Islamic Banking and Interest: A Study of the Prohibition of Riba and Its Contemporary Interpretation

By Abdullah Saeed | Go to book overview

CHAPTER FOUR

PROFIT AND LOSS SHARING: MUḐĀRABA AND MUSHĀRAKA

Islamic banking theorists envisioned that the investment activities of the Islamic bank would be based on the two legal concepts of muḍāraba and mushāraka, alternatively known as Profit and Loss Sharing (PLS). These theorists contended that the Islamic bank would provide its extensive financial resources to the borrowers on a risk sharing basis, unlike the interest-based financing in which the borrower assumes all risks. However, in practice, Islamic banks generally have come to realise that PLS, as envisaged by the theorists, cannot be utilised extensively in Islamic banking due to the risks it imposes on the bank. This realisation has led Islamic banks to find ways by which they can limit the flexibility of these two concepts of PLS and transform them almost to risk-free financing mechanisms. This chapter examines how the two concepts of muḍāraba and mushāraka developed in Islamic law and how they are utilised in Islamic banking.


Muḍāraba in fiqh literature

Muḍāraba is a contract between two parties whereby one party called rabb al-māl (investor) entrusts money to a second party, called muḍārib for the purpose of conducting trade. The muḍārib contributes his labour and time and manages the venture according to the terms of the contract. One of the essential characteristics of this contract is that the profit, if any, will be shared between the investor and the muḍārib on a pre-agreed proportional basis. The loss, if any, should be borne by the investor alone.1

The Qur'ān has no direct reference to muḍāraba, though it uses the root ḍ-r-b from which muḍāraba is derived, fifty-eight times.2 The verses in the Qur'ān which may have some bearing on muḍāraba, though admittedly in a distant way, denote 'travel' or 'travel for the purpose of trade.'3 It has been claimed that even the Prophet and some of his Companions were engaged in muḍāraba ventures.4 According to Ibn Taymiyya, Muslim jurists declared the lawfulness of muḍāraba, on the basis of certain reports attributed to

1 Jazīrī, Fiqh, III, p.34; Saleh, Unlawful Gain, p.103; 'Abd al-Qādir, Fiqh al-Muḍāraba,
pp.8-9; Abu Saud, “Money, Interest and Qiraḍ”, p.66; EI-Ashker, The Islamic Business Enterprise, p.75.

2 Qur'ān 2:273; 3:156; 4:101; 5:106; 73:20.

3 Asad, The Message, pp.92,905.

4 Ibn Hishām, al-Sīrat al-Nabawiyya, I, p.188; Sarakhsi, Mabsṣūṭ, XXII, p.18; Ibn Qudāma,
Mughni, V, p.26.

-51-

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