The revival of mudharabah contract: A proposed framework

Abstract

Mudharabah is a profit-sharing partnership agreement of a business venture to carry out economic activities. Despite its potential socioeconomic benefits to the parties involved and to the society, the application of mudharabah is limited to engineered Islamic finance products which transform the conventional financial products into Shari'ah-compliant ones. We argue that, in order to realise the mudharabah true potentials, among others, the mudharabah contract needs to be revived. The purpose of this study is to propose a framework in reviving the mudharabah contract between the sahibul mal (capital provider/investor) and the mudharib (entrepreneur). The research methods used in this study are library research and content analysis. As a result, agency theory is recognised to be very relevant to the mudharabah contract. To revive the mudharabah contract, tahaluf concept (Islamic treaty with compliance with Shari'ah) is identified as the most suitable concept to be adopted. This proposed framework serves as guidance in formulating the data collection strategy from different perspectives i.e. from sahibul mal, mudharib, Shari'ah advisors and academicians.