Mudaraba, Musharaka ideal modes of transaction.

Byline: MUHAMMAD ZEESHAN FARRUKH

Need to overcome hindrances for the true growth of Islamic banking, financing

Islamic Banking and Finance practices are running and growing at a rapid pace and have been proven viable financial systems before the conventional economic and banking system. The present-day Islamic banking practices are Shariah compliant as these are being governed and supervised by eminent Shariah scholars throughout the world but the socio-economic objectives could not be achieved with these practices.

What was the objective to start Islamic finance? The objective was to start a financial system that could lead to an Islamic socio-economic welfare system. The reason for transforming the banking and finance system was that this sector is the engine of the present-day economic vehicle of society. There was no objective to merely establish the Islamic banking system but to affect the overall socio-economic structure.

At this point in time when Islamic financial practices have gained suitable momentum and growth, we must consider the achievement of Islamic socio-economic goals and objectives which can only be achieved through the serious and effective implementation of the partnership modes i.e. Mudaraba and Musharaka but this is the fact that there are serious hindrances in this respect.

Despite the fact that Mudaraba and Musharaka are the ideal modes of transaction, the practices of Mudaraba and Musharaka exist in the Islamic financial industry in a very limited manner as compared to other prevalent modes like Murabaha, Ijarah, Diminishing Musharaka, Salam and Istisna etc.

The mode of Mudaraba is being used for the liability side of the bank but not for the asset side and the mode of Musharaka is being used on the asset side as Diminishing Musharaka on Shirkat ul Milk basis and Running Musharaka on Shirkat ul Aqd basis. There is a need for Shirkat ul Aqd transactions on the asset side of Islamic banks. It is evident that the transactions of Running Musharaka are prevalent in Islamic banks but unfortunately, these transactions do not show the real essence of Musharaka transactions and these transactions face very much criticism.

If the partnership modes i.e. Mudaraba and Musharaka would be implemented and practiced in an ideal manner, both parties share the profit with a certain ratio. In this respect, no cost of funds or cost of financing is involved. In this case, both parties will bear their own risk and earn their own reward...