Partnership, Equity-financing and Islamic finance:

Whither Profit-Loss-Sharing?
Mohammad Omar Farooq
Associate Professor of Economics and Finance
Upper Iowa University
August 200
!Draft in progress" Feed#ac$ we%come&
Introduction
Is%amic 'an$ing and Finance (I'F) movement has #ecome a rapid%y e*panding phenomenon in
the Mus%im wor%d+ It is a%so drawing attention and serious invo%vement of ma,or western financia%
powerhouses+ -he cru* of I'F movement is the Is%amic prohi#ition of Riba. which the orthodo*y
equates with interest in genera%+ -o comp%ete%y avoid interest as its centra% a%%ocation too%. I'F has
deve%oped an impressive array of modes of transactions that is c%aimed to #e primari%y #ased on
profit/%oss/sharing (P01) modes+ P01 modes are to avoid de#t/financing and use partnership and
equity/financing. simi%ar to venture capita%ism+ Parado*ica%%y. whi%e the pertinent %iterature
continues to emphasi2e P01 modes as the main modes. the practice of Is%amic financia%
institutions (IFIs) is such that they have de%i#erate%y and systematica%%y avoided P01 modes+ 1uch
modes are often presented as various forms of partnership financing+ -his paper argues that
there is a serious pro#%em with the partnership framewor$. in which equity/financing is
considered+ -he pro#%em %ies with the very nature of partnership as a %ega% form of #usiness
organi2ation+ It is further argued that without modifying various contractua% aspects of the equity/
financing. it is on%y economica%%y rationa% for IFIs to predominant%y use de#t/%i$e instruments. whi%e
c%aiming its Is%amicity on the #asis of a%most non/e*istent P01 modes+
Idealiation of PLS !ode in Islamic "inance
One of the $ey precepts of Is%amic finance is that under conventiona% systems #ased on interest.
neither profit and %oss nor ris$ is shared #y the contracting parties+
3!-&he instrument of interest has a constant tendency in favour of the rich and against the
interests of the common peop%e+ -he rich industria%ists. #y #orrowing huge amounts from
the #an$. uti%i2e the money of the depositors in their huge profita#%e pro,ects+ After they
earn profits. they do not %et the depositors share these profits e*cept to the e*tent of a
meagre rate of interest. and this is a%so ta$en #ac$ #y them #y adding it to the cost of
their products+ -herefore. %oo$ed at from macro %eve%. they pay nothing to the depositors+
4hi%e in the e*treme cases of %osses which %ead to their #an$ruptcy and the consequent
#an$ruptcy of the #an$ itse%f. the who%e %oss is suffered #y the depositors+ -his is how
interest creates inequity and im#a%ance in the distri#ution of wea%th+5
6
7Profit 0oss 1haring (P01) dominates the theoretica% %iterature on Is%amic finance+
'road%y. P01 is a contractua% arrangement #etween two or more transacting parties.
which a%%ows them to poo% their resources to invest in a pro,ect to share in profit and %oss+
Most Is%amic economists contend that P01 #ased on two ma,or modes of financing.
name%y Mudaraba and Musharaka. is desira#%e in an Is%amic conte*t wherein reward/
sharing is re%ated to ris$/sharing #etween transacting parties+7
2
7-he most important feature of Is%amic #an$ing is that it promotes ris$/sharing #etween
the provider of funds (investor) and the user of funds (entrepreneur)+ 'y contrast. under
conventiona% #an$ing. the investor is assured a predetermined rate of interest+ 1ince the
nature of this wor%d is uncertain. the resu%ts of any pro,ect are not $nown with any
certainty ex ante. and so there is a%ways some ris$ invo%ved+ In conventiona% #an$ing. a%%
1
Muhammad -aqi Usmani+ An Introduction to Islamic Finance !-he 8ague" 9%uwer 0aw Internationa%.
2002&. p+ 66:+
2
8umayun ;ar and <ohn Pres%ey+ 70ac$ of Profit 0oss 1haring in Is%amic 'an$ing" Management and
=ontro% Im#a%ances.7 International Journal of Islamic Financial Services, >o%+ 2 ?o+2. <u%y/1ept+ 2000. pp+ :/
6@. on p+ :+
this ris$ is #orne #y the entrepreneur+ 4hether the pro,ect succeeds and produces a
profit or fai%s and produces a %oss. the owner of capita% gets away with a predetermined
return+ In Is%am. this $ind of un,ust distri#ution is not a%%owed+ In Is%amic #an$ing #oth the
investor and entrepreneur share the resu%ts of the pro,ect in an equita#%e way+ In the case
of profit. #oth share this in pre/agreed proportions+ In the case of %oss. a%% financia% %oss is
#orne #y the capita%ist and the entrepreneur %oses his %a#our+7
:
-o remedy the c%aimed harms of interest/#ased arrangements. the orthodo* Is%amic finance
c%aims that financing shou%d #e #ased on fair sharing of profitA%oss and ris$+ -he
financingA#usiness forms that are c%aimed as the mode% Is%amic forms are Mudaraba and
Musharaka+
-he movement for Is%amic #an$s and financia% institutions origina%%y #egan with identifying
Mudaraba !investment partnership invo%ving (a) active or managing and (#) si%ent or capita%/
contri#uting partners& and Musharaka !partnership in genera%& as the primary modes of operation.
arguing that Is%am #e%ieves in profit/%oss/sharing (P01 and thus. ris$/sharing)+ 7-he most
important feature of Is%amic #an$ing is that it promotes ris$/sharing #etween the provider of funds
(investor) and the user of funds (entrepreneur)+7
B
According to Muhammad -aqi Usmani. one of
the %eading 1hariah e*perts. who a%so serves on the #oards of a%most a do2en different Is%amic
#an$s or #an$s with Is%amic operations. 7-he rea% and idea% instruments of financing in 1hariah
are musharaka and mudaraba+7
C
-he author further adds a#out musharaka"
3Musharaka is a specific form of shirkah. which 7means DsharingD of various $inds.
inc%uding shirkat-ul-milk (7,oint ownership of two or more persons in a particu%ar
property7). shirkat-ul-aqd (7a partnership in #usiness effected #y a mutua% contract7)+
Musharaka 7has #een introduced recent%y #y those who have written on the su#,ect of
Is%amic modes of financing and it is norma%%y restricted to a particu%ar type of shirkah. that
is. the shirkatul-amwal. where two or more persons invest some of their capita% in a ,oint
commercia% venture+ 8owever. sometimes it inc%udes shirkat-ul-amal a%so where
partnership ta$es p%ace in the #usiness of services+5

Pra#is of Islamic "inancial Institutions $I"Is%: &hetoric 's( &eality
Even though P01 modes are idea%i2ed in Is%amic finance. the rea%ity is that. as it current%y stands.
it is serious%y margina%i2ed in IFIs+
3A%most a%% theoretica% mode%s of Is%amic #an$ing are either #ased on Mudara#a or
Mushara$a or #oth. #ut to/date actua% practice of Is%amic #an$ing is far from these
mode%s+ ?ear%y a%% Is%amic #an$s. investment companies. and investment funds offer
trade and pro,ect finance on mar$/up. commissioned manufacturing. or on %easing #ases+
P01 features margina%%y in the practice of Is%amic #an$ing and finance+
4hatever is the degree of success of individua% Is%amic #an$s. they have so far fai%ed in
adopting P01/#ased modes of financing in their #usiness+ Even specia%ised Is%amic firms.
