Document Details

Document Type : Article In Journal 
Document Title :
Income Ratio, Risk-Sharing, and the Optimality of Mudarabah
نسبة الدخل، والاشتراك في الخطر وأمثلية المضاربة
 
Subject : Income Ratio, Risk-Sharing 
Document Language : English 
Abstract : Little attention in the current literature is given to the analysis of interest-free Islamic financing tools within the framework of risk-return portfolio analysis. This paper adopts the standard tools to establish interesting optimal properties of mudarabah within a two-party contractual model of an income generating economic activity. ‘Income ratio’ is defined as the percentage of expected income that goes to each of the two parties whereas the ‘risk-sharing structure’ refers to how risk is shared between the two parties. The key question is how these two parameters are related through alternative two-party contracts. This paper is an extension to another one where the risk-sharing structure is shown to be perfectly proportionate to income ratio in the case of mudarabah. The Shariah-prohibited interest-rate financing is a manifest disproportionate case as the income ratio of lender is totally insensitive to the contract’s risk. Adopting the same competitive set-up within an informational efficient environment, this paper sets out to establish two more findings: First, a negative relationship proves to exist between income ratio and the risk-sharing structure in terms of an optimal contracts curve (OCC). The mudarabah contract emerges at an optimal break-even point where the OCC coincides with pure profit-sharing but fixed return financial leverages also co-exist with mudarabah. Hence, a pure equity-based Islamic order is theoretically inconceivable even under ideal information efficiency. Second, the optimal mudarabah income ratio (i.e. profit-sharing ratio) is shown to depend crucially on the extent to which the two parties differ in their attitude towards risk (i.e. the risk-attitude differential). The paper goes further to examine the impact of risk-attitudinal differentials on the optimal profit-sharing ratio. These findings are shown to have useful practical and policy implications. 
ISSN : 1018-7383 
Journal Name : Islamic Economics Journal 
Volume : 21 
Issue Number : 2 
Publishing Year : 1429 AH
2008 AD 
Article Type : Article 
Added Date : Saturday, July 3, 2010 

Researchers

Researcher Name (Arabic)Researcher Name (English)Researcher TypeDr GradeEmail
سيف الدين تاج الدينTag El-Din, Saif ResearcherDoctorate 

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