An Assessment Of Muḍārabah And Mushārakah Contracts For Islamic  Equity Crowdfunding

Abdul Muneem; Nor Fahimah Mohd Razif; Abdul  Karim

Authors

Abdul Muneem Universiti Malaya
Nor Fahimah Mohd Razif Universiti Malaya
Abdul Karim Universiti Malaya

Keywords:

Islamic equity crowdfunding, Mudarabah, Musharakah, Malaysia, Shariah

Abstract

This study aims to address the current practice of adopting Sharīʿah contracts in Islamic equity crowdfunding in Malaysia, and to analyze the compliance, issues, and challenges associated with these contracts. A qualitative research approach was utilized, with data collected from various secondary sources. The collected data was subsequently analyzed using descriptive and explanatory methods. The study reveals that ensuring Sharīʿah compliance in Islamic equity crowdfunding necessitates the incorporation of specific Sharīʿah contracts. These contracts are compatible with modern technology-driven financial systems. The concept of crowdfunding aligns with several Sharīʿah contracts, making them suitable for implementation in Islamic equity crowdfunding. However, certain Sharīʿah issues and challenges emerge in practice due to market dynamics and demands. For example, the muḍārabah contract appears appropriate for ventures at the ideation stage but is less suitable when the issuer contributes capital to the venture. This is because, under muḍārabah, capital must solely come from the rabbul māl (investor), while the muḍārib (issuer) provides labor. In contrast, the mushārakah contract can be applied at any stage of a business, irrespective of the issuer's capital contribution. Both contracts, however, face challenges regarding risk-sharing and the potential for loss. The rights and responsibilities of investors under these contracts differ when applied in the crowdfunding context. Future research may focus on examining the implementation of specific Sharīʿah contracts within an Islamic equity crowdfunding platform.

Downloads

Download data is not yet available.

Author Biographies

Abdul Muneem, Universiti Malaya

PhD Candidate,

Department of Fiqh and Usul,

Academy of Islamic Studies,

Universiti Malaya, Kuala Lumpur, 50603, Malaysia

Abdul Karim, Universiti Malaya

Professor,

Department of Fiqh and Usul,

Academy of Islamic Studies,

Universiti Malaya, Kuala Lumpur, 50603, Malaysia

References

Book

Ahmad, K., Nor, R. M., & Kamely, A. A. (2021a). Crowdfunding in the emerging markets. In S. Rana & A. K. Shrivastava (Eds.), Doing Business in Emerging Markets: Progress and Promises (pp. 178-205). London: Taylor and Francis.

Al-Anṣārī, Z. M. (n.d.). Asnā al-maṭālib fī sharḥ rawḍ al-ṭālib. Cairo: Dār al-Kitāb al-Islāmī.

Ali, S. A. M., Hassan, R., & Othman, A. A. (2024). Al-Musharakah-Led Islamic Sustainable Finance. In M. M. S. Billah, R. Hassan, R. Haron, & N. R. Mohd Zain (Eds.), Islamic Finance and Sustainable Development (pp. 148-161). Abdingdon: Routledge.

al-Kāsānī, A. D. (1974). Badāʾiʿ al-ṣanāʾiʿ (2nd ed.). Beirut: Dār al-Kitāb al-ʿArabī.

Ayub, M. (2007). Understanding Islamic finance. West Sussex: John Wiley & Sons Ltd.

Basir, K. H., Besar, M. H. A. H., & Ahad, A. D. (2023). Islamic crowdfunding: viability for start-ups. In: V. Ratten (Ed.), Entrepreneurship Business Debates: Multidimensional Perspectives across Geo-political Frontiers (pp. 13-27). Singapore: Springer.

Basir, K. H., Besar, M. H. A. H., & Ahad, A. D. (2023). Islamic crowdfunding: viability for start-ups. In V. Ratten (Ed.), Entrepreneurship Business Debates: Multidimensional Perspectives across Geo-political Frontiers (pp. 13-27). Singapore: Springer.