%i$e Mudara#a =ompanies +++ in Pa$istan. which are supposed to #e functioning pure%y on
a P01 #asis. have a neg%igi#%e proportion of their funds invested on a Mudara#a or
Mushara$a #asis+ According to the Internationa% Association of Is%amic 'an$s. P01
3
Munawar Iq#a% and Phi%ip Mo%yneu*+ !hirt" #ears of Islamic $ankin%& 'istor", (erformance and
(ros)ects !Pa%grave. 200C&. p+ 2@+
4
ibid+. p+ 2@+
5
Usmani. o)* cit*. p+ *v+
6
Usmani. pp+ C/+
covered %ess than 20 percent of investments made #y Is%amic #an$s wor%d/wide (6EE
figures)+ 0i$ewise. the Is%amic ;eve%opment 'an$ (I;') has so far not used P01 in its
financia% #usiness e*cept in a few sma%% pro,ects+5
F
It is c%ear%y esta#%ished that most of the Is%amic #an$s have now given up or margina%i2ed those
two (ris$/sharingAP01) modes. and have turned to the predominant mode of Murabaha. a mode
that a%%ows them to ensure that they avoid ris$ a%most a%together in their transactions and earn
re%ative%y high return+ -hese #an$s have found Mudaraba and Musharaka to #e inopera#%e in the
modern conte*t+
@
>oge% and 8ays revea%s" 74hi%e the distinction from a mere %oan is compe%%ing in
theory. in practice Is%amic #an$s often emp%oy various stratagems to reduce their ris$s in
mura#aha a%most to 2ero. particu%ar%y in internationa% trade+7
E
-hus. quiet%y they have disengaged
from the P01Aris$/sharing modes and em#raced Murabaha. which is descri#ed #y many as
7murabaha syndrome" the strong and consistent tendency of Is%amic #an$s and financia%
institutions to uti%i2e de#t/%i$e instruments7 particu%ar%y in e*terna% financing+
60

3Murabaha. which is the dominant method of investment of funds in Is%amic #an$ing is.
for a%% practica% purposes. a virtua%%y ris$/free mode of investment. providing the #an$ with
a predetermined return on its capita%+ As the =ounci% of Is%amic Ideo%ogy Geport
recogni2es. in mura#aha there is Dthe possi#i%ity of some profit for the #an$s without the
ris$ of having to share in the possi#%e %osses. e*cept in the case of #an$ruptcy or defau%t
on the part of the #uyer+D5
66
Interesting%y. 1iddiqi. one of the %eading proponents and e*perts of Is%amic economics and
#an$ing. asserted during his ear%ier writings in the 6E@0s" 7For a%% practica% purposes this !the
mar$/up system or Mura#aha& wi%% #e as good for the #an$ as %ending on a fi*ed rate of interest+7
62
After providing some internationa% and nationa% statistics that i%%ustrate the serious%y s$ewed
distri#ution of wea%th. 1ufyan Ismai% writes" 7Any neutra% o#server can see the pro#%ems the a#ove
!=apita%ist #an$ing& system causes on a macro #asis in any economy+ Is%amic finance operates a
system ca%%ed Mushara$a which ensures that the a#ove inequa%ities do not occur+ +++ Mushara$a
%ies at the heart of the Is%amic Financing phi%osophy. where the notion of sharing in ris$ and return
#etween investors and entrepreneurs finds its natura% home+7
6:
-he same viewpoint was c%ear%y
echoed in -he -e*t of the 8istoric <udgment on Interest #y the 1upreme =ourt of Pa$istan" 7-he
=ounci% has in fact suggested that the true a%ternative to the interest is profit and %oss sharing
(P01) #ased on Mushara$ah and Mudara#a+
1iddiqi went much further to warn the Is%amic finance industry"
3+++ we cannot c%aim. for an interest/free a%ternative not #ased on sharing. the superiority
which cou%d #e c%aimed on the #asis of profit/sharing+ 4hat is worse. if the a%ternative in
practice is #ui%t around predetermined rates of return to investi#%e funds. it wou%d #e
7
;ar and Pres%ey. o)* cit+. p+ :+
8
A#du%%ah 1aeed+ Islamic $ankin% and Interest& A Stud" of the (rohibition of Riba and its
+ontem)orar" Inter)retation !?ew Hor$" E+ <+ 'ri%%. 6EE&. see chapter 7Mura#aha Financing Mechanism.7
pp+ F/ECI Ga,esh Aggarwa% and -ari$ Housef+ 7Is%amic 'an$s and Investment Financing.7 Journal of Mone",
+redit and $ankin%. >o%+ :2. ?o+ 6. Fe#ruary 2002. pp+ E:/620. on p+ 60I Fran$ >oge% and 1amue% 8ayes.
III+ Islamic ,aw and Finance& Reli%ion, Risk and Return !-he 8ague" 9%uwer 0aw Internationa%. 6EE@&. p+ F+
9
>oge% and 8ayes. p+ 6B6+
10
-ari$ Housef+ 7-he Mura#aha 1yndrome in Is%amic Finance" 0aws. Institutions and Po%itics.7 in
=%ement 8enry and Godney 4i%son (eds+)+ !he (olitics of Islamic Finance !Edin#urgh University Press.
200B&. pp+ :/@0. p+ C+
11
1aeed. p+ @F+
12
Mohammad ?e,atu%%ah 1I;;IJI+ Issues in Islamic $ankin% !0eicester" -he Is%amic Foundation. U9.
6E@:&. p+ 6:E+
13
1ufyan Ismai%+ 74hy Is%am has prohi#ited Interest and Is%amic a%ternatives for financing.7 =hief
E*ecutive. 6st Ethica%+ http"AAwww+6stethica%+comA-hepro#%emswithInterest+pdf. pp+ 6. 26+
e*posed to the same criticism which was directed at interest as a fi*ed charge on capita%+
It so happens that the returns to finance provided in the modes of finance #ased on
murabaha. ba" salam (a forward sa%e. where#y payment is made at time of contract and
item is de%ivered at %ater). %easing and %ending with a service charge. are a%%
predetermined as in the case of interest+ 1ome of these modes of finance are said to
contain some e%ements of ris$. #ut a%% these ris$s are insura#%e and are actua%%y insured
against+ -he uncertainty or ris$ to which the #usiness #eing so financed is e*posed is
fu%%y passed over to the other party+ A financia% system #ui%t so%e%y around these modes of
financing can hard%y c%aim superiority over an interest/#ased system on grounds of
equity. efficiency. sta#i%ity and growth+5
6B
Why PLS model is )eing shunned )y I"Is?
-he #usinessmen are not irrationa%+ -hey have reasons not to #e deep%y enamored with P01
modes+ According to Iq#a% and Mo%yneus.
