Mudharabah Solution to Unemployment Crisis

Economics in the Qur’an and the Sunnah

1 Mudharabah : Islamic Solution to Unemployment Crisis

Islamic Solution to the Unemployment Crisis

Prepared by:

Ezry Fahmy B. Eddy Yusof

Ibrahim Bin Muhammad Hassan

Muhammad Hafizi Bin Mihzan

Yusof Bin Yahaya



1.0 INTRODUCTION The whole world is now in the grip of a financial crisis which is far more serious than any

experienced since the Great Depression. It has taken more than $3 trillion of bailout and liquidity

injections by a number of industrial countries to abate somewhat the intensity of the crisis.

Nevertheless, there are fears that this crisis may have exposed the world economy to a long

period of economic slowdown. There is, hence, a call for a new architecture that would help

minimise the frequency and severity of such crises in the future.

As the scholars in Islamic economics mostly sees from the macro perspective, from this

assignment we will look it from a micro perspective where we chose unemployment that has

increase tremendously as the topic of discussion. We choose some of the latest news in the

unemployment matters that reported by the Economist magazine to be our literature review.

Later we will propose some solution to overcome the problem that faced by the global

because of the current crisis. We believe that the financial crisis has widened the global appeal of

Islamic finance and therefore the opportunity must be use wisely. It may sound idealistic, but we

believe that fourty years ago no one haven’t thought that Islamic financial system could become

such phenomenon like nowadays. We also believe that based on a proper understanding of the

Maqasid Al-Shariah (Shariah objectives) is needed to be included in Islamic finance practically

in order to achive justice in the society.

Thus, this paper is made as suggestions to the current crisis that

sooner or later will affect the Malaysia economy. The suggestions will

focus directly to the institutions or organizations that we feel have a

potential in strengthening our ideas. We hope through Islamic financial

system the investment organisations are committed to enhance the

economic wealth of the community in particular and contribute towards

the growth and prosperity of the nation for the benefit of Malaysians.



2.0 ARTICLE REVIEW It seems that the economic downturn has hit the employment sector so hard especially the

one in U.S. According to Kelly Evans and Kris Maher, the employment rate in U.S has climbed

up to 7.2% and brought the total number of job lost last year to just 2.5 million, the worst since

1945. The latest update by CNN shows that by February, the rate is still increasing up to 76%, a

1% higher than what the economist has been expected. It is recorded that January’s job loss of

540000 jobs was worse than expected. However, this alarming percentage of unemployment is

the beginning. Sung Won Sohn, economics professor at Cal State University-Channel Islands has

forecast that by the end of the year, the rate of unemployment will rise up to 9% while monthly

job losses will climb to 800 000 soon.

According to Economist’s, an economic

collapse on this scale is bound to hit jobs hard. In the

latest quarterly survey Manpower, an employment-

services firm, finds that in 23 of the 33 countries it

covers, companies’ hiring intentions are the weakest

on record (see chart 1). Because changes in

unemployment lag behind those in output, jobless rates

would rise further even if economies stopped

contracting today. But there is little hope of that. And

several features of this recession look especially

harmful.

Furthermore, output has shrunk even faster in

countries dependent on exports (such as Germany,

Japan and several emerging Asian economies) or

foreign finance (notably central and eastern Europe).

The IMF said this week that global output will

probably fall for the first time since the Second World



War. The World Bank expects the fastest contraction of trade since the Depression.

Since labor is one of the factors of production, there is an interdependent relation

between both variable. Analyzing the impact of the economic downturn, it is likely that the

production has to be cut down due to the declining demand on goods. As a respond to this

situation, company will try to reduce their cost. The Economist reaffirms this that the credit

crunch has exacerbated the impact of falling demand, pressing cash-strapped firms to cut costs

more quickly.

It is shown that not only in America but also Europe joblessness has grown fastest in

places such as Spain and Ireland, where building booms have crashed, but has only begun to

edge up elsewhere. The unemployment rates in many European countries are below America’s,

but that may be because their more rigid labour markets adjust more slowly to falling demand.

Given how fast European economies are shrinking, nobody doubts that worse lies ahead. By the

end of 2010, unemployment in much of the rich world is likely to be above 10%.

Looking into the effect of this crisis, it seems

that the outcomes are more painful. As trade shrinks,

millions of workers are losing their grip on the level of

the global supply chain. Poverty will rise as they sink

into informal work or move back to the land. The

World Bank expects some 53m people to fall below

the level of extreme poverty this year.

Another factor that has direct relationship with

economic crisis is the industrial production that has

been financed by det. Malaysia as an example has been

depending highly on their export, mostly on electrical

manufacturing. As been stated by Laalitha Hunt in the

Star, “as an export-oriented economy, Malaysia is not

immune to the slowing global trade as seen in the



straight months of decline in exports and

industrial productions”.

These productions were mainly

financed by debt and the problem that

contributes to the layoff workers during

economic crisis is to repay the debt.

