Equity versus Debt- Financing in Islamic Finance

UAE Laws and Islamic Finance

In Islamic Finance, equity- financing is done primarily through the profit-sharing contracts (Uqud al-Ishtirak) of Al-Mudarabah and Al-Musharakah.

  1. Al-Mudharabah: (Origin)

“Al-Mudarabah for example can be traced back to Prophet Muhammad s.a.w. himself, who acted as a Mudharib (agent/entrepreneur) for his wife, Khadijah.  That was even before the first revelation was revealed to Prophet Muhammad s.a.w. by the Angel Jibril (Gabriel).  Such partnership performed an important economic function; they combined the three most important factors of production, namely: capital, labor, and entrepreneurship, the latter two factors being, usually, combined win one person.”  (*The Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan.  (2003))

Mudarabah” is partnership where one partner gives money to the other partner for investing it in a commercial enterprise. The investment money comes from the first partner who is called “rabb-ul-mal

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