Gharar in Mudaraba

[Prof Mahmoud El-Gamal/ Moderator]

There can also be riba in mudaraba. Consider the case where the profit rate is all but certain (near zero variance), the wage for comparable work of the mudarib is well known in the market, but the profit share stipulated in the mudaraba contract is either much lower or much higher than the market wage. The discrepancy is riba. The idealization of mudaraba in mid century Islamic economics and late century Islamic finance was very unfortunate and based on deep misunderstanding of classical jurisprudence. Far from mudaraba being an ideal form of finance, jurists had to bend backward to find a way to permit it, because they felt that it is sometimes quite useful to have.

[Mohammed Zahid Mateen]

Thank you for sharing Mahmoud El-Gamal. What would you say is the best way forward for those that wish to adopt the mudaraba structure in their businesses in today’s industry? Could be at a personal level or even at an enterprise level?

[Prof Mahmoud El-Gamal]

@Mohammad Zahid Mateen
You wrote this question in English. So why are you asking for the silent partnership contract with its Arabic name? There is nothing Islamic about it. It was just a contract that predated Islam and earlier Muslims adapted it to their needs during their time. Wherever you are living today, I am sure that your commercial law allows for different types of partnership structures. Find the one that best suits your need.

[John Salevurakis]

I wonder Mahmoud, how “much” higher or lower is too much? Also, as a worker, I wince a bit when I see a higher than “market” wage/profit share defined as riba. 🙂

[Prof Mahmoud El-Gamal]

John Salevurakis Alas, that’s what the Prophet said: “any increase or diminution is riba” and what the Qur’an said “you shall have your capital without suffering or causing injustice” (which the exegetes said means without increment or decrement).

How much is too much is at the heart of most jusirprudence. Minor gharar is tolerated, and so is riba in small denomination coins (fulus or copper coins), and so on. As economists, we would say too much is when the social cost exceeds the social benefit, and we need to do the calculations.

[Prof Mahmoud El-Gamal]

@John Salevurakis
Another interesting aspect of your question (the humorous part) is presumption that class problems are always unidirectional. But consider an elderly retiree with a modest sum on which to survive, and her money manager who is the worker. Now you would agree that the money manager’s wages may be too high.

[Mohammed Obaidullah]

So Prof Mahmoud El-Gamal, what I understand from your explication of riba and gharar prohibition is that these norms essentially are about being “fair”. The idea of fairness would then be something very objective in certain cases, but would also permit subjective interpretation in others.

[Prof Mahmoud El-Gamal]

@Mohammed Obaidullah PhD.
Yes, even a cursory reading of Muslim scripture and scholarship will leave any fair reader with the impression that justice is the central organizing principle (as in the verse “God commands justice, goodness and generosity to kin; and forbids immorality, blameworthiness and oppression” (16:90)

Ibn Rushd explained the Hanafi position on riba (which he favored even though he was Maliki) by an Aristotelian argument on justice in exchange… almost straight out of Nicomachean Ethics.

Subjectivity is unavoidable, and it is why scholars of Muslim theories of justice have noted that the principle eventually reduces to procedural rule of law. The Prophet himself noted that disputants may differ in their argumentative skill and that he himself may make a wrong judgment, but then the one who gets more than his right should know that this is associated with sin… and God is the ultimate judge who knows all.

[John Salevurakis]

Personally, I would like to see any paid overage re-defined as charity. 🙂