DEVELOPMENT OF MUDARABAH INSTRUMENTS: UNDERSTANDING THEIR PROFITABILITY, SECURITIZATION AND NEGOTIABILITY ASPECTS

Abstract

This paper attempts to examine the securitization, negotiability and profitability aspects of three types of mudarabah instruments; namely, asset-enfaced mudarabah instruments, currency-enfaced mudarabah instruments representing monetary contributions and currency-enfaced mudarabah instruments representing real assets. This paper begins with a distinction between riba (usury) and profit and concludes that an exchange of currency-enfaced mudarabah instruments in varying amounts entails riba while an exchange of asset-enfaced mudarabah instruments will generate legitimate profits. The current practice is to issue currency-enfaced mudarabah instruments but treat them as asset-enfaced mudarabah instruments. This position is analyzed and policy implications are drawn for future development of mudarabah instruments.

JEL classification: G10, P43, Z12

Key words: Mudarabah instruments, Islamic finance, Financial instrument