Mudarabah Islamic banking product
Now, Islamic banking assets rose at USD1.32tln and more than 255 microfinance institutions are providing Islamic financial services in the worldwide, It accumulate value approximately USD628mln in which USD1.28mln transaction happen for the shari’ah compliant product.
Historical Background of Mudarabah:
Islam strongly prohibits interest-based transactions but appreciate business, partnerships and trade. In conventional, interest-based transactions shift the risks from the investor to the entrepreneur. Partnerships also lead both to share profit and loss, which refers risk sharing to risk shifting. But Islam prefers risk sharing rather than risk shifting.
From the beginning of Islamic economy, it is observed that mudaraba and its derivatives were the most important partnerships. Mudaraba was introduced in the Middle East and then extended to the whole of the Islamic world from the Atlantic to the Pacific. It was widen to Europe through the crusaders. Eleanor of Aquitane, Queen of France, brought the Islamic law of Partnerships as well as the Admiralty Law, from Jerusalem to France during the late 12th century. In France, at the Island of Oleron, these laws were incorporated into the Lex Mercatoria – the medieval European law of commerce. Throughout this incorporation, the Islamic mudaraba was called commenda by Europeans. Borrowing the Islamic risk sharing partnerships appears to have had a huge impact on European economic, financial and even political history. After the incorporation, Europe went through a period of massive growth in commerce which known as the “commercial revolution”. In other way around, it was mudaraba/commenda contract (risk sharing) which financed this massive increase of trade both within Europe and across the Mediterranean. There were two Italian city-states named Genoa and Venice specialized in trade between Europe and the Islamic world. Acemoğlu and Robinson had demonstrated that Venice became a super power of the period to its new merchant class using the mudaraba/commenda. There was the beginning of decline for Venice when the old elite began to fear the rising new merchant class and in the meantime, decided to prohibit mudaraba/commenda, during the late 13th century. When the young men of Venice could freely practice the mudaraba/commenda in foreign trade, Venice prospered and became powerful. But when this risk sharing contract was banned and the rising new mercantile class was thrown out from the decision making process and the city began to decline.