Gadhoum, M. A. (2017). Wealth from the Shariah perspective. In M. Ariff & S. Mohamad (Eds.), Islamic Wealth Management (pp. 13-24): Edward Elgar Publishing.

Ḥaidar, A. (2003). Durar al-ḥukkām sharḥ majallah al-aḥkām. Riyad: Dār ʿĀlam al-Kutub.

Hassan, M. K., Raza Rabbani, M., Khan, S., & Moh’D Ali, M. A. (2022). An Islamic finance perspective of crowdfunding and peer-to-peer (P2P) lending. In M. K. Hassan, M. R. Rabbani, & M. Rashid (Eds.), FinTech in Islamic Financial Institutions: Scope, Challenges, and Implications in Islamic Finance (pp. 263-277): Springer International Publishing.

International Shariah Research Academy for Islamic Finance (ISRA). (2016). Islamic financial system: principles and operations (2nd ed.). Kuala Lumpur: ISRA.

Kallio, A., & Vuola, L. (2020). History of crowdfunding in the context of ever-changing modern financial markets. In R. Shneor, L. Zhao, & B.-T. Flåten (Eds.), Advances in crowdfunding (pp. 209-239). Cham, Switzerland: Palgrave Macmillan.

Mohammed, J. A. (2013). The ethical system in Islam–implications for business practices. In C. Luetge (Ed.), Handbook of the philosophical foundations of business ethics (Vol. 3, pp. 873-882). Dordrecht, Heidelberg, New York, London: Springer.

Mrass, V. (2024). Crowdfunding as a digital financing alternative. In T. Endress (Ed.), Digital Project Practice for Banking and FinTech (pp. 88-94). Abingdon: CRC Press.

Muhammad Al-Bashir, M. A. (2019). Crowdfunding in Islamic finance: ensuring proper Sharīʿah oversight. In U. A. Oseni & S. N. Ali (Eds.), Fintech in Islamic Finance: Theory and Practice (pp. 132-155). London: Routledge.

Munshi, U. (2021). The role of Islamic crowdfunding in the new economy. In S. S. Fernández (Ed.), Islamic Fintech (pp. 91-101). Abingdon: Taylor and Francis.

Nivoix, S., & Ouchrif, F. Z. (2016). Is crowdfunding Sharia compliant? In J. Méric, I. Maque, & J. Brabet (Eds.), International Perspectives on Crowdfunding: Positive, Normative and Critical Theory (pp. 185-198). Bingley: Emerald Group Publishing Limited.

Rexhepi, G., & Ramadani, N. (2017). Ethics and Social Responsibility in Islamic Finance. In V. Ramadani, L.-P. Dana, S. Gërguri-Rashiti, & V. Ratten (Eds.), Entrepreneurship and Management in an Islamic Context (pp. 133-142). Cham: Springer.

Translation of The Meanings of The Noble Qur'an in The English Language. (1996). (M. T. AI-Hilali & M. M. Khan, Trans.). Madinah: King Fahd Complex.

Conference

Wahjono, S. I., Marina, A., & Widayat. (2015). Islamic crowdfunding: alternative funding solution. Paper presented at the 1st World Islamic Social Science Congress (WISSC 2015), Putrajaya.

Journal

Abdeldayem, M., & Aldulaimi, S. (2022). Developing an Islamic crowdfunding model: a new innovative mechanism to finance SMEs in the Middle East. International Journal of Organizational Analysis, 31(6), 2623-2644.

Abdullah, S., & Oseni, U. A. (2017). Towards a Shari'ah compliant equity-based crowdfunding for the halal industry in Malaysia. International Journal of Business and Society, 18(S1), 223-240.

Abuznaid, S. A. (2009). Business ethics in Islam: the glaring gap in practice. International Journal of Islamic and Middle Eastern Finance and Management, 2(4), 278-288.

Aderemi, A. M. R., & Ishak, M. S. I. (2020). Adopting qard al-hasan and mudarabah crowdfunding for micro enterprise. International Journal of Islamic Economics and Finance Research, 3(2), 26-38.

