Wednesday, August 27, 2008


Assalamu 'Alaikum


The icon of pure Islamic banking and the most maligned concept. Fourteen centuries ago a very special young man entered into a business relationship with a widowed noble lady of Makkah. She provides the capital; he buys goods and brings them for trade in Sham (Syria). Profits from the venture are shared based on a ratio as preagreed between them; any and all business losses are borned by the noble lady. The young man, Prophet Muhammad s.a.w, an icon of trustworthiness, captured the heart of the noble lady, Siti Khadijah r.a. She became his wife, and the rest, as they say is history.

The first recorded example of the concept of Mudharabah. Other rules of the concept are, the capital must only be in the form of cash and delivered to the entrepreneurial partner upfront; the giver of the capital must not involve himself or herself in the venture, and cannot demand any guarantee or collateral for business losses from the entrepreneur. The profit sharing ratio strictly pre agreed upfront. Losses arising from gross negligence or willful default of the entrepreneur are borne by the entrepreneur, otherwise all business losses are borne entirely by the owner of capital. The entrepreneur is also not allowed to introduce any capital, his contribution being purely entrepreneurship. A marriage of enterprise with idle capital to move the idle capital into the mainstream economy. Otherwise the capital does not serve society.

Introduced into a world thick with riba practice and beliefs the concept is much maligned as impractical. We were so used to the rules set by the riba owners of money, we couldn’t believe our ears when we first heard the rules of Mudharabah. Owner of capital bears all business losses?! Crazy, we cringed. No collateral can be taken?! Madness, we exclaimed. And still they cringe and exclaim, especially the riba owners of money who’ve had it all their way for so long now. Do we really stop to think what riba banking business is? Is it a business in the first place? A business is where there is a chance of making profits and a chance of making losses. You invest in the venture and depending on the business outcome you make a profit or you make a loss. How do you describe a business where only one party wins all the time? This is what happens when riba owners of money lend money to you. And they have the audacity to call it a business. They are not concern whether your business is profitable or not. All they are concerned with is that you must pay back the money come hell or high water. If you are unable to pay they are the least concern with your reasons, they will proceed to sue you to kingdom come. This is a business? This is the business everyone is so proud of where the CEO’s are highly praised for jobs well done?! Seems to me with all rules set in their favour my ten year old nephew can run this business profitably blind folded. A business must have a sense of equitability between the counter parties. There must be fairness and economic justice between the parties engaged in the business. Not one which is consistently loaded in favour of one party all the time. It is about time we rise to challenge this status quo. Just because the system has been going on for centuries and generations doesn’t mean it is right. With this system the rich gets richer and richer, the poor gets poorer and poorer and every so often the world economy gets smashed by a mother of recession.

Do we know that Mudharabah kills economic recessions. Lets examined how the riba system starts and deepens economic recessions. Export sales for some reason or other goes down. Exporting companies have less and less money. If the situation worsens soon they will have no money to pay their riba lenders. What do the riba lenders do? They up the ante and demand additional collateral and immediate payments of all overdues. Where are the companies going to find additional collateral in an environment of fast reducing values? When the companies fail to deliver the additional collateral and/or pay all overdues the riba lenders up the ante further. This time not only overdues but entire principals are demanded to be repaid up front. With reduced sales and little cashflow the companies fail to meet the demands of the uncompromising lenders. Caught between a rock and a hard place the companies soon collapse and massively lay off workers. If the collapse spread nationally millions of workers will be out of jobs. Guess what happens next? Purchasing power falls and consumer demand falls. Now it’s the turn of the local companies to lose sales and lay off workers. Another swathe of firms collapse, another million workers laid off. More purchasing power is lost and more consumer demand falls. Guess what happens next; you get the picture? This is the true character of the riba bankers. Their purely selfish act of demanding their money is returned at whatever cost to the company, and at whatever cost to the economy, turns minor downturns into full blown recessions.

And what they have done is considered acceptable standard risk management practice in response to non payers of the banks’ money. That is why we really have to question the validity of risk management as a subject. When address to a business venture, risk management in the sense of doing valid things to reduce risk is absolutely acceptable. But in the context of perpetuating the wealth of riba owners of money it is really a vile subject which creates much hurt to other people operating in the economy. But do we really lay back and assess the big picture? No, risk management and conventional banking comes from the West and the West always knows best. Sheesh!

Now picture an economy powered by Mudharabah. Sales dipped for exporting companies. The companies have less and less cash in its coffers and less and less profit to distribute to its Mudharabah Financiers. Does its Mudharabah financiers demand additional collateral to be delivered? No, collaterals are not allowed to be taken under Mudharabah. Does Mudharabah Financiers demand profits to be paid to them upfront? No, profits are distributed only when there are profits ; if the company makes losses nothing is distributed. And Mudharabah Financiers are not worried about this because their profit share is based on a ratio. When times are good they get exceptionally high returns, which tides them over when times are lean. So bending with the wind always Mudharabah financiers do not cause companies facing temporary sales loss to collapse. Hence no worker lay offs and no subsequent drops in consumer demands that usually leads to deeper and deeper recessions. Mudharabah is therefore decidedly kinder to the economy and society than riba lending. But is it given a chance to prove itself in economies in the world? Nah, Mudharabah is not practical, it’s for the birds say all the wise guys in town.


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