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Islamic Business Contracts and Microfinance-A Case of Mudaraba

Author

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  • Nadeem, Azhar

Abstract

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.

Suggested Citation

  • Nadeem, Azhar, 2010. "Islamic Business Contracts and Microfinance-A Case of Mudaraba," MPRA Paper 27194, University Library of Munich, Germany, revised 2010.
    • Handle: RePEc:pra:mprapa:27194
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    File URL: https://mpra.ub.uni-muenchen.de/27194/1/MPRA_paper_27194.pdf
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    Cited by:

    1. Uddin Tanvir Ahmed & Mohiuddin Md Fazla, 2020. "Islamic Social Finance in Bangladesh: Challenges and Opportunities of the Institutional and Regulatory Landscape," The Law and Development Review, De Gruyter, vol. 13(1), pages 265-319, January.

    More about this item

    Keywords

    Microfinance; Islamci Microfinance; Non profit; Mudaraba;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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