Islamic Business Contracts and Microfinance: A Case of Mudaraba (Nadeem A.)

Islamic Banking

Abstract This article presents the Mudaraba partnership as an example of financial products compatible with the norms of Islamic finance.

Mudaraba is designed to meet the need of poor Muslim microentrepreneurs for financial services that comply with their religious belief of interest prohibition. It is a partnership where one partner provides capital to the other for investing in a commercial enterprise. The profit-sharing ratio is agreed by the parties at the beginning of the contract, which can be terminated by either party after giving due notice.

The article explains the assumptions and terms and conditions of the Mudaraba model, and lists challenges involved. Any bank engaging in Mudaraba transactions should meet the following legal obligations:

Contract details should be clearly documented;
Microfinance program should bear the entire financial risk without demanding collateral;
Profit-sharing ratios as a percentage of profit should be agreed upon before execution of contract;
Microentrepreneur has full control over business management, while supervision is the right of the microfinance program.

The article concludes that patronage of Islamic financial institutions will enable Islamic microfinance to develop Shariah compliant products that can contribute to poverty reduction.
External link Download
Libref/ Nadeem A. (2010) "Islamic Business Contracts and Microfinance: A Case of Mudaraba", pp. 1 - 16
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