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Income Ratio, Risk-Sharing,and the Optimality of Mudarabah نسبة الدخل، والاشتراك في الخطر وأمثلية المضاربة

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  • Seif. I. Tag El-Din

    (Markfield Institute of Higher Education, Leicester, UK)

Abstract

Little attention in the current literature is given to the analysis of interest-free Islamic financing tools within the framework of risk-return portfolio analysis. This paper adopts the standard tools to establish interesting optimal properties of mudarabah within a two-party contractual model of an income generating economic activity. ‘Income ratio’ is defined as the percentage of expected income that goes to each of the two parties whereas the ‘risk-sharing structure’ refers to how risk is shared between the two parties. The key question is how these two parameters are related through alternative two-party contracts. This paper is an extension to another one where the risk-sharing structure is shown to be perfectly proportionate to income ratio in the case of mudarabah. The Shariah-prohibited interest-rate financing is a manifest disproportionate case as the income ratio of lender is totally insensitive to the contract’s risk. Adopting the same competitive set-up within an informational efficient environment, this paper sets out to establish two more findings: First, a negative relationship proves to exist between income ratio and the risk-sharing structure in terms of an optimal contracts curve (OCC). The mudarabah contract emerges at an optimal break-even point where the OCC coincides with pure profit-sharing but fixed return financial leverages also co-exist with mudarabah. Hence, a pure equity-based Islamic order is theoretically inconceivable even under ideal information efficiency. Second, the optimal mudarabah income ratio (i.e. profit-sharing ratio) is shown to depend crucially on the extent to which the two parties differ in their attitude towards risk (i.e. the risk-attitude differential). The paper goes further to examine the impact of risk-attitudinal differentials on the optimal profit-sharing ratio. These findings are shown to have useful practical and policy implications. إن أدبيات التمويل الإسلامي لم تمنح العناية الكافية لتحليل أدوات التمويل اللاربوي باستخدام تحليل العائد والخطر في تحلل المحافظ المالية. هذه الورقة تستخدم الأدوات المعهودة للوصول إلى خصائص أمثلية المضاربة في إطار نموذج العلاقة التعاقدي الثنائي لنشاط اقتصادي مولد للدخل. والورقة تمثل امتدادًا لما قام به الباحث عندما وجد أن تركيبة الخطر المشترك تتناسب بشكل تام مع نسبة العائد في عقد المضاربة. وقد توصلت الورقة الحالية إلى نتيجتين إضافيتين لهما أبعاد تطبيقية وإجرائية، وهما: الأولى وجود علاقة سلبية بين نسبة العائد وتركيبة المشاركة في الخطر باستخدام منحنى الأمثلية للعقود (OCC)، والثانية وتتمثل في أن نسبة العائد الأمثل في عقد المضاربة تتوقف بشكل كبير على سلوك الطرفين المتعاقدين حيال الخطر.

Suggested Citation

  • Seif. I. Tag El-Din, 2008. "Income Ratio, Risk-Sharing,and the Optimality of Mudarabah نسبة الدخل، والاشتراك في الخطر وأمثلية المضاربة," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 21(2), pages 37-59, July.
    • Handle: RePEc:abd:kauiea:v:21:y:2008:i:2:no:2:p:37-59
    DOI: 10.4197/islec.21-2.2
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    References listed on IDEAS

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