7-here are many reasons why #usinessmen do not prefer P01 contracts+ -hese inc%ude.
among others" (i) the need to $eep and revea% detai%ed recordsI (ii) it is difficu%t to e*pand
a #usiness financed through mudaraba. #ecause of %imited opportunities to re/invest
retained earnings andAor raising additiona% fundsI (iii) the entrepreneur cannot #ecome
the so%e owner of the pro,ect e*cept through diminishing musharakah. which may ta$e a
%ong time+ 1imi%ar%y. there are some practica% reasons for #an$s to prefer fi*ed/return
modes. inc%uding the fact that due to mora% ha2ard and adverse se%ection pro#%ems in a%%
agent/principa% contracts such as mudara#a. there is a need for c%oser monitoring of the
pro,ect+ -his requires pro,ect monitoring staff and mechanisms. which increase the costs
of these contracts+ Moreover. on the %ia#i%ities side. the structure of deposits of Is%amic
#an$s is not sufficient%y %ong term. and therefore they do not want to get invo%ved in %ong/
term pro,ects+ -hird. P01 contracts require a %ot of information a#out the entrepreneuria%
a#i%ities of the customer+ -his may not #e easi%y avai%a#%e+7
6C
It is noteworthy that. contrary to popu%ar perception of the #e%ieving Mus%ims. Murabaha. as
practiced. may not #e quite 1hariah/comp%iant as genera%%y c%aimed and it is heavi%y critici2ed or
repudiated #y many Is%amic scho%ars and even some Is%amic financia% institutions+
A num#er of scho%ars have recent%y cast dou#ts upon the accepta#i%ity of one of the most wide%y
used forms of Is%amic finance" the type of Murabaha trade financing practiced in 0ondon+ -hese
investors and we%%/$nown mu%tinationa%s are see$ing %owest/cost wor$ing capita% %oans+ A%though
these mu%ti/#i%%ion/do%%ar contracts have #een popu%ar for many years. many dou#t the #an$s tru%y
assume possession. even constructive%y. of inventory. a $ey condition of a re%igious%y accepta#%e
mura#aha+ 4ithout possession. these arrangements are condemned as nothing more than short/
term conventiona% %oans with a predetermined interest rate incorporated in the price at which the
#orrower repurchases the inventory+ -hese DsyntheticD murabaha transactions are unaccepta#%e to
the devout Mus%im. and according%y there is now a movement away from mura#aha investments
of a%% types+ A%/Ga,hi 'an$. a%/'ara$a. and the Kovernment of 1udan are among the institutions
that have vowed to phase out murabaha dea%s+ -his deve%opment creates difficu%ty" as Is%amic
#an$ing now operates. mura#aha trade financing is an indispensa#%e too%+
6

8owever. things have fundamenta%%y changed re%ative to the origina%%y postu%ated princip%es of
Is%amic #an$ing. and despite the criticisms or %ac$ of the desired 1hariah/comp%iance. cost/p%us
financing or Mura#aha (most%y de#t/%i$e instruments) continue to #e the mainstay of Is%amic
14
1iddiqi. 6E@:. p+ C2+
15
Iq#a% and Mo%yneu*. p+ 62+
16
>oge% and 8ayes. pp+ @/E+
#an$ing+ In the chapter 7-he Performance of the Is%amic 'an$s / A Gea%istic Eva%uation7 Usmani.
a quintessentia% 1hariah e*pert in the fie%d of Is%amic #an$ing and finance. ma$es a stunning
reve%ation as he %aments"
7-his !i+e+. Is%amic& phi%osophy cannot #e trans%ated into rea%ity un%ess the use of
mushara$ah is e*panded #y the Is%amic #an$s+ It is true that there are practica% pro#%ems
in using the mushara$ah as a mode of financing. especia%%y in the present atmosphere
where the Is%amic #an$s are wor$ing in iso%ation. and most%y without the support of their
respective governments+ -he fact. however. remains that the Is%amic #an$s shou%d have
advanced towards mushara$ah in gradua% phases and shou%d have increased the si2e of
mushara$ah financing+ Unfortunate%y. the Islamic banks have overlooked this basic
requirement of Islamic bankin% and there are no visible efforts to )ro%ress towards this
transaction even in a %radual manner, even on a selective basis+ +++ !-&he #asic
phi%osophy of Is%amic #an$ing seems to #e tota%%y neg%ected+7
6F

Het. even though P01AGis$/sharing mode has #een virtua%%y a#andoned. quite deceptive%y. 7Profit
0oss 1haring (P01) dominates the theoretica% %iterature on Is%amic finance+7
6@
-here are severa%
e*p%anations identified in the %iterature for IFIsD entrenched tendency to avoid P01 modes and
overwhe%ming%y use murabaha and other non/P01 modes+ ;ar and Pres%ey !2000& enumerate
severa% such e*p%anations"
7P01 contracts are inherent%y vu%nera#%e to agency pro#%ems as entrepreneurs have
disincentives to put in effort and have incentives to report %ess profit as compared to the
se%f/financing owner/manager+ +++
P01 contracts require we%%/defined property rights to function efficient%y+ As in most
Mus%im countries property rights are not proper%y defined or protected. P01 contracts are
deemed to #e %ess attractive or to fai% if used+ +++
Is%amic #an$s and investment companies have to offer re%ative%y %ess ris$y modes of
financing as compared to Mudara#a or Mushara$a in the wa$e of severe competition
from conventiona% #an$s and other financia% institutions. which are a%ready esta#%ished
and hence more competitive+ +++
the restrictive ro%e of shareho%ders (investors) in management and. hence. the
dichotomous financia% structure of P01 contracts ma$e them non/participatory in nature.
which a%%ows a s%eeping partnership+ +++
equity financing is not feasi#%e for funding short/term pro,ects due to the ensuing high
degree of ris$ (i+e+. the time diversification effect of equity)+ -his ma$es Is%amic #an$s and
other financia% institutions re%y on some other de#t/%i$e modes. especia%%y mar$/up to
ensure a certain degree of %iquidity+ +++
unfair treatment in ta*ation is a%so considered to #e a ma,or o#stac%e in the use of P01+
4hi%e profit is ta*ed. interest is e*empted on the grounds that it constitutes a cost item+
-his %ega% discrimination and its associated pro#%em. ta* evasion. ma$e P01 %ess re%ia#%e
as a too% for reward sharing+ +++
secondary mar$ets for trading in Is%amic financia% instruments. particu%ar%y Mudara#a and
Mushara$a. are non/e*istent+ =onsequent%y. they have so far fai%ed to effective%y mo#i%ise
financia% resources+7
6E
17
Usmani. p+ 66:I emphasis is mine+
18
;ar and Pres%ey. p+ :+
19
ibid*, pp+ :/B+
Each of these e*p%anations has some merits+ Indeed. the starting point of any such critica%
eva%uation of the gap #etween rhetoric and rea%ity might #e that the Is%amic finance discourse
simp%y has e*aggerated the 7usefu%ness7 and re%evance of P01 modes.
20
which may a%so have
stemmed from a fundamenta% pro#%em with the notion that riba and interest are equiva%ent (and
since riba is prohi#ited in Is%am. so is interest)+
Why partnership is the least common form of )usiness organiation?
'usiness organi2ations usua%%y ta$e three #road forms" so%e proprietorship. partnership and
corporation+ Is%amic finance. at the %eve% of rhetoric. em#races various forms of partnership or
equity/sharing+ -hree such forms that that can ta$e various sharing modes are"
Partnership" %east common type of #usiness organi2ationI
Equity/financing" corporate structureI few pu#%ic%y traded corporationsI private
corporations are greater ris$
>enture capita% partnership / entrepreneuria% financeI ris$yI sma%% portion
?one of these forms is predominant or common in the portfo%io of IFIs+ It has a%ready #een
e*p%ained why IFIs might not find P01 modes very attractive and practica%+ 8owever. there is
another ang%e from which the issue can #e approached+ 4hich of the three forms of #usiness
organi2ation / so%e proprietorship. partnership and corporation / is the %east commonL For
e*amp%e. in the conte*t of U1A (and it is not much different in many deve%oped countries). the
%east common is partnership+
Distri)ution of )usinesses )y legal types in *S+
?um#er Gevenue Profits
1o%e Proprietorship F2M CM 6M
Partnership @M @M 6CM
=orporation 20M @FM EM
1ource" 1tatistica% A#stracts of the United 1tates. 200B/200C
As a %ega% form of #usiness organi2ation. partnership is the %east popu%ar for reasons that are we%%
esta#%ished+ 1ome of these are" 1p%itAdivided authorityI hard to find suita#%eAcompati#%e partnersI
conf%ict #etween partners. etc+ An Inc+ maga2ine po%% in U1A on 7Are partners #ad for #usinessL7
is revea%ing+
26
Is partnership a bad way to run a business?