Company will face inadequate cash flow

to control the liabilities at the same time

sustain the company, Hunt further states

“Industry experts concur that an uptick

in corporate defaults is likely as the

feeble global economic conditions

weaken companies’ finances and slash

the cash flow available for debt

repayments”.

As a step to reduce the impact,

governments must intervene

energetically to help. That’s partly

because capital has taken such a large

share of profits for so many years that

the extreme opposite side has swing

back and partly because, having just

given trillions of dollars to the banks,

politicians will be under pressure to put

vast amounts of money into saving jobs.

But help cannot be measured in dollars alone. Badly designed policies can be self-defeating.

After the recessions of the 1970s and early 1980s, Europe’s rigid labour-markets kept

unemployment high for decades.



Governments are piling in with short-term help for workers. In America, which has one

of the lowest social safety nets in the rich world, extending unemployment benefits was, rightly,

part of the recent stimulus package. Japan is giving social assistance to “non regular” workers, a

group that has long been ignored. In general, however, it makes more sense to pay companies to

keep people in work than to subsidies unemployment. Many countries are topping up the

earnings of workers on shortened weeks or forced leave.

These are sensible measures, so long as they are time-limited; for, in the short term,

governments need to do all they can to sustain demand. But the jobs crisis, alas, is unlikely to be

short-lived. Even if the recession ends soon, the asset bust and the excessive borrowing that led

to it are likely to overshadow the world economy for many years to come.



3.0 PROPOSE SOLUTION The idea of proposing mudharabah institution is to

give solution for the unemployment problem in Malaysia

or all over the world if possible. As in the case of

Malaysia, the unemployment problem becomes among the

major problems of the crisis. When many firms and

companies especially from the manufacturing sector

experience abrupt decline of demand from the customers

on their products, they have taken immediate action to

reduce losses incurred from such problem. As a result, lay-off activities will be exercised by the

firms as one of the ways to avoid more losses by reducing the scale of production from numbers

of branches toward few of factories continued to be operated. Thus, thousand of labours become

unemployed workers and many more are afraid of experiencing the same impact. It has been

reported that, last year 2008, almost 33,451 workers were retrenched, compared with 26,417 in

2007. Between October last year and until January 25 2009, 13,040 workers were retrenched,

including 2,955 foreigners, while 45,000 have been temporary layoff work (nst.com).

Therefore, in tackling this serious issue, we have suggested a proposal on how to solve

the unemployment problem through mudharabah institution. For a first glance, it seems to be

illogical and nonsense. How can the financing package like Mudharabah will solve

unemployment problem? It does not have any direct relation between financial supports with job

opportunities because people want to get job as soon as possible and not financial package which

is presumed to be a transient income. Then, the arguments come in to stress that Mudharabah

will not directly give people jobs but it helps people to create jobs for him and the rests. The

money that received through mudharabah-financing will help someone to open new business and

producing new goods for the use of the domestic usages.

Now another refutation arises, why do we need to produce more goods by establishing

new firms while in fact the problem of the crisis is a demand side problem not the supply side

problem? Shortly we can say creating more firms from small or medium size enterprise will

contribute to increasing demand and not only the supply side. The detail of the discussion we

will elaborate further on the next part.



3.1 Mudharabah: A Mode of Finance Mudharabah-financing works as an instrument

and alternative to risk-free investment which in reality

does not really exhibit the true principle of Islamic

investment which is risk-sharing. Islam is the religion

that promotes justice in its rules and regulations.

Burdens that borne by one party should be felt by other

involving parties to make it balance and to justify the

spirit of cooperation and mutual aid on the action of the

parties through binding the risk-sharing condition on the

contract.

In brief, mudharabah-financing was initiated during the pre-Islamic period (jahiliyyah) by

Hashim ibn Abd Manaf ibn Qusayy at the fifth Century A.D in order to control the destructive

potential of ‘ritual suicide’. The suicide was committed by Meccans if they experienced business

disasters (Muhammad Anwar, 2001). It was then recognized by the prophet (peace be upon him)

in post-jahiliyyah period and Muslim exercised it as legal transaction in financing their trade

ventures. Some opinions has said that Mudharabah has been practiced by the prophet (peace be

upon him) with Khadijah (R.A), but critical analysis of the said narrations will show that it was

not the contract of Mudharabah, but that of fixed Ujrah (labour charges) (Tanzilur Rahman,

1999). The acceptance of mudharabah practices is also shows that Islam is the religion for all and

not coming to existence for rejecting or replacing non-based revelation activities totally but

rather it combines three main elements in its approaches; there are introduction, rejection and

modification.

Mudharabah is an agreement between financiers (rabb-al-mal) who provide capital to the

business-proposed with the entrepreneur (mudharib) who manage and run business activities.

