Re-Analyzing the Inherent Complexities in the Principal/Agent Relationship of Two-Tier Mudarabah

Abstract

The principal/agent relationship is at the forefront of the most frequently cited problems of mudarabah. This article seeks to analyse the principal/agent relationship and its impact on the profitability of two-tier mudarabah.In the context of Islamic banking and finance, theoretically, mudarabah has long been touted as one of the ideal instruments of the Shari’ah-compliant banking system by its advocates and proponents. The structure of mudarabah is based on a limited-liability, joint-venture-undertaking in which the provider of capital and the entrepreneur agree on common terms of business.