Hes CEM ?o :EM
Why is partnership )ad?
Persona% conf%icts outweigh the #enefits 0M
20
;ar and Pres%ey. ibid*. p+ 6C+
21
=hristopher =aggiano+ 7Are Partners 'ad for 'usinessL Fa*Po%% resu%ts on questions a#out
partnership.7 Inc+ Maga2ine. Fe# 6EE2+ http"AAwww+inc+comAmaga2ineA6EE20206A:E6:+htm%
Partners ne'er li'e up to one another,s
e*pectations CEM
-ompanies function )etter .ith one clear leader
C:M
-he survey a%so indicated some positive aspects that the participants appreciated+ 8owever. of
those who characteri2ed partnerships as good. the ma,ority (0M) said they were or are invo%ved
in 7equa% partnerships+7
-his matter of 7equa% partnership7 might e*p%ain why P01 mode%s do not appear attractive either
#y #usinesses or IFIs for the simp%e reason that most re%ationships invo%ving IFIs and their c%ients
are not interested in such equa% partnerships+
Another Inc+ Maga2ine study of C00 partnership #usinesses found that partners in each of those
#usinesses $new one another %ong #efore wor$ing together+ In a competitive setting. where IFIs
have to offer their services and #usinesses have to uti%i2e their services. such partnership or
equity/sharing mode%s simp%y are not compe%%ing%y attractive to either side+ -hese pro#%ems are
not %imited to ,ust partnerships (genera% or %imited). #ut a%so to a%% equity/sharing modes. inc%uding
corporations and venture capita%ists+
-hese pro#%ems are further comp%icated #y some of the restrictive e%ements of c%assica%
parameters of Is%amic contracts and #usiness structures. which are not necessari%y derived from
the JurDan or 1unnah direct%y. #ut are primari%y derivations #y ,urists #ased on human
interpretations+
8ere are some e*amp%es+
3Imam Ma%i$ and 8an#a%i ,urists are of the view that Nthe %iquidity of capita% is not a
condition for the va%idity of musharakaO+5
22
Equity/sharing modes often can run into pro#%em. when partners #ring capita% to the #usiness that
is not %iquid+
7Imam A#u 8anifah and Imam Ahmad are of the view that no contri#ution in $ind is
accepta#%e in a musharaka+7
2:
On the other hand. some of the c%assica% schoo%s restrict in/$ind contri#ution to Musharaka+ -here
isnDt rea%%y anything direct and specific in the JurDan and 1unnah to derive the ru%es %i$e the
a#ove+ 4hy not %eave these matters to the #usinesses to wor$ outL -he pro#%em is that Is%amic
%aws gradua%%y tended toward overstretched %ega%ism+ 4hat the ,urists and scho%ars cou%d have
offered as e*pert guidance was turned into matters of %aw+
According to Mufti Muhammad -aqi Usmani. 7the ru%es of financing in #oth mushara$ah and
mudara#a are simi%ar7
2B
0et us ta$e a further %oo$ at some of the #asic princip%es of musharaka
and mudaraba+
22
Usmani. o)* cit*. p+ @+
23
Usmani. p+ E+
24
Usmani. p+ 62+
(6) Financing through Musharaka and mudaraba does never mean the advancing of
money+ It means participation in the #usiness and in the case of musharakah. sharing in
the assets of the #usiness to the e*tent of the ratio of financing+
2C
-his %imitation is not %i$ed #y the c%ients of IFIs+ It is ,ust as simp%e as that+ One can argue that
arenDt the c%ient #usinesses supposed to act according to Is%am and. regard%ess of any other
factor. simp%y see$ out P01 modesL After a%%. riba is prohi#ited and so is interest+ Unfortunate%y.
the pro#%em may %ie right there+ A%though Riba is categorica%%y prohi#ited. interest in %oans for
mutua% #enefits and mutua%%y agreed. without any e*p%oitative aspects. may not #e prohi#ited+
-hus. trying to devise #usiness modes and practices to ma$e it compati#%e with the presumed
scope of prohi#ition that simp%y may #e Is%amica%%y untena#%e+
(2) An investorAfinancier must share the %oss incurred #y the #usiness to the e*tent of his
financing+
2
In theory it sounds good+ 8owever. IFIs. as #usinesses. do not %i$e to enter into underta$ings that
wou%d e*pose them to share of %osses+ Gationa% #usinesses genera%%y try to ma*imi2e profit
(su#,ect to other parameters) and thus a%so try to minimi2e %oss and ris$+ IFIs canDt artificia%%y a%ter
the common sense human #ehavior+ -hus. whi%e one can argue that #usinesses themse%ves are
not great%y interested in IFIs getting c%ose%y invo%ved in #usinesses as partners. it is a%so true that
IFIs a%so have found their invo%vement as partners or passive equity/investor unattractive+
71ince the use of ris$/sharing modes. considered to #e the ha%%mar$ of Is%amic #an$ing. is
rather %imited. c%ients do not notice any significant operationa% departure from the previous
practices #ased on fi*ed rate financing+7
2F
-hus. whi%e IFIs stand on the premise of #eing interest/free in their transactions. avoiding de#t
instruments. in their practice they mimic the conventiona% financia% institutions and #road%y %imit
themse%ves to contracts that are de#t/%i$e. such as mar$/up type transactions (murabaha, i-ara,
salam. etc+)
(:) -he partners are at %i#erty to determine. with mutua% consent. the ratio of profit
a%%ocated to each one of them. which may differ from the ratio of investment+ 8owever.
the partner who has e*press%y e*c%uded himse%f from the responsi#i%ity of wor$ for the
#usiness cannot c%aim more than the ratio of his investment+
2@
-his is o#vious%y re%ated to issues pertaining to agency pro#%ems+ 'eing active partners is not
%i$ed #y the #usinesses+ 4ithout #eing active partners in management. which is not possi#%e for
financia% institutions. IFIs face #oth agency pro#%ems. asymmetric information and mora% ha2ard+
=%ient #usinesses may ho%d #ac$ accurate information a#out profit and %osses" profit cou%d #e
understatedI %oss cou%d #e overstated or understated depending on particu%ar advantages
potentia%%y sought #y the partner #usinesses+ As far as mora% ha2ard.
!it& arises when a contract or financia% arrangement creates incentives for parties to
#ehave against the interest of others+ It is genera%%y #e%ieved that mora% ha2ard pro#%ems
much more serious in profit/sharing contracts than in interest/#ased contracts. which is
one of the reasons for their %ac$ of popu%arity in Is%amic #an$s+ One pro#%em. for e*amp%e.
