Islamic Business Contracts and Microfinance-A Case of Mudaraba

Azhar Nadeem

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Microfinance; Islamci Microfinance; Non profit; Mudaraba (search for similar items in EconPapers)
JEL-codes: D14 (search for similar items in EconPapers)
Date: 2010-10-27, Revised 2010
New Economics Papers: this item is included in nep-cwa and nep-mfd
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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