The Muḍāraba Facility: Evolution, Stasis and Contemporary Revival

in Arab Law Quarterly
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The age-old concept of partnership was seen by Muslim jurists from the 8th century Hijra onwards as a sacrosanct commercial arrangement—and, therefore, subjected to a form of fixity which is unparalleled in any other religious tradition. Since the formative period of Islamic law, the limited-liability partnership, or muḍāraba, a specific variation of the over-arching mushāraka partnership, has continued to hold central importance for Muslims. Yet, despite this centrality, it has not been examined with a view to reformulating it for contemporary Islamic banking and finance. This has led to its virtual neglect in modern Islamic banking operations. This article suggests that the revival of the muḍāraba facility requires the overcoming of key disadvantages inherent in its structure and that a restructuring on the basis of the hybrid facility called participating preferred ijāra is one possible way of achieving such an outcome.

  • 2

    Mohammad O. Farooq“Partnership, Equity-Financing and Islamic Finance: Whither Profit-Loss Sharing?”Review of Islamic Economics 11 (2007): 68.

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  • 4

    Taqi UsmaniAn Introduction to Islamic Finance (The Hague: Kluwer Law International2002).

  • 9

    Mahmoud El-GamalIslamic Finance: Law Economics and Practice (New York: Cambridge University Press2006).

  • 13

    Ibid. p. 19.

  • 15

    Ibid. p. 13.

  • 19

    See Andrew Winton“Limitation of Liability and the Ownership Structure of the Firm”Journal of Finance 48 (1993): 487-512; Timur Kuran “The Logic of Financial Westernization in the Middle East” Journal of Economic Behavior and Organization 56 (2005): 593-615.

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  • 21

    See Bernard JacksonJewish Law in Legal History and the Modern World (Leiden: Brill1980).

  • 30

    Ibid. p. 81.

  • 31

    Ibid. p. 70.

  • 32

    See Siddiqisupra note 27; M. Umar Chapra “Why has Islam prohibited interest? Rationale behind the prohibition of interest” in A.S. Thomas (Ed.) Interest in Islamic Economics: Understanding Ribā (London: Routledge 2006).

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  • 36

    See Hasanuz-Zamansupra note 29 at 70; Udovitch supra note 7.

  • 38

    See Timur Kuran“Why the Middle East is Economically Underdeveloped: Historical Mechanisms of Institutional Stagnation”Journal of Economic Perspectives 18 (2004): 71-90.

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  • 49

    See M. Shahid Ebrahim“Integrating Islamic and Conventional Project Finance”Thunderbird International Business Review 41 (1999): 583-609.

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  • 53

    See Ronald H. Coase“The Nature of the Firm”Economica (4) New Series (16) (1937): 386-405; and Armen A. Alchian “Uncertainty Evolution and Economic Theory” Journal of Political Economy 58 (1950): 211-221.

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  • 55

    Merton H. Miller“Debt and Taxes”Journal of Finance 32 (1977): 261-275.

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