25
Usmani. p+ 6F+
26
Usmani. p+ 6F+
27
Iq#a% and Mo%yneu*. o)* cit*. p+ 62+
28
Usmani. p+ 6F+
is the incentive the #orrower may have in concea%ing the true %eve% of profits. or a#sor#ing
some of the profits through unauthori2ed perquisites+7
2E
Iq#a% and Mo%yneu* argue that the pro#%em of mora% ha2ard in this conte*t may have #een
overstated+
34hi%e there may #e a grain of truth in this argument. we #e%ieve the matter has #een
e*aggerated+ For one thing. these pro#%ems are not unique to profit/sharing contractsI
they are simi%ar to those that arise in any equity contract in conventiona% systems+ For
another. the pro#%em of mora% ha2ard a%so e*ists in interest/#ased contracts+7
:0
In economic %iterature. there are contending positions a#out the re%ative efficiency of sharing
arrangements+
7A wide%y he%d perception among economists is that sharing arrangements are %ess
efficient compared to first/choice so%utions+ 1tig%it2 and 4eiss (6E@6). for e*amp%e. write"
In genera%. revenue sharing arrangements such as equity financing. or
sharecropping are inefficient+ Under those schemes the managers of a firm or the
tenant wi%% equate their margina% disuti%ity of effort with their share of their
margina% product rather than with their tota% margina% product+ -herefore. too %itt%e
effort wi%% #e forthcoming from agents+
-he same pro#%em arises in corporate management+5
:6
Iq#a% and Mo%yneu* then present counter arguments from the economic %iterature+ 8owever. if the
trend%ine for P01 contracts in IFIsD portfo%io is any indication. there is no apprecia#%e change in
favor of P01 to suggest that the pro#%em is overstated+
'ased on primary survey data. an empirica% study on 7Evidence on agency/contractua% pro#%ems
in mudarabh financing operation #y Is%amic #an$s.7 the authors investigated three main
questions"
6+ 4hat are the aims of the monitoring system in mudaraba contractsL
2+ 4hat are the main areas of activity to #e monitoredL
:+ 4hat are the main devices which agents use in monitoring the mudaraba
contractL
-he authors !.halil et al+&
:2
c%arify"
3In genera%. a num#er of distinctive features can #e attri#uted to the mudara#a contract to
ref%ect its nature and the inherent magnitude of agency/contractua% pro#%ems+ 4e identify
three main featuresI name%y. idiosyncratic uncertainty (ris$). e*treme %inearity and
discretionary power+ +++ !I&diosyncratic uncertainty. particu%ar%y for the #an$. is em#odied in
profit/sharing contracts+ -his uncertainty has many sources" the #an$Ds return is assumed
to depend so%e%y on the reported future cash f%ows resu%ting from operating profita#i%ity.
which in turn depends entire%y on the corporate investment decisions that are made #y
29
Iq#a% and Mo%yneu*. o)* cit*. pp+ 6B:/6BB+
30
Iq#a% and Mo%yneu*. p+ 6BB+
31
Iq#a% and Mo%yneu*. p+ 6BF+
32
A#de%/Fattah A+A+ 9ha%i%. =o%in Gic$wood. and >ictor Murinde+ 7Evidence on agency/contractua%
pro#%ems in mudaraba financing operations #y Is%amic #an$s.7 in Munawar Iq#a% and ;avid -+ 0%ewe%%yn
(eds+)+ Islamic $ankin% and Finance& /ew (ers)ective on (rofit-Sharin% and Risk !U9" Edward E%gar. 2002&
the agent+ Moreover. the agent is not fu%%y supervised. and has a measure of
independence+ Kiven that the agentDs %eve% of effort may #e regarded as uno#serva#%e. it
cannot #e contracted+ Moreover. the uncertainty is e*acer#ated #y %ac$ of security over
assets+ +++ According%y. uncertainty wi%% #e severe and the #an$ #ears very significant
ris$s. particu%ar%y in the case of occurrence of %osses+ -his may give rise to high incidence
of adverse se%ection and mora% ha2ard pro#%ems. which are faci%itated #y the a#i%ity of
entrepreneur. in such contracts to hide information regarding his a#i%ities and #ac$ground
#efore contracting and to concea% actions ta$en after the contract is put in p%ace+ In
addition. the outcome may not #e reported truthfu%%y #y the agent+ +++
Monitoring costs may #e incurred in a%% stages of the contract to ensure comp%iance with
the terms of the contract. and to convey verifia#%e and informative signa%s a#out the
entrepreneurDs #ehavior+ +++
Mudara#a contract +++ provides the entrepreneur with fu%% discretion over assets. simi%ar to
that assigned to so%e owner/manager pro,ects. without #earing the ris$ of financia% %osses+
'y contrast with equity. there are no automatic rights to ma$e appointments to the #oard
of directors using associated voting power. which wou%d give the financier some scope of
intrusive oversight of operating activity+7
::
-he point that the entrepreneur has fu%% discretion over the assets and operation. #ut doesnDt #ear
the ris$ of financia% %osses is worth noting+ Usmani. a %eading shariah e*pert. enunciates"
6+ in mudaraba. investment is the so%e responsi#i%ity of the rabb-ul-mal !i+e+ the
financing partner&
2+ in the mudaraba. the rabb-ul-mal has no right to participate in the management
which is carried out #y the mudarib !i+e+ entrepreneur& on%y+
3. in mudaraba the %oss. if any. is suffered #y the rabb-ul-mal on%y. #ecause the
mudarib does not invest anything+ 8is %oss is restricted to the fact that his %a#or
has gone in vain and his wor$ has not #rought any fruit to him+
:B

-he distinctive characteristics of mudaraba. as specified #y c%assica% Is%amic ,urisprudence. are
i%%ustrative of the under%ying pro#%ems as to why such arrangements are not so compe%%ing%y
attractive to rationa% financiers on a P01 #asis+ In the conte*t of #an$ participation. this wou%d
mean that financing wou%d #e from the #an$ on%y and the entrepreneur wi%% not have any financia%
contri#ution to the pro,ect+ It a%so means that financia% ris$ of %oss wou%d #e #orne e*c%usive%y #y
the #an$. the financing partner. whi%e the entrepreneurDs %oss wou%d #e %imited to his %a#or+ 4ou%d
a rationa%e investor or financier find such an arrangement attractiveL
4hi%e the unattractiveness of c%assica% mudaraba is compe%%ing. what a#out musharakaL 8ere are
some of the sa%ient features of musharaka. as enunciated #y Usmani+
6+ -he investment in mushara$ah comes from a%% the partners
2+ In mushara$a. a%% the partners can participate in the management of the #usiness
and can wor$ for it+
:+ In mushara$a a%% the partners share the %oss to the e*tent of the ratio of their
investment+
B+ -he %ia#i%ity of the partners in mushara$a is norma%%y un%imited+ -herefore. if the
%ia#i%ities of the #usiness e*ceed its assets and the #usiness goes in %iquidation.
a%% the e*ceeding %ia#i%ities sha%% #e #orne pro rata #y a%% the partners+ 8owever. if
33
9ha%i%. et* al*. pp+ CE/0+
34
Muhammad -aqi Usmani+ Mushara$ah P Mudara#ah !undated. avai%a#%e on%ine&
a%% the partners have agreed that no partner sha%% incur any de#t during the
course of #usiness. then the e*ceeding %ia#i%ities sha%% #e #orne #y that partner
a%one who has incurred a de#t on the #usiness in vio%ation of the aforesaid
condition+
5. In mushara$a. as soon as the partners mi* up their capita% in a ,oint poo%. a%% the
assets of the mushara$a #ecome ,oint%y owned #y a%% of them according to the
proportion of their respective investment+ -herefore. each one of them can
#enefit from the appreciation in the va%ue of the assets. even if profit has not
accrued through sa%es+
:C
-he conditions of musharakah are more practica% for en%isting partner participation or equity/
financing+ 1o. why is not musharaka as common and preva%ent in IFIsD portfo%ioL -his may #e
e*p%ained #y the very nature of #an$s+ 'an$s are genera%%y specia%i2ed for financia%
intermediation. not for participation in #usinesses as partners or on the #asis of equity/financing+
IFIs are %i$e merchant #an$s. not #an$s in the conventiona% sense+ 8istorica%%y. 7Merchant #an$s.
