A Comparative Analysis of Riba Prohibition in Murabahah and Mudharabah Contracts: The Case of Malaysian Islamic Banks

Islamic finance is based upon the principle of prohibition of riba, which requires that a financial transaction must be based on real economic activity, risk sharing and ethical concerns instead of the fixed guaranteed returns. Despite this principle, the Islamic banking operations especially in Malaysia use the debt based contracts like Mudharabah continues to be heavily relied on and thus creating an apprehension that substantive fulfilment of the riba prohibition has been fulfilled. This paper discusses how riba is avoided in operating the Murabahah and Mudharabah contracts under the Malaysian Islamic banking system through evaluating the economic substance, risksharing, and suitability with the purpose of Shariah (Maqasid al-Shariah). As a qualitative and descriptive study design, the research is grounded on a review of the classic Islamic jurisprudence, the current academic literature and regulations provided by Bank Negara Malaysia as well as the Shariah Advisory Council. The results show that, despite the fact that both agreements are formally deemed to be Shariah-compliant, there are some considerable discrepancies in the applicability of both. The use of Murabahah is much more popular because it is easy to administer, predict income, and it requires less operational risk. Mudharabah, in contrast, is more consistent with the objective of justice and equity and is more typically in line with the Shariah goals of justice, equity and ethical financing, but is limited by information asymmetry, monitoring costs and governance issues. The paper finds that adherence to the form of contract is not adequate to fulfill the aim of the riba ban, hence the importance of putting more emphasis on the substance of risk sharing and economic involvement to enhance the ethical basis of the Islamic banking in Malaysia.

Islamic banking, Riba, Murabahah, Mudharabah, Maqasid al-Shariah, Malaysia

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