THE LEGAL NATURE OF THE MUDARABA CONTRACT AND ITS REGULATORY FUNCTION WITHIN ISLAMIC BANKING LAW

Abstract

This article examines the legal nature and regulatory function of the mudaraba contract in Islamic banking law, through a doctrinal and comparative analysis. Mudaraba (profit-sharing) is a classical Islamic partnership where one party (rab al-mal) provides capital and the other (mudarib) provides labor/management, sharing any profit per an agreed ratio while loss is borne by the capital provider. Drawing on authoritative Sunni jurisprudence (Hanafi, Maliki, Shafi’i, Hanbali) and modern regulatory frameworks, the study elucidates how classical Islamic law conceptualizes mudaraba and how contemporary legal systems incorporate it. The results detail mudaraba’s juristic definition, essential conditions, and its unanimous acceptance among classical jurists as a sharikat al-amal (silent partnership). Modern civil law perspectives – including examples from Malaysia’s Islamic Financial Services Act, the GCC, the UK’s regulatory adaptations, and emerging frameworks in Uzbekistan – are analyzed to show how mudaraba has been recognized and modified in practice. The discussion explores mudaraba’s operation in today’s Islamic banking: its use in investment accounts and financing, the governance and supervision mechanisms in different jurisdictions, and challenges such as asymmetric information, moral hazard, capital guarantees, and cross-jurisdictional inconsistencies. Notably, comparative insights are provided from Malaysia, the Gulf states, the United Kingdom and other counties. Throughout, the views of prominent Islamic finance scholars – including Muhammad Taqi Usmani, Wahbah al-Zuhayli, and Muhammad al-Bashir – are incorporated to interpret doctrinal principles and propose reforms. The article concludes with original recommendations for aligning regulatory policies with the authentic spirit of Mudaraba, aiming to enhance its viability and integrity in Islamic banking.