Wednesday word: mudarabahOctober 5, 2011
If a bank finances a venture for a private individual, they split the profits under a mudarabah arrangement. In this fashion, the extra money given back to the bank for financing the project is deemed not to be a haram interest payment, but a halal share of the profits.
Many sharia financial transactions, not just business loans, are based on the concept of profit sharing. Islamic finance lawyer John Dewar defines it this way:
An investment fund arrangement under which the financiers act as the capital providers (rab al-mal) and the client acts as the mudareb (akin to an investment agent) to invest the capital provided by the rab al-mal and manage the partnership. The profit of the venture, which is based on the amount yielded by the fund that exceeds the rab al-mals‘ capital investment, can be distributed between the parties at a predetermined ratio but with any loss (subject to whether the loss is caused by the mudareb‘s negligence) being borne by the rab al-mal.*
Al Baraka offers this visual:
The problem with mudarabah, like murabaha, is that the profits are disgorged back into the strongboxes of the sharia banks to further propagate radical Islam.
* Dewar, John, International Project Finance: Law and Practice (New York: Oxford University Press, 2011).