However, it does not confine for both parties to be entrepreneur and not the capital provider or

vice versa in a particular time. They can stand for both in where parallel on the stipulated

agreement. The idea of mudharabah contract is to seek earnings by having consent from both

parties to distribute the generated profits from business activities based on the profit-sharing-

ratio (PSR). The capital contribution can be in form of real assets or money. The guided



principles underlines on the mudharabah financing will determine the crudeness of this joint-

venture financing (LearnIslamicFinance.com):

1. Financing through Mudharabah does not mean the advancing of money but rather the

participation in the business.

2. An investor or financier (rabb-al-mal) must share the loss incurred by the business to

the extent of his financing.

3. The partners are at liberty to determine, with mutual consent, the ratio of profit

allocated to each one of them, which may differ from the ratio of investment.

However, the partners who have expressly excluded himself from the responsibility of

work for the business cannot claim more than the ratio of his investment.

The capital providers can invest their money by making restriction on the particular

business only. This type we called as al-Mudharabah al-muqayyadah (restricted mudharabah).

The capital whether in form of money or real property can also be invested in any form of

businesses which the mudharibs want to run with. This form we call as al-Mudharabah al-

mutlaqah (unrestricted Mudharabah) (Taqi Usmani, 2007).

Mudharabah-financing can also work with musharakah in other word the principle used in

musharakah combined or applied in mudharabah. This case happens when the mudharibs want

also to invest in the Mudharabah scheme where despite being the entrepreneur, the mudharib will

also work as a capital provider (Taqi Usmani, 2007).

3.2 Misgiving on profit and loss sharing (PLS) The most common arguments against theoretical and empirical issues regarding Al-

Mudharabah are discussed by Iqbal and Molyneux (2006) when some economists such as Stiglist

and Weiss (1981) held perception that sharing arrangement such as profit and loss sharing are

less efficient. A system that emphasis on partnership becomes an equity-based system with no

debt and when the depositors become shareholders is deem to be risky. Among the arguments

that being highlighted are such as problem of asymmetric information and the cost involved in

reducing it, the problems of moral hazard, adverse selection problem, the agency costs and the

need for monitoring the counterparties' behavior.



Most of the institutions have these kind of perceptions towards the sharing arrangement

such as profit and loss sharing may argue that agency problem could not be avoided under the

behavioral assumption of self interest. This is because the agent may not spend their best effort

since they are not using their own money but others, therefore it is very risky.

However, whilst this position has it supporters, their arguments are untenable because in

examining the argument that profit and loss sharing financing is too risky for banks to adopt,

Iqbal and Molyneux (2006) found two fallacies in this line of arguments. First, the variability in

the rate of return is not the only risk involved in financial contracts. Second, the so called 'fixed

return' contracts, like interest based contracts may not in fact yield a fixed return.

Besides, when the proposed institutions exposed to greater risks and the variation of the

rate of ultimate return to the banks of their investments is greater and resulted from large scale

resorting to PLS instruments could pose much more serious risk and hazards. Moreover, Akacem

and Gilliam (2002) and Mehmet (2007) thinks that profit sharing concept may approach to

market solution because it requires direct involvement of civil society, managerial skills and

expertise in overseeing different investment projects from the banks. The banks need to have a

correct perception in considering the superiority of Al-Mudharabah. Therefore, the argument that

Al-Mudharabah contracts are too risky for the above mentioned institutions to adopt is not

convincing.



3.2 Small Medium Enterprice (SME)

Illustration 1: Structure propose to be implemented



As we have discussed earlier in brief, the modus-operandi of Mudharabah-financing which

mostly involving two parties, they are the mudharib (entrepreneur) and rabb-mal (capital

provider). The agreement of both parties on the contract of Mudharabah in regard to profit-rate-

sharing (PRS) as well as others principles embedded to the contract would likely exhibit a true

partnership in business.

In this proposal, we will recommend few things on our Mudharabah model in order for

the institution to work properly and able to achieve its targets and objectives especially during

this hard period of the crisis. The Mudharabah institution that we proposed will be working as a

direct financial aid from the government to the people as an incentive for them to open new

small and medium size of business through the present programme under supervision of National

SME Development Council or bank Negara. The idea of choosing the government to be a capital

provider is because of the lack of confidence from the people to invest in a real risky investment.

Such level of confidence even reducing when the economic faces recession and turmoil

situations, expecting the return from the investment will be likely low or negative. Therefore, we

are strongly believe that with the proactive step taken by the government by looking at strong

ground of SMEs to expand further, the effort of introducing Islamic financial packages like

mudharabah will result to better achievement and shielded from a direct implication of the

fluctuation of the interest rate due to the financial crisis.