Ahmad, A. A., Azman, S. M. M., & Nordin, N. (2021b). A comparative analysis of tanazul and conditional hibah in preference shares. Sciences, 11(2), 771-783.

Ahmad, S., & Bakar, M. A. (2017). The Status of Preference Shares from Islamic Perspective. International Journal of Academic Research in Business and Social Sciences, 7(10), 617-627.

Andaleeb, U., & Mishra, A. (2016). Equity crowdfunding in Shariah compliant nations: an outlook in the middle-east. Global Journal of Finance and Management, 8(1), 97-102.

Bensalem, S., & Bouherb, H. (2021). Analysis on Islamic banking financing difficulties for smes using musharakah and mudaraba financing instruments. Al Bashaer Economic Journal, 7(2), 878-897.

Biancone, P. P., Secinaro, S., & Kamal, M. (2019). Crowdfunding and fintech: business model Sharia compliant. EJIF - European Journal of Islamic Finance (12), 01-09.

Bouziani, L., & Azegagh, J. (2024). Crowdfunding: alternative financing for entrepreneurs. Revue du Contrôle de la Comptabilité et de l’Audit (Review of Accounting Control and Audit), 8(1), 200-235.

Farooq, M. O. (2015). Islamic finance and debt culture: treading the conventional path? International Journal of Social Economics, 42(12), 1168-1195.

Fianto, B. A., Gan, C., Hu, B., & Roudaki, J. (2018). Equity financing and debt-based financing: evidence from Islamic microfinance institutions in Indonesia. Pacific-Basin Finance Journal, 52(December), 163-172.

Hamid, O. H., & Allaymoun, M. (2019). E-Mudaraba suggested system for Islamic investments. Journal of Internet Banking and Commerce, 24(1), 1-21.

Haniff, W. A. A. W., Halim, A. H. A., & Ismail, R. (2019). Equity crowdfunding in Malaysia: legal and sharia challenges. International Journal of Asian Social Science, 9(8), 450-460.

Hendratmi, A., Sukmaningrum, P. S., Hadi, M. N., & Ratnasari, R. T. (2019). The role of Islamic crowdfunding mechanisms in business and business development. Journal of Business and Economics Review, 7(1), 1-7.

Ishak, M. S. I., & Rahman, M. H. (2021). Equity-based Islamic crowdfunding in Malaysia: a potential application for mudharabah. Qualitative Research in Financial Markets, 13(2), 183-198.

Ishak, M. S. I., Kamaruddin, M. H., & Aderemi, A. M. R. (2022). Mudharabah based crowdfunding as an alternative source of funding book publications in Malaysia. Journal of Islamic Marketing, 13(9), 1973-1987.

Islam, R., & Ahmad, R. (2020). Muḍārabah and mushārakah as micro-equity finance: perception of Selangor’s disadvantaged women entrepreneurs. ISRA International Journal of Islamic Finance, 12(2), 217-237.

Jamaluddin, F. A. A., Nasir, N. S. M., & Ishak, M. S. I. (2022). Mudarabah based crowdfunding model as an alternative fund for empowering single mother entrepreneurs. Al-Qanatir: International Journal of Islamic Studies, 25(2), 102-112.

Kamal, A. A., Yusof, E. F. E., & Kashoogie, J. (2009). Debt versus equity financing in the light of maqasid al-Shari'ah. Munich Personal RePEc Archive (MPRA Paper No. 20722).

Khan, M. A., Siswantoro, D., & Rahman, A. U. (2020). The obstacle factors of Musharakah and Mudharabah application in Pakistan. Jurnal Akuntansi Dan Keuangan Indonesia, 17(2), 5.

Marwa, M. H. M., Al-Fatih, S., Hussain, M. A., & Haris, H. (2023). The position and role of the Sharia supervisory board in ensuring Sharia compliance equity crowdfunding in Indonesia. Jurnal Hukum, 39(2), 212-230.

