Origins, Evolution and the Future
- Studies in Islamic Finance, Accounting and Governance series
Chapter 4: Evolution of Medieval Islamic Business Partnerships in the Islamic World and the West
The multiple mudaraba Since Islamic law of partnerships allows the agent to pool the capital of several principals, total capital entrusted with a single agent can be considerably enhanced.1 This brings us to the ‘multiple mudaraba’. The term ‘multiple’ here refers to the multitude of principals, who pool their capital and entrust the thus pooled capital to a single mudarìb, agent. The advantage of this arrangement is that economies of scale are achieved. That is to say, the agent with the now much greater capital at his disposal can bargain more effectively with the suppliers. The arrangement also minimizes transaction costs per unit of commodity purchased. The agent signs a separate mudaraba contract with each of the principals and with the thus combined capital larger profits are generated. Since the entire capital is provided, now, by a group of principals, the loss also accrues to them in accordance with the principle: profit follows mutual agreement and loss follows capital. This means losses are distributed among all the principals in proportion to the capital they have provided. The agent, as usual, does not suffer any pecuniary loss; his loss would be in the form of unpaid effort. Profits are distributed between the group of financiers and the mudarìb/agent, either according to their mutual agreement stated in the contract or according to their relative capital contribution. The great achievement of the multiple mudaraba (and inan) is that it has made it possible for various merchants to pool capital to finance...
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