings are not considered in every transaction andconcequently if profits is to be deposited in the centralbank; this could be detrimental to the entirety of theinvestment process. (ELAMIN: 1988 P. 13)This work is divided into "tHree main chapters and aconclusion.In the first chapter I will discuss Mudarabah definition inthe language and "Fiqh" i.e. jurisprudence. The chapterwill also cover the origin and legalisation of Mudarabahand 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 necessaryfor egendering legitimate Mudarabah which includescontractual form conditions related to partners, capital"Ras-Al-Mal", manager and conditions pertaining todistribution of profit.Chapter III will explain and discuss the modern practicalimplementation 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 ofpractical problems raised in previous chapters.Lastly the conclusion will be a summary of the findings ofthe study. It will also pose some recommendations for theestablishment of a proper Islamic Mudarabah System.

Level dc:type.qualificationlevel

Master's Level (Level 7)

Year dc:date.issued

1991

Author dc:creator

• Ziada, ZA

Language dc:language

en

Identifier

oai:salford-repository.worktribe.com:1338512

OAI identifier oai:identifier

oai:salford-repository.worktribe.com:1338512