Mathkur, N. M. M. (2019). Business ethics in Islamic finance. Archives of Business Research, 7(2), 143-152.

Mohamed Naim, A., Long, M. N. H., Md Hussein, M. N., & Abu Bakar, M. (2018). Critical analysis on the essence of mudārabah and mushārakah and its relation to ḍamān. Malaysian Management Journal (MMJ), 22, 1-18.

Moriguchi, T., Khattak, M. A., Farhan, M., Firdaus, M., Worasutr, A., Hakim, A. L., . . . Muneeza, A. (2016). Contemporary practices of musharakah in financial transactions. International Journal Of Management and Applied Research, 3(2), 65-76.

Muhammad, S. D., Usman, M., Majid, A., & Lakhan, G. R. (2013). Distribution of wealth an Islamic perspective: theoretical consideration. World Applied Sciences Journal, 23(8), 1118-1124.

Muhammad, T., & Ngah, B. (2020). Modeling debt and equity crowdfunding based on murabahah, musharakah and mudarabah: trust and awareness. Ikonomika: Jurnal Ekonomi dan Bisnis Islam, 5(2), 271-296.

Muneem, A., Mohd Razif, N. F., Ali, A. K., & Rosele, M. I. (2024). Debt-based financing: a case study of Malaysian Islamic banks. Global Business and Economics Review, 30(1), 39-55.

Pişkin, M., & Kuş, M. C. (2019). Islamic online P2P lending platform. Procedia Computer Science, 158, 415-419.

Rahman, M. P., Thaker, M. A. M. T., & Duasa, J. (2020). Developing a Sharīʿah-compliant equity-based crowdfunding framework for entrepreneurship development in Malaysia. ISRA International Journal of Islamic Finance, 12(2), 239-252.

Ramli, H. S., & Ishak, M. S. I. (2022). Equity-crowdfunding in Malaysia: the needs for a comprehensive Shariah governance. The Journal of Management Theory and Practice (JMTP), 3(1), 48-55.

Sapuan, N. M. (2016). An evolution of mudarabah contract: a viewpoint from classical and contemporary Islamic Scholars. Procedia Economics and Finance, 35, 349-358.

Sarpini, S. (2019). Application of musyarakah in Islamic banking. Journal of Islamic Economics, Management, and Business, 1(1), 173-190.

Thaker, H. M. T., Khaliq, A., Sakaran, K. C., & Thaker, M. A. M. T. (2020). A discourse on the potential of crowdfunding and Islamic finance in the agricultural sector of East Java, Indonesia. Jurnal Ekonomi & Keuangan Islam, 6(1), 10-23.

Zafar, S. H., & Siddiqui, D. A. (2022). Impact of asymmetric information in Islamic financial contract: an empirical analysis. Available at SSRN: https://ssrn.com/abstract=3384228 or http://dx.doi.org/10.2139/ssrn.3384228.

Standard, Guidelines and Resolutions

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). (2015). Sharīʿah standards for Islamic financial institutions. Manama, Bahrain: AAOIFI.

Bank Negara Malaysia (BNM). (2015a). Mudarabah. Kuala Lumpur: BNM.

Bank Negara Malaysia (BNM). (2015b). Musyarakah. Kuala Lumpur: BNM

International Islamic Fiqh Academy (IIFA). (2000). Resolutions and recommendations of the Council of Islamic Fiqh Academy: 1985-2000. Jeddah: Islamic Development Bank and Islamic Fiqh Academy.

Securities Commission Malaysia (SC). (2022). Resolutions of The Shariah Advisory Council of the Securities Commission Malaysia. Kuala Lumpur: Securities Commission Malaysia (SC).

Website

IFN Fintech. (n.d.). Landscape - Crowdfunding and P2P Finance. https://ifnfintech.com/landscape/ (accessed on 10 September 2024)

pitchIN. (n.d.). Home. https://www.pitchin.my/ (accessed on 10 September 2024)