Moreover, there are several reasons of choosing the SMEs entrepreneurs as mudharib in

our model. The potential of SMEs to work as a catalyst to gear up our economic is something

undeniable. By looking at the achievement from the developing countries from the past few

years, SMEs promote private ownership and entrepreneurship; provide broad based growth

whilst also acting as incubators for developing enterprises into large corporations. In developed

Asian countries like Japan and PR China, SMEs contribution to the GDP is already above 55%

compared to 32% recorded by Malaysian SMEs in 2005 (SME Annual Report,2007). From the

total SMEs operation in Malaysia, almost 56.4% contribution has made to the employment

sectors. Thus, the Malaysian government has taken its step to show commitment by providing

more facilities on this programme. This effort has been reflected on the national development

agenda. Both the Ninth Malaysia Plan (9MP) and the Third Industrial Masterplan (IMP3),



outline key strategies for SME development for the 2006-2010 and 2006-2015 respectively

(SME Annual Report, 2007).

In ensuring the successful of this programme, government has played very important role

especially in providing financial scheme to the new entrepreneur. It has been reported that the

government has identified 27 programmes in the year 2007, with an allocation of RM 2.4 billion

and implemented by various Ministries and Agencies including Bank Negara Malaysia to

enhance SMEs’ access to financing (SME Annual Report, 2007). Moreover, with the cooperation

from the financial institution and Development Financial Institution (DFIs), they have offered

financing more than 26,000 micro enterprises. The significant expansion of financing SMEs has

been found in where almost RM63.2 billion amount of loan had been approved to over 132,000

SME accounts in 2007, exceeding the projected target of RM51 billion to 110, 000 SME

accounts (SME Annual Report, 2007). This situation has shown a massive allocation has been

put on to the SME programme. In overall, banking institutions are the main providers of

financing to SMEs, with financing outstanding as at the end-march 2008 amounting to RM118.8

billion.

There are four types of financial assistance under the government funds and scheme, they

are; soft loans, grants, venture capital, equity and both soft loans and equity. A huge number of

demand from the SME in the year of 2007 was on soft loans which has been reported that almost

1, 254, 317 applications has been applied. Unfortunately, only 138 applications on the equity

financing and 1,906 applications for both soft loans and equity have been applied to finance their

project. Before we touch the issue of equity financing that has been offered by the government,

we would firstly look at the other types of financial scheme offered by the government especially

on soft loans. This observation will be the cornerstone of our proposal to the Mudharabah equity

financing scheme.

In the preceding statement, we had mentioned that financial institutions that are coming

from conventional and Islamic banks are among the largest contributors to financing SMEs. The

numbers of outstanding loan in 2007 has increased to almost RM118.8 billion. By knowing the

fact, riba’ is among the prohibited things in any transactions under Islamic rules and regulations.

The prohibition of riba’ is not just merely a divine order but rather it concern on the maslahah of

the individual as well as public. The impacts of riba’ transaction is so worse and it creates more



harmful rather than benefit to the public. It is undeniable the matter of fact is that the crisis occur

today mainly because of widely of riba’ practices. Allowing more institutions to commit in riba-

based financing will certainly create a way to further disaster specifically in financial markets or

world economic in general.

The increasing amount of loan plus interest charged in compounded, creating more

problems to SMEs in the future. The profits earned from the small business would be likely used

to pay a big amount of interest every year plus with the capital amount of loan. As a result, many

defaulters will be occurred. Looking at these phenomena, the government has taken an

immediate action by establishing a scheme to help the defaulters called a Small Debt Resolution

Scheme (SDRS) in November 2003. It has been reported that until the end April 2008, 763

applications with total Non-Performing Loan (NPLs) of RM527 million have been received. Of

these, 592 applications involving NPLs of RM350 million were approved for restructuring, while

RM19 million new financing was approved for 38 applications. Under the financial institutions

financial scheme, even though it has been reported a decline of SME NPLs by 10.6% to RM12

billion as at the end of March to 2008 as compared to the same time on the end of March 2007

by almost RM13.4 billion, the amount remains huge (SME Annual Report, 2007). Therefore, if

we are keep on exercising more loans on riba-based instruments; we will just bring up darkness

to our potential GDP contributors from SMEs in the future.

Moreover, if we are looking at the equity financing that has been offered under

government scheme, there are four institutions work on it, among them are (smeinfo.com):

1. Permodalan Usahawan Nasional Berhad (PUNB) through Bumiputera Enterpreneurs

Retail Project Fund (PROSPER).

2. Perbadanan Nasional Berhad (PNS) through PNS Equity Investment Scheme

3. Perbadanan Nasional Berhad (PNS) through PNS Equity Investment Scheme

4. Ministry of Entrepreneur and Co-operative Development with Equity financing.

After we have gone through all of the schemes, we found that none of the scheme applies

mudharabah or musyarakah equity financing, and not only that, there are still interest is charged

and no real partnership or investment from the government on SMEs. Even if we are looking at

the banking institution under Islamic bank categories, several Islamic banks involve in funding



the SMEs projects like Bank Islam Malaysia Berhad, Kuwait Finance House Malaysia Berhad,

EONCAP Islamic Bank Berhad, Bank Muamalat Malaysia Berhad and so on. Several packages

of financing have been offered by the Islamic Banks but none appeared to offer a Mudharabah or

musyarakah equity financing. We may expect that those banks will try to run away from the risk

and loss or the limitations imposed by Bank Negara give them less liberty to involve any real

partnership in Mudharabah or musyarakah contracts.

