The Risks Associated with Banking Muḍārabah, and Ways to Reduce It

Abstract

Sharīʿah-compliant muḍārabah, which is to pay money to someone who invests it and develops it for a portion of the profit, is one of the best means that Islamic banks and investment companies can use in order to invest their money, finance their clients, and raise capital without introducing new owners to own shares of the bank or company. It is also a means of achieving balance in financial liquidity between receivables and liabilities; however, muḍārabah investment or financing comes with multiple risks that make the executive management of banks and companies reluctant to deal with it. These risks are exemplified in the fear of capital loss, of inability to make a profit, and of the use of funds for purposes other than the investment. These risks should not remain a barrier that prevents its use in investment and financing in a manner that equals, or surpasses, other means of investment and financing. In this research we will examine the solutions proposed to reduce these risks; for example, a third party guarantee of capital or expected profit, and establishing provisions for investment risk and profit rate risk (profit stabilization). This research will be conducted according to three methodologies: inductive, comparative and analytical. The research has reached a number of results. These include that the correct view is the permissibility of renting an asset for a portion of what is produced from it. Also, it is imperative to find legitimate means to invest the compulsory reserve that is held by the Central Bank so that its owners are not deprived of its profits. Also, it is not permissible for the capital owner to require the muḍārib to make a certain minimal percentage of profit or a lump sum. Also, there is an urgent need to create a collective fund among Islamic banks and financial institutions to secure against the potential risks.