Examining the anatomy of Mudaraba Islamic financing
Produced in partnership with Freshfields Bruckhaus Deringer LLP
Examining the anatomy of Mudaraba Islamic financing

The following Banking & Finance guidance note Produced in partnership with Freshfields Bruckhaus Deringer LLP provides comprehensive and up to date legal information covering:

  • Examining the anatomy of Mudaraba Islamic financing
  • The evolution of Islamic finance
  • The rise of equity financing: background to Mudaraba
  • Structure and required elements of a Mudaraba transaction
  • Documentation and transaction mechanics
  • Current implementation in the finance markets

In the Name of Allah, the Most Beneficent, the Most Merciful

The evolution of Islamic finance

The requirement for financing is an essential requirement of business and commerce. Conventional financing has been operational for hundreds of years whereas Islamic financing is a recent phenomenon which gained momentum in the mid-1970s following the incorporation of the Islamic Development Bank and Dubai Islamic Bank. Both of these banks operate within the boundaries of Shari'ah, which is the Islamic code of law, and since their inception, Islamic financing has been gradually expanding and has become one of the fastest growing sectors in the financial markets.

The accrual and payment of interest is one of the cornerstones of the majority of all types of conventional financing. However dealing with interest (riba) is prohibited in Islam as set out in the Holy Quran. This is clear from a translation of Ayah 275 from Surah Al Baqara:

'Those who swallow usury cannot rise up save as he ariseth whom the devil hath prostrated by (his) touch. That is because they say: Trade is just like usury; whereas Allah permitteth trading and forbiddeth usury. He unto whom an admonition from his Lord cometh, and (he) refraineth (in obedience thereto), he shall keep (the profits of) that which is past, and his affair (henceforth) is with Allah. As for him