Therefore, we really want to suggest to the Government in order to implement this

Mudharabah scheme into his financial packages to SMEs as a pioneer of the early institution to

involve in real partnership. By establishing the Mudharabah institution, the government may

inject some amount of money to the institution and allowing the SMEs to get financial support

through mudharabah-financing. The reasons why we are choosing the mudharabah and not

musyarakah in our model will be explained as follows:

Mudharabah not really require a direct participation from the government to the

operation, but we just requesting government to

supervise the activities from SMEs. Unlike the

musyarakah, the participation to operate the

business must be in there from the government

which we think is not affordable to the government

to involve in all the SMEs projects.

The mudharabah purposes to give opportunity to

the entrepreneur (mudharib) to run the business

with the help of the financial support from the

capital provider. In our case, we suggest the

government to be responsible in providing the

capital. However, in musyarakah both parties must

allocate some portions in the business in form of

money or property in order to fulfil the musyarakah

contracts. In our humble opinion, it is not a good recommendation because normally the

applicants or entrepreneur will come with the idea or business proposal but without

having enough funds to operate the business. Therefore, by proposing musyarakah at this



time of crisis will not likely be a good approach to attract more people to start their

business.

In our model of Mudharabah institution, we choose the government for the time being as the

capital provider to the Mudharabah institutions. Among the reasons that we suggest it are as

follows:

1. During the crisis, it is understood that the individuals coming from the households and

also the companies would be hardly to involve in any risks investment in where the

uncertainty of the market condition will bring less confidence to them in putting up the

money to the real investment and uncertain returns. However, government as a big

institution would likely be possible to take risk and duty to help the society.

2. The government through his second big budget under stimulus package that amounting

almost RM60 billion should be allocated aside some portions in order to finance the

SMEs through Mudharabah way of financing where the government will be the main

capital provider and the potential entrepreneur will be from the potential individuals

from the scociety. The supervision of the business will be done through the existing

government units called National SME Development Council and Bank Negara or by

establishing special unit under it to supervise the movement of the SMEs under the

Mudharabah financing.

3. Government is the institution that requires fewer profits as compared to other interested

parties. As the government main objectives is serve their best to help the society in

getting better life provided with good welfare and social security. The idea of

mudharabah financing is to propose the government to give financial assistance directly

to the public through funding their small and medium business not just merely a one-

time income or transient income which is not idealistic to be implemented during the

crisis. As an implications, those business are actually helping the government to create

more job opportunities to the others, increasing income to the public through job salary

earned from the workers work in the industries, creating more demands on the domestic

goods through inter-industrial demand of goods or consumption from the households to

the domestic goods and services. Those are among the targets that the government

wants to achieve during the crisis in order to increase GDP through stimulating



domestic expenditure and reducing dependency of the net exports. The proposal of

mudharabah financing on the SMEs projects go parallel with government’s intention.

4. Government can play big roles in promoting or convincing the society to support our

domestic goods and services. The weakness of demands that caused by lack of

confidence and negative future expectation from the public to purchase goods and

services due to the crisis will be solved through political persuasion which government

has it and which it is more influences than the others.

After several years of operations, if the SMEs programme successful to expand and

achieve its target, the government may reduces its roles and responsibilities of directly financing

the capital of the SMEs by selling its shares to the others investors. By that the capital amount of

investment that government has already put on under mudharabah scheme will be returned and

plus with additional profits from the selling of shares due to the expansion of business and its

shares values during the period of investment that government involves in. After the right of

being capital providers has been handed over to the new investors, now the structure of

Mudharabah contract may change to musyarakah contract on the agreement between the

mudharib and rabb-al-mal. The reason is that the individual may have more time and efforts to

involve directly in the operation as compared to the government that has limitations in its

movements which we have already mentioned before.

In the preceding discussion, we have touched a little about the crisis and the causes of the

crisis. As far we have concerned, the solution on the crisis is not merely its symptoms such lack

of demands, unemployment problems, and negative growth of GDP rate and so on. But the main

problem that lead to the crisis which is riba’ which we have taken it for granted. If people work

hard day and night just want to think how to solve the symptoms but no effort taken to avoid the

cause, for the next few years we will still exactly facing the same things happens. Crisis will

continue and even getting worse than usual. The amounted of debt skyrocketing every years, no

genuine participation of any investment and transactions, we will remain sitting in the darkness

of riba’ and continuing facing the same impacts.

In finding the solutions to combat the symptoms, initiatives to reduce the dependency on

riba’ must be taken into account. With the observation of the potential of SMEs in gearing up the

economic, having capacity to increasing productions, ability to creating more jobs and providing



more income to the society, we should now taking step ahead to get far from riba’ by proposing

real partnership or joint venture on it. Looking at the increasing number of the participations

from the society in SMEs, it is good to use this channel to implement genuine Syariah rulings on

transactions especially through mudharabah and musyarakah. The government should try their

best to impose the systems as it is likely to reduce the riskiness of the uncertainty riba’

fluctuations which in the mode of the crisis it is likely to increase sharply.

