Risk Sharing in Mushārakah Contract: Theory and Practice

Abstract

The risk sharing concept has recently gained its popularity among the scholars, economists and practitioners despite the fact that Sharīʿah has long endorsed it as an ideal mechanism for all economic activities. Risk sharing, as an alternative to the prevailing interest-based system, promotes the sharing of resources between the rich and the needy, thus leads to establishing socio-economic justice in the society. Nonetheless, not many studies have established a well-defined concept of risk sharing from the Islamic law perspective, particularly in the context of mushārakah and examined its application in the modern Islamic finance. The main objective of this paper is to formulate a general theoretical understanding on the risk sharing features that are inherent in the mushārakah contract by examining the subject of risk sharing in the contract and investigating the prohibitive elements that may arise from the violation of the fundamental risk associated with mushārakah contract. The paper also explores whether the contemporary application of mushārakah contract in Islamic finance truly adheres to the ideals of risk sharing by delineating several examples of products that utilize mushārakah as its underlying contract. To achieve its objectives, the study relies on the content analysis of the classical and contemporary literature. The study finds that some contemporary Islamic financial products that are structured based on mushārakah are not in line with the true spirit of risk sharing. Therefore, it is recommended that Islamic finance should adhere to the risk sharing features of mushārakah contract for such adherence will promote justice and fairness to all contracting parties.