The Mudharib’s Legal Responsibility for the Business Risk in Mudharabah

Mudharib or the entrepreneur can take the opportunity to report a lower profit or loss due to business risk. This reason allows him to be freed from the legal responsibility. Consequently, shahibul mal or the financier has to absorb the loss. This paper attempts to find a solution to overcome this moral hazard. This paper employs the components of the Business Judgment Rule (BJR) that analysed to compare them with the related stipulations in the Islamic law. The finding concludes that in light of the fiduciary relationship, mudharib must fulfill the fiduciary duties being equal to the concepts of tabayyun and amanah in Islam. Based on freedom of contract, the parties can agree to insert the clauses to specify such legal duties in the contract. His legal responsibility can be determined, if mudharib has made an effort to mitigate the business risk, and taking no financial benefit behind the loss. This can serve as a solution to use mudharabah contact more frequently.