With a good start from the government, the Mudharabah institution may be expanded its

capital funds through sukuk Mudharabah from any direct participation from the individuals or

big investors to involve into the programme. The confidence will be gained from those parties if

the effort taken by the government show successfulness. It is also create a good impression from

the world and turn up their faces to know that Islam is the best religion in the world which

provide solutions to all the problems. Credit also will be given to the Malaysia government as its

brave step taken to promote Islamic institutions and being a pioneer to future development of

Islamic banking and finance in this world.

3.3 Permodalan Nasional Berhad (PNB)

Permodalan Nasional Berhad (PNB) is one of the largest government link companies

(GLC) of Malaysia. Its foundation is accordance with the main objective of New Economic

Policy which was established since earlier 1970s. The objective is to achieve at least 30% overall

equity for Malays from the whole economics equity in Malaysia. By founding PNB, which is

specially provided for Malays to master the equity by investing in the shares launched by the

company. These shares normally known as Amanah Saham like Amanah Saham Nasional

(ASN), Amanah Saham Bumiputra (ASB) and so on.

In present, from the information which I got from the news about the company, it is

expected that its assets is nearly trillion of ringgit. Thus I think this company is very strong in



term of its financial stability. This can be proven by yearly dividends it announced and gave to

its investors which is most of them are Malays.

As a company that is aiming to assist the Malays, PNB also regarded as muslim

company. Thus it should observe the services and investment mechanism of its operation to be

shari’ah compliance. One of the suggestions for the company is to invest in MUDHARABAH

SCHEME instead of investing in ambiguous field such as riba based investment and so on.

Mudharabah scheme is an alternative suggestion in current situation where we are now facing the

hardship of economic downturn that caused the job cut about 200 000 to 400 000 workers in

Malaysia. In this scheme the company would act as rabbul mal and the applicants of the scheme

act as mudharib. This is contra with what the current systems are doing which is debt and interest

based system.

As a rabbul mal, PNB will encourage the Malays to participate in entrepreneurship fields

that promote by the government to overcome the unemployment problems. However PNB will

abide by the risk in bearing any losses (if any) throughout the business, this is due to the nature

of Islamic investment in having a mutual risk in any jointly business and investment pursuits.

PNB could reduce the risk by giving some training to future and potential mudharib before they

go to the real business.In addition, the contract of Mudharabah that involves both the PNB and

the mudharib should be based on Mudharabah Mutlaqah in order to give the Mudharib

opportunities to enter in any field they would like to, as long as the sector is not involve in any

forbidden activities.

This cooperation between rabbul mal and mudharib is hoped to be the pioneer of

reconciling the whole current economic system which is riba based system. Who are qualified to

be future mudharib under this scheme? Any interested applicants must undergo some interview

process to know exactly their backgrounds so that PNB can reduce any asymmetric information,

adverse selection, or moral hazard problems. After the interview process the applicants should

undergo several discourse and training so that they have a clear prospect of their ventures. And

also to ensure that they are fit with the theoretical and practical knowledge in running business

and entrepreneurship. This is hoped to minimize the risk that rabbul mal may encounter and so



that it may increase probability of getting joint profit between both parties. Thus from our

humble opinion, we suggest that the qualified applicant must be those who have entrepreneur

skills, and those who are qualified after given any relevant training.

3.3 Islamic Banking Industry

Evidence on current practice by Islamic banks worldwide suggests that the majorities of

financing operations are not based on equity but rather takes the form of debt-like instruments

(Aggarwal and Yousef 2000; Wajdi and Irwani 2006; Mehmet 2007). This is because according

to Mehmet (2007), Islamic banks and financial institutions have opted for profitable Islamic

financing such as murabahah instead of Mudharabah. This phenomenon is described by Farooq

(2006) as murabaha syndrome since the Islamic Banking and Financial Institutions overly use

debt-based financing as their products.

This is proven when Mehmet (2007) quoting Hasan’s recent data while studying the Malaysian

case as stated:

It seems that the major modes of Islamic financing are in the form

of bay bi thaman al-ajil and ijarah thumma al-bay with 47.4% and

27.9% respectively in 2003 (p.5).

It means that Islamic banks and conventional banks are both still using debt-based

financing contract when they give out the financing facilities to the clients. As a result, it does

not fulfill justice and criteria in the contract as reflected in Mudharabah contract. When the banks



prefer debt based financing instead of using Mudharabah, it is assume by the bank to be less

risky. But such assumption is wrong when the current situation show otherwise.

Because of that, the poor and unemployed have not really benefited as well as such a

killing and discrimination for those in direly needs financing from the presence of Islamic banks

as the implementation of PLS contracts such as Mudharabah implementation is very limited.

