Mudarabah in Islamic Sharia law

Ziada, ZA 1991, Mudarabah in Islamic Sharia law , MPhil thesis, University of Salford.

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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.

Item Type: Thesis (MPhil)
Contributors: Awad, YN (Supervisor)
Schools: Schools > Salford Business School
Depositing User: Institutional Repository
Date Deposited: 23 Jul 2021 13:24
Last Modified: 27 Aug 2021 21:55
URI: http://usir.salford.ac.uk/id/eprint/61277

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