now so ca%%ed. are in fact the origina% D#an$sD+ -hese were invented in the Midd%e Ages #y Ita%ian
grain merchants+7
:

3Merchant #an$s first arose in the Ita%ian states in the Midd%e Ages.6 when Ita%ian
merchant houses/genera%%y sma%%. fami%y/owned import/e*port and commodity trading
#usinesses/#egan to use their e*cess capita% to finance foreign trade in return for a share
of the profits+ -his trade genera%%y consisted of %engthy sea voyages+ -hus. the
investments were very high ris$" war. #ad weather. and piracy were constant threats. and
#y their nature the voyages were %ong/term and i%%iquid+5
:F

In the #an$ing arena. merchant #an$ is another name for investment #an$s+ Kradua%%y.
commercia% #an$ing. especia%%y in the U1A in the aftermath of 6E2E crash. was comp%ete%y
separated from investment #an$ing. and para%%e% to commercia% #an$s. private equity mar$et. to
#e served #y investment #an$ing. deve%oped into a specia% and significant niche+
3A%though not defined in U+1+ federa% #an$ing and securities %aws. the term merchant
#an$ing is genera%%y understood to mean ne%otiated )rivate equit" investment b"
financial institutions in the unre%istered securities of either )rivatel" or )ublicl" held
com)anies+ 'oth investment #an$s and commercia% #an$s engage in merchant #an$ing.
and the type of security in which they most common%y invest is common stoc$+ -hey a%so
invest in securities with an equity participation featureI these may #e converti#%e
preferred stoc$ or su#ordinated de#t with conversion privi%eges or warrants+ Other
investment #an$ services/raising capita% from outside sources. advising on mergers and
acquisitions. and providing #ridge %oans whi%e #ond financing is #eing raised in a
%everaged #uyout (0'O)/are a%so typica%%y offered #y financia% institutions engaged in
merchant #an$ing+5
:@

Kradua%%y. even the investment #an$ing. in comparison with merchant #an$ing. #ecame further
defined+
3Investment #an$s assist pu#%ic and private corporations in raising funds in the capita%
mar$ets (#oth equity and de#t). as we%% as in providing strategic advisory services for
35
Usmani. Mushara$ah P Mudara#ah. on%ine+
36
http"AAen+wi$ipedia+orgAwi$iAMerchantQ#an$
37
>a%entine >+ =raig+ 7Merchant 'an$ing" Past and Present.7 F0I+ $ankin% Review. >o%+ 6B. ?o+ 6.
1eptem#er 2006 !avai%a#%e on%ine&
38
=raig. 2006I on%ine
mergers. acquisitions and other types of financia% transactions+ -hey a%so act as
intermediaries in trading for c%ients+5
:E
In Europe. another variation in #an$ing practices is more common" universa% #an$ing+ 1uch
#an$ing covers the entire range of financia% services. the traditiona% products offered #y
commercia% #an$s as we%% as ho%ding c%aims on firms (inc%uding equity and de#t). and participating
7direct%y in the corporate governance of firms that re%y on the #an$s for funding or as insurance
underwriters+7
B0
3=ontinenta% European #an$s are engaged in deposit trading. rea% estate and other forms
of %ending. foreign e*change trading. as we%% as underwriting. securities trading. and
portfo%io management+ In the Ang%o/1a*on countries and in <apan. #y contrast.
commercia% and investment #an$ing tend to #e separated+ In recent years. though. most
of these countries have %owered the #arriers #etween commercia% and investment
#an$ing +++5
B6
8owever. even in many of those countries where universa% #an$ing is common. for e*amp%e in
Kerman. equity/financing is genera%%y average one/quarter of their portfo%io+
B2
4hat is important is
that it is neither mandated #y the government nor any particu%ar pattern is o#serva#%e+ Indeed.
many of these #an$s. even operating as universa% #an$s. choose to specia%i2e+
-he reason the issue of universa% #an$ing is re%evant #ecause Is%amic #an$ing is trying to function
as a fu%% service financia% institution. where the genera% history of financia% institutions. #ased on
their %earning curves. have ta$en the path of specia%i2ation and even that with the fu%% range of
choice avai%a#%e to them+ On the other hand. Is%amic #an$ing wants to serve as a financia%
intermediary and as a merchant/cum/investment #an$. with the parameter that its services are
supposed to #e primari%y #ased on P01 mode+
A question can #e raised as to whether such conditions of mudaraba or P01 contracts can #e
modifiedL -he answer is yes. #ut the pro#%em is that then it wou%d #e significant%y de%in$ed from
the c%assica% Is%amic ,urisprudence. which is the foundation of Is%amic finance to #egin with+ -here
is a recogni2ed need for new 7financia% engineering+7
3Financia% mar$ets are #ecoming more and more sophisticated. and competitive+ In order
to e*p%oit the fast changing mar$et environment and face increasing competition. financia%
engineering and innovation is imperative+
Unti% now. the Is%amic financia% too%s have essentia%%y #een %imited to c%assica% instruments
deve%oped centuries ago and their variants+ -hose instruments were deve%oped to meet
the needs of those societies+ 4hi%e they may serve as usefu% guide%ines for Is%amic
contracts. there is no reason to #e restricted on%y to them+5
B:
8owever. the rea% pro#%em may %ie with the way the prohi#ition of riba has #een a straightforward
and then overstretched carryover to modern times+ -he other pro#%em may #e approaching it in a
comp%ete%y %ega%istic manner+ -he evidence of IFIs #ehavior is quite c%ear that ,ust #ecause it is
39
http"AAen+wi$ipedia+orgAwi$iAInvestmentQ#an$
40
=har%es 4+ =a%omiris+ 7Universa% #an$ing and the financing of industria% deve%opment.7 Po%icy
Gesearch 4or$ing Papers. 4or%d 'an$. 6EEC+
41
Keorg Gich and =hristian 4a%ter+ 7-he Future of Universa% 'an$ing.7 +ato Journal. >o%+ 6:. ?o+ 2
!Fa%% 6EE:&. pp+ 2@E/:6:. on p+ 2@E+
42
Gich and 4a%ter. p+ 2EF. as of 6EE6+
43
Munawar Iq#a%. Ausaf Ahmad and -ariqu%%ah 9han+ +hallen%es Facin% Islamic $ankin% !Is%amic
;eve%opment 'an$AIs%amic Gesearch and -raining InstituteI Occasiona% Paper. 6EE@I avai%a#%e on%ine&. p+
C+
#ased on the foundation to #e interest/free and thus avoid monetary de#t contracts. in rea%ity the
IFIs have ended up in hi"al (ruseI %ega% stratagems) to fo%%ow the prohi#ition in forum. #ut
circumvent it in su#stance+
Indeed. the fascination with P01/on%y as the idea% Is%amic mode is a hangover from the c%assica%
Is%amic ,urisprudence. which is the so/ca%%ed homo Islamicus is finding insurmounta#%y difficu%t to
imp%ement+ 1yed ?awa# 8aider ?aqvi. a nota#%e authority in the fie%d. has made some revea%ing
comments"
3-he most wide%y he%d view is that Is%amic #an$s shou%d deemphasi2e use of the fi*ed
rate of return instruments. and that. reversing present trends. they shou%d #e run
e*c%usive%y on the #asis of the profit and %oss sharing (P01) princip%e to #ecome tru%y
Is%amic+ It is argued that any attempt to di%ute the importance of the P01 princip%e in
Is%amic #an$ing theory or practice #y the use of even the 1haricah/compati#%e fi*ed rate
of return instruments wi%% ma$e Is%amic #an$ing %ess efficient and %ess equita#%e #ecause
this is the one princip%e most recommended #y the 1haricah (i+e+. the Is%amic 0aw) (e+g+.