Rahman (2007) also explains that the Prophet saw was once a poor trader and eventually became

successful due to PLS contracts he conducted with his wife Khadijah. It is in line with Rosly

(2005) that banks give out the financing to the customers based on 5C’s criteria which are

credibility, character, capital, collateral, and capacity. Based on this fact, there is clearly no

justice and equality inherited in the financing contract which causes income gap between for

those who have access in financing and for those who are being barred for doing financing.

The illustration could be

explained when the bank as a

financial institution borrow the

money to the manufacturing sector

via debt based financing, this will

lead to a periodically payment by

the manufacturer as what stated in

agreed contract. When the crisis

hit the economy, this will surely

affect the manufacturer

productions due to the decrease in

the demand, this will lead to

reduce in the units of production

and eventually decrease in sales.

But however, the debt based

financing didn’t recognize global

economics crisis because the



payment towards the debt must be paid constantly based on monthly, or periodically. Due to

this, the manufacturer has no choice but to lay off some of the workers in order to reduce the cost

of production. Thus, unemployment rate increase tremendously during the crisis.

Therefore, equity based financing is more desired as compared to debt-based financing

and also necessities of Islamic banks helping the unemployed people especially in this current

economic crisis. In addition, the current practice of collateral in the prevalent banking system

favor net worthy corporate clients and businesses based on strict evaluation/due diligence for

doing financing. However, the profit-loss sharing mechanism desired in the Islamic banks

promotes Small and Medium Enterprises (SME) as well as micro financing with a viable

business (Wajdi & Abozaid, 2008), Rahman (2007).

Thus, we will examine the success of Grameen bank in their model of micro financing.

The models of micro financing used by Grameen are very close to Islamic ideals. It appears that

with some modification, especially with a financial engineering approach to development of

Shariah-compliant products, the Grameen model has all the potential for eradication of poverty

what not the unemployment problems from Muslim societies in a manner that is compatible with

Islamic Shariah, both in letter and spirit.

It is important that deposit products using Mudharabah should use realistic financial

projections and a variety of product or sector-specific Mudharabah products could be designed to

raise resources and provide a realistic return to depositors. Similarly, in lieu of simple Al-Qard

Hasan, a linking of the same with specific physical commodities available locally (commodity

selected after careful evaluation of price volatility) could be more attractive as a hedge against

inflation. A problem typical to small deposits is that these savings do not qualify for investment,

even at a micro level, and savers from the "economically active poor" with adequate amounts to

be invested, in most cases, lack the know-how and professional ability to decide on whom to

invest with. The answer to this problem is to treat micro savings as a pool for investment funds

to be operated on the basis of Mudharabah, thereby yielding profits to savers.

Mudharabah deposits are based on profit-loss sharing with the depositor as rabb-al-mal

and the microfinance institution as the mudarib. Available empirical evidence from Indonesia

asserts that Islamic microfinance institutions have lagged far behind their conventional



counterparts in raising funds through deposits. Clearly there is a need to redesign many of the

deposit products by taking into account customer needs and preferences. Even real-life

experience shows that murabaha is preferred over Mudharabah primarily because it eliminates

the need for written records, often unavailable at the micro enterprise level or if available, the

client may be unwilling to share them. Further, in case of murabaha a well-defined contract

exists, with pre-defined amounts; a fixed contract creates a less complicated process and a lower

implementation cost to the institution.

As part of that, the arena of micro-financing

has emerged as a new alternative for Islamic

banking to exploit in order to expand the horizons of

their operations. This mode of financing is projected

to be to have the capacity to compliment the socio-

economic developmental objectives of Shariah since

it targets potential entrepreneurs who are relatively

economically or financial deprived and handicapped

or even the unemployed people who have the skills

to become entrepreneur. This mode of financing

seeks to induce commercial innovation,

entrepreneurship and risk sharing among aspiring

entrepreneurs that are not endowed with the

financial resources to realize their commercial potentials. Importantly, this mode of financing

would immune scale entrepreneur from the exploitation of conventional financial institutions. In

the same vein, it would also encourage the channeling of funds to entrepreneurs who otherwise

would face upheaval task in their quest to access funds to realize their commercial or

entrepreneurial aspirations.

In a nutshell, for resolving the current financial debacle faced by many countries surfaces

as a result of reckless risk taking and lack of financial discipline that the whole spectrum of

Shariah frown upon, the Islamic banks have to be far away from debt based financing because it

is such a tool that lead economy into deep crisis. Thus with the proliferation of Islamic financial



instruments done by Islamic banks, the objectives of shariah would be universally realized. Thus

the central objective of asset based as professed by Islamic financial industry is geared to

eradicate “riba” or interest and established the norms of socio-economic justice and equality that

conventional financial industry is greatly lacking. At the end of the day, if Islamic banking and

finance put serious effort to counter what conventional financial industry is greatly lacking, we

believe that Islamic banking and finance can be institutions epitomizing the objective of shari’ah

in the whole economy.

