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Abstract
There are several Islamic modes of financing which
serve as alternatives to interest based financing. There is,
however, divergence of views between theory and practice
about the order of preference of these modes of financing. The
theoreticians are, generally, of the view that profit-loss sharing
should be the most widely prevailing mode of financing in the
financial system of Islam. Some theoreticians have been quite
critical of this practice. Profit-loss sharing techniques make the
capital owner share the profit according to-actually realized
productivity. Thus, the actually realized return on profit is the
price of capital which will determine its allocation. Among PLS
techniques, musyarakah may have an edge over mudarabah in
the sense that in musyarakah, capital owner has a right to
interfere in the management and hence can have some control
over the problems created by informational asymmetry and
moral hazards, mudarabah is void of any such control. This
divergence is a result of the fact that the capital user does not
have to bear the uncertainties that the capital owner does. It
may also be noted that since an upper limit on their profit is
fixed by the rent or the mark up which are not related to the
profitability of the enterprise, these techniques may not have as
primary a role in investment decision making as profit-loss
sharing techniques.
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Authors
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