1iddiqui. 6E@:aI =hapra. 6E@CI and Usmani. 6EE@)+ From this point of view. it does not
matter if the P01 instruments have %ost out in the process of Nnatura% se%ectionO. practica%%y
vanishing from the Is%amic #an$Os portfo%ios+ -he a%most Nuniversa%O recommendation sti%%
is that the P01 princip%e #e o#served faithfu%%y. even e*c%usive%y. #ecause it is hoped that
R presuma#%y #y some variant of 1ayOs 0aw R an amp%e supp%y of such instruments wi%%
create their own demand+ 'ut this argument comes dangerous%y c%ose to circu%ar
reasoning" it ma$es the desired efficiency and equity outcomes of Is%amic #an$ing
contingent on the adoption of the P01 princip%e. which is pre,udged as the on%y one which
is Is%amica%%y ,ustS -he possi#i%ity that the P01 princip%e. if imp%emented universa%%y and
without any safeguards. may itse%f %ead to inefficiency and inequity is tota%%y a%ien to this
antiseptica%%y Nconsequence/insensitiveO procedura% way of thin$ing+7
BB

-onclusion
IFIs proc%aim that the conventiona% financing #ased on interest is un,ust. #ecause there is no fair
sharing of profitA%oss and ris$+ 8owever. the IFIs themse%ves are not actua%%y uti%i2ing P01 modes
in their portfo%io to any meaningfu% e*tent+ A good part of the pro#%em re%ates to the parameters
for the P01 modes in c%assica% Is%amic %aws+ Innovations can address the pro#%ems facing the
IFIs. #ut the so%utions then #ecome %ess anchored in the traditiona% Is%amic %ega% discourse+ Many
suggested innovations. as we%% as many current practices. ma$e the IFIs appear to mimic the
conventiona% finance+ An important constraint ignored #y the Is%amic discourse is that partnership
is the %east common type of #usiness organi2ation. due to certain inherent pro#%ems associated
with partnership+ -hose pro#%ems are rea%. and human #ehavior in such #usiness organi2ationa%
conte*ts is not irrationa% in avoiding the $ind of P01 and ris$/sharing modes+
-he preoccupation with P01 modes stems from the presumed prohi#ition of interest and dis%i$ing
for de#t instruments in #usiness+ 8owever. since pro#%em might %ie with this presumed prohi#ition
in terms of interpretation and over%y e*panded scope. the IFIs end up coming with ruses (hi"al) to
devise and offer products and services that are on%y %ega%%y Is%amic or shariah/comp%iant. #ut in
su#stance there isnDt much difference #etween IFIs and conventiona% financia% institutions+ It is no
wonder that conventiona% financia% institutions are aggressive%y trying to gra# their share of this
niche mar$et. #ecause they can easi%y adapt the form. where in rea%ity they have %ess ris$ and
profit that is compara#%e to or #etter than what they earn in their conventiona% mar$et+
44
1yed ?awa# 8aider ?aqvi+ 7Is%amic 'an$ing" An Eva%uation.7 Finance in Is%am we#site !undatedI
avai%a#%e on%ine&
/i)liography:
Ga,esh AKKAG4A0 and -ari$ Housef+ 7Is%amic 'an$s and Investment Financing.7 Journal of
Mone", +redit and $ankin%. >o%+ :2. ?o+ 6. Fe#ruary 2002. pp+ E:/620+
Imtia2 Uddin A8MA;+ =omments on 1eref -urenDs 7Performance and Gis$ Ana%ysis of Is%amic
'an$s" -he =ase of 'ahrain Is%amic 'an$.7 <ourna% of 9ing A#du%a2i2 University" Is%amic
Economics. >o%+ F. 6EEC+
Eng$u G+A+E+ A0I+ 3Gi#a and its prohi#ition in Is%am.5
!http"AAwww+cert+com+myAcertAGI'AQA?2+P;F&
=hristopher =AKKIA?O+ 7Are Partners 'ad for 'usinessL Fa*Po%% resu%ts on questions a#out
partnership.7 Inc+ Maga2ine. Fe# 6EE2+ http"AAwww+inc+comAmaga2ineA6EE20206A:E6:+htm%
=har%es 4+ =A0OMIGI1+ 7Universa% #an$ing and the financing of industria% deve%opment.7 Po%icy
Gesearch 4or$ing Papers. 4or%d 'an$. 6EEC+
M+ Umer =8APGA+ 7Prohi#ition of Interest" ;oes it ma$e sense.7 !an updated version of the
paper. 7A Matter of Interest" -he Gationa%e of Is%amDs Anti/Interest 1tance.7 pu#%ished in the
Octo#er 6EE2 issue of Ah%an wa 1ah%an. pp+:@/B6+
>a%entine >+ =GAIK+ 7Merchant 'an$ing" Past and Present.7 F0I+ $ankin% Review. >o%+ 6B. ?o+
6. 1eptem#er 2006 !avai%a#%e on%ine&
8umayun ;AG and <ohn PGE10EH+ 70ac$ of Profit 0oss 1haring in Is%amic 'an$ing"
Management and =ontro% Im#a%ances.7 International Journal of Islamic Financial Services, >o%+ 2
?o+2. <u%y/1ept+ 2000. pp+ :/6@+
Mahmoud E0/KAMA0+ 7An Economic E*p%ication of the Prohi#ition of Gi#a in =%assica% Is%amic
<urisprudence.7 (roceedin%s of the !hird 'arvard 1niversit" Forum on Islamic Finance.
