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a rather controversial issue amongst Muslim jurists. One school of thought (Hanafi and Hanbali) is of the opinion that it is possible to restrict a Mudarabah to a particular term, after which it will automatically come to an end without any notice. Another school of thought (Shafi’i and Maliki) is of the opinion that the Mudarabah cannot be restricted to a particular time.


This difference of opinion for deciding the maximum time limit of Mudarabah is ex- plicit; on the other hand, the issue of fixing a minimum time limit for Mudarabah contract termination is not explicitly stated in Shariah law. However, it has been argued that an ap- parent principle it can be derived from gen- eral principles enumerated in Islamic holy books, which imply that no such limit can be fixed, and that each party is at liberty to ter- minate the contract at their own free will.


The ease of termination of a Mudarabah contract has both advantages and disad- vantages. While on one hand, the flexibility which it allows is a plus, on the other hand the unlimited power of the parties to termi- nate the Mudarabah at their own free will may create some difficulties for commercial enterprise. Ventures take time to develop and demand continuous and complex ef- forts; therefore, it could be disastrous for


the project if the Rabb-ul-mal chooses to terminate the Mudarabah right in the begin- ning of the enterprise or at an unexpected point. This could bring a severe setback to the Mudarib, whose efforts will go down the drain. Therefore, it is recommended that when entering into a Mudarabah, parties should make an agreement stating that no party shall terminate it during a minimum specified period, except in specified circum- stances. This does not seem to violate any principle of Shariah, and resolves the issue of uncertainty.


Modifications of Mudarabah Islamic banks often apply various modifi- cations to the basic concept of Mudaraba. Some of these involve the use of many in- vestors and scores of entrepreneurs, as op- posed to the traditional one-to-one interac- tion. The bank is an intermediary who enjoys investors’ confidence when receiving their funds.


Projects put forward by entrepreneurs are financed by the intermediary, rather than the investors. Investors and entrepreneurs do not have a direct relationship, and have no responsibility or obligation towards each other. While the profit sharing ratio is pre- agreed between intermediary and entrepre- neur, no such agreement takes place be-


Figure A: Snapshot of Islamic Finance Offerings Banking and Finance Needs Shariah sources


• Quran • Sunnah


• Ijma’ (jurist consensus) • Qiyas (analogy) • Ijtihad (reasoning)


Shariah filter Fiqh al - Muamalaat contracts


• Musharaka • Mudaraba • Murabaha • Ijara


• Istisna • Salam


tween investor and intermediary. There is no specified time period or limit to the number of projects, and the agreement is an ongo- ing process. It is interesting to note that in this investor-intermediary-entrepreneur tri- angle, the investor continues to remain an inactive partner. S/he provides capital and then shares the profit or absorbs losses, unless these are caused by intermediary’s negligence.


As I discussed earlier, the intermediary plays a vital dual role of an entrepreneur and an investor. Because of this position, it be- comes his or her primary responsibility to hire experienced staff, in order to thoroughly examine the business proposals submitted by entrepreneurs, and to prudently invest the funds held in trust. S/he is also respon- sible for keeping proper books of accounts, and conducting a periodical audit in order to maintain high credibility.


In this case, it becomes all the more impor- tant that the investor does not know which project is being financed through his or her capital. Similarly, the entrepreneur does not know whose funds are financing his project.


• Partnership • Partnership • Purchase-resale • Lease • Manufacturing contract • Forward sale


As regards profit sharing, the net profit from all the avenues of enterprise is distributed by the intermediary to the investors; after the intermediary’s own operat- ing expenses have been net- ted out and his/ her share of the profit has been retained. However, the entrepreneurs share the pre-agreed ratio of profit with the intermediary, and this profit is taken out of the income generated by their projects.


Islamic Banking and Finance Solutions


Prohibition on: • Interest


• Speculation • Gambling


Prohibition of certain investments:


• Sectors (e.g.: alcohol, armaments, • financial services, gambling, pork, • pomography, tobacco) • Instrument (e.g. no forward transactions, limited option use, no derivatives, short- selling


• Asset-backed


transactions with investments in real, durable assets


• Credit and debt


products are not encouraged


It is interesting to note that in the above scenario, the finan- ciers - both the investors and the intermediary - operate purely on the basis of Mudara- bah, while the entrepreneur is free to choose any mode of fi- nancing - such as Mura-baha, Ijara, Sallam, or Istisna - which is suitable to his business re- quirements.


Source: Iqbal Khan 2007 Islamic Finance: Relevance and Growth in the Modern Financial Age 70 Global Islamic Finance February 2011


A Mudarabah agreement is usually made under the as- sumption that the Mudarib does not invest financial capital in the Mudarabah, but


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