=am#ridge" =enter for Midd%e Eastern 1tudies. 8arvard University. 2000. pp+ :6/BB+
http"AAwww+ruf+rice+eduATe%gama%Afi%esAri#a+pdf
=%ement 8E?GH and Godney 4I01O? (eds+)+ -he Po%itics of Is%amic Finance !Edin#urgh
University Press. 200B&
Inc+ 1napshot" Partners+ 7-he partners in each of these Inc+ C00 #usinesses $new one another
%ong #efore wor$ing together7. Octo#er 2000+
http"AAwww+inc+comAmaga2ineA2000606CA20F:B+htm%
Munawar IJ'A0 and Phi%ip Mo%yneu*+ -hirty Hears of Is%amic 'an$ing" 8istory. Performance and
Prospects !Pa%grave. 200C&
Munawar IJ'A0 and ;avid -+ 0%ewe%%yn (eds+)+ Is%amic 'an$ing and Finance" ?ew Perspective
on Profit/1haring and Gis$ !U9" Edward E%gar. 2002&
Munawar IJ'A0. Ausaf Ahmad and -ariqu%%ah 9han+ =ha%%enges Facing Is%amic 'an$ing !Is%amic
;eve%opment 'an$AIs%amic Gesearch and -raining InstituteI Occasiona% Paper. 6EE@I avai%a#%e
on%ine&
Is%ami 'an$ 'ang%adesh 0imited+ 7=oncept and ideo%ogy" Issues and pro#%ems of Is%amic
#an$ing.7 http"AAwww+is%ami#an$#d+comApageAihQ62+htm+
1ufyan I1MAI0+ 74hy Is%am has prohi#ited Interest and Is%amic a%ternatives for financing.7 =hief
E*ecutive. 6st Ethica%+ http"AAwww+6stethica%+comA-hepro#%emswithInterest+pdf
A#de%/Fattah A+A+ 98A0I0. =o%in Gic$wood. and >ictor Murinde+ 7Evidence on agency/contractua%
pro#%ems in mudaraba financing operations #y Is%amic #an$s.7 in Munawar IJ'A0 and ;avid -+
0%ewe%%yn (eds+)+ Is%amic 'an$ing and Finance" ?ew Perspective on Profit/1haring and Gis$ !U9"
Edward E%gar. 2002&
1hahru$h Gafi 98A?+ Profit and 0oss 1haring" An Is%amic E*periment in Finance and 'an$ing
!9arachi" O*ford University Press. 6E@F&
1un 'ae 9IM+ 7-he use of equity positions #y #an$s" -he <apanese Evidence.7 -he Economic
Geview. Federa% Geserve 'an$ of 1an Francisco. Fa%% 6EE6. ?um#er B. pp+ B6/CC+
U<onathan 0E>I? and 1teven -ade%is+ 7A -heory of Partnerships.7 1tanford Institute for
Economics Institute for Economic Po%icy Gesearch ;iscussion Paper. August 2002+
http"AAsiepr+stanford+eduApapersApdfA06/2@+pdf
<an MA8G-/1MI-8+ 71hou%d 'an$s Own Equity 1ta$es in their 'orrowersL A =ontractua%
1o%ution to 8o%d/Up Pro#%ems.7 March 200B.
http"AAwww+rotman+utoronto+caA,mahrtAresearchAcurrent#an$equity+pdf
M+ A+ MA??A?+ Islamic 2conomics& !heor" and (ractice !0ahore. Pa$istan" 1h+ Muhammad
Ashraf. 6E@0&
Owen MA--8E41+ 78ow the 4est =ame -o Gun Is%amic 'an$s.7 ?ewswee$ !Octo#er :6. 200C&
Pau% MI001 and <ohn Pres%ey+ Is%amic Finance" -heory and Practice !U9" Macmi%%an. 6EEE&
1yed ?awa# 8aider ?AJ>I+ 2thics and 2conomics& An Islamic S"nthesis !U+9+" -he Is%amic
Foundation. 6E@6&
1yed ?awa# 8aider ?AJ>I+ 7Is%amic 'an$ing" An Eva%uation.7 IIUM <ourna% of Economics and
Management. >o%+ @. ?o+ 6. 2000. pp+ B6/F0+ !avai%a#%e on%ine&
Keorg Gich and =hristian 4a%ter+ 7-he Future of Universa% 'an$ing.7 =ato <ourna%. >o%+ 6:. ?o+ 2
!Fa%% 6EE:&. pp+ 2@E/:6:+
A#du%%ah 1AEE;+ Is%amic 'an$ing and Interest" A 1tudy of the Prohi#ition of Gi#a and its
=ontemporary Interpretation !?ew Hor$" E+ <+ 'ri%%. 6EE& !A MU1- reading for anyone interested
in the contemporary discourse on Gi#a and interest. especia%%y from a critica% perspective&
Md+ A#du% Awwa% 1AG9EG+ Is%amic 'usiness =ontracts. Agency Pro#%em and the -heory of the
Is%amic Firm.7 International Journal of Islamic Financial Services >o%+ 6 ?o+2. <u%y / 1ept+ 6EEE.
pp+ 62/2@+
A%i%2a 18EGMA?+ 7Partners Are From Mars" Advice for choosing a #usiness partner.7
'usiness 1tart/Ups maga2ine. Apri% 2000+
http"AAwww+entrepreneur+comAartic%eA0.B26.2ECF.00+htm%
Mohammad ?e,atu%%ah 1I;;IJI+ Issues in Is%amic 'an$ing !0eicester" -he Is%amic Foundation.
U9. 6E@:&
QQQQQQQQQ 1I;;IJI. Gi#a. 'an$ Interest. and -he Gationa%e of Its Prohi#ition !Is%amic
;eve%opment 'an$. >isiting 1cho%ars Gesearch 1eries. 200B&
1hahid 8asan 1I;;IJUI+ Is%amic 'an$ing" Kenesis P Gationa%e. Eva%uation P Geview. Prospects
P =ha%%enges !9arachi" Goya% 'oo$ =ompany. 6EEB&
1UPGEME =OUG- OF PA9I1-A?+ -he -e*t of the 8istoric <udgment on Interest !6EEEI e*act
date" 6B Gamadan. 6B20&
Muhammad -aqi U1MA?I+ An Introduction to Is%amic Finance !-he 8ague" 9%uwer 0aw
Internationa%. 2002&
Muhammad -aqi U1MA?I+ Mushara$ah P Mudara#ah !avai%a#%e on%ine&
Fran$ >oge% and 1amue% 8ayes. III+ Is%amic 0aw and Finance" Ge%igion. Gis$ and Geturn !-he
8ague" 9%uwer 0aw Internationa%. 6EE@&
-ari$ Housef+ 7-he Mura#aha 1yndrome in Is%amic Finance" 0aws. Institutions and Po%itics.7 in
=%ement 8E?GH and Godney 4I01O? (eds+)+ -he Po%itics of Is%amic Finance !Edin#urgh
University Press. 200B&. pp+ :/@0+
M+ Gaqui#u2 VAMA? and 8ormo2 Movassaghi+ 7Is%amic 'an$ing" A Performance Ana%ysis.7 -he
Journal of 3lobal $usiness. >o%ume 62. ?o+ 22. 1pring 2006. pp+ :6/:@+
Interest Gi#a Is%amic 'an$s Is%amic 'an$ing Is%amic Finance Is%amic Economics a%/Jaradawi Usury
Partnership mudara#a mushara$a equity/financing usmani mura#aha partnership mudara#a
Interest Gi#a Is%amic 'an$s Is%amic 'an$ing Is%amic Finance Is%amic Economics a%/Jaradawi Usury
Partnership mudara#a mushara$a equity/financing usmani mura#aha partnership mudara#a
Interest Gi#a Is%amic 'an$s Is%amic 'an$ing Is%amic Finance Is%amic Economics a%/Jaradawi Usury
Partnership mudara#a mushara$a equity/financing usmani mura#aha partnership mudara#a
Interest Gi#a Is%amic 'an$s Is%amic 'an$ing Is%amic Finance Is%amic Economics a%/Jaradawi Usury
Partnership mudara#a mushara$a equity/financing usmani mura#aha partnership mudara#a
Interest Gi#a Is%amic 'an$s Is%amic 'an$ing Is%amic Finance Is%amic Economics a%/Jaradawi Usury
Partnership mudara#a mushara$a equity/financing usmani mura#aha partnership mudara#a
Interest Gi#a Is%amic 'an$s Is%amic 'an$ing Is%amic Finance Is%amic Economics a%/Jaradawi Usury
Partnership mudara#a mushara$a equity/financing usmani mura#aha partnership mudara#a
Interest Gi#a Is%amic 'an$s Is%amic 'an$ing Is%amic Finance Is%amic Economics a%/Jaradawi Usury
Partnership mudara#a mushara$a equity/financing usmani mura#aha partnership mudara#a