4.0 CONCLUSION

One of the most important objectives of Islam is to realise greater justice in human society.

According to the Quran, a society where there is no justice will ultimately head towards decline

and destruction. Allah Azza Wa Jalla says:

We sent aforetime our apostles with Clear Signs and sent down with them the Book and the

Balance (of Right and Wrong), that men may stand forth in justice; and We sent down Iron, in

which is (material for) mighty war, as well as many benefits for mankind, that Allah may test

who it is that will help, Unseen, Him and His apostles: For Allah is Full of Strength, Exalted in

Might (and able to enforce His Will). [Quran, 57:25]

Justice requires a set of rules or moral values, which everyone accepts and faithfully

complies with. The financial system may be able to promote justice if, in addition to being strong

and stable, it satisfies at least two conditions based on moral values. One of these is that the



financier should also share in the risk so as not to shift the entire burden of losses to the

entrepreneur, and the other is that an equitable share of financial resources mobilised by financial

institutions should become available to the poor to help eliminate poverty, expand employment

and self-employment opportunities and, thus, help reduce inequalities of income and wealth.

The financial crisis has “take away” money from the public. Many have lost their jobs and

their purchasing power. In the time of crisis, the needs of liquidity are very crucial in order to

cure the diseases that are rampant. It is therefore the obligation of the financial institutions to

strengthening Mudharabah as individuals has no liquidity to give out.

This liquidity will give equal chance to the society to take part in the economy and to

realise their needs. There are people who have the expertise in doing business but have no access

to fund. Thus, the institution of al-Mudharabah will provides them liquidity and this will provide

income to them. A firm or company that has access to this money also will provide jobs for the

public. Thus, this will reduce the unemployment rate. Thus through al-Mudharabah there will be

more job vacancies prove that the problem of unemployment can be cure effectively by it.

Umer Chapra in his response towards the current crisis said that in order to fulfill the first

condition of justice, Islam requires both the financier and the entrepreneur to equitably share the

profit as well as the loss. For this purpose, one of the basic principles of Islamic finance is ‘no

risk, no gain’. This should help introduce greater discipline into the financial system by

motivating financial institutions to assess the risks more carefully and to effectively monitor the

use of funds by the borrowers. The double assessment of risks by both the financier and the

entrepreneur should help inject greater discipline into the system, and go a long way in reducing

excessive lending.

The injection of a greater discipline into the financial system may tend to deprive the

subprime borrowers from access to credit. Therefore, justice demands that some suitable

innovation be introduced in the system to ensure that even small borrowers are also able to get

adequate credit. Such borrowers are generally considered to be subprime and their inability to get



credit will deprive them from realising their dream of owning their own homes and establishing

their own microenterprises.

There is no doubt that a number of countries have established special institutions to grant

credit to the poor and lower middle class entrepreneurs. Even though these have been extremely

useful, but in case of Malaysia, Small Medium Enterprise (SME) and entrepreneurs face

problems when the cost of finance is high, because it is based in the interest-oriented

microfinance system. That is why for those who can afford to bear the cost of microfinance, it

would be better to popularise Al-Mudharabah mode of financing, not only to avoid interest but

also to prevent the misuse of credit for personal consumption.

Since the current architecture of the conventional financial system has existed for a long

time, it may perhaps be too much to expect the international community to undertake a radical

structural reform of the kind that the Islamic financial system envisages. Therefore, this topic

need further research so that the ideal of Islamic financial system could be implemented.

5.0 REFERENCES Asyraf Wajdi, and Nurdianawati Irwani Abdullah. (2006). The Ideal Of Islamic Banking: Chasing A Mirage? Retrieved January 16, 2009, from www.asyrafwajdi.com/download.php?f=0013(downloaded-from asyrafwajdi.com).pdf AIMS-UK Islamic Banking and Finance, Musharakah and Mudharabah as Modes of Financing, retrieved 24 March 2009, from www.LearnIslamicFinance.com.

Funding a Bussiness, 2009, retrieved 24 March 2009, from http://www.smeinfo.com.my/

Mehmet Asutay. (2007). Conceptualisation of the second best solution in overcoming the social failure of Islamic finance: Examining the overpowering of homoislamicus by homoeconomicus. IIUM Journal of Economics and Management 2007, 15, 1-17.

Munawar Iqbal, and Molyneux, P. (2005). Thirty Years of Islamic Banking: History, Performance and Prospects. London: Palgrave Macmillan. Mohammed Akacem, and Gilliam, Lynde. (2002). Principles Of Islamic Banking: Debt Versus Equity Financing, Middle East Policy, 9 (1), p124-138.



Muhammad Taqi Usmani, 2007, An Introduction to Islamic Finance, Maktaba Ma’ariful Qur’an, pg 49.

Muhammad Anwar. (2001) Development of Mudharabah Instruments: Understanding Their Profitability, Securitization and Negotiability Aspects, IIUM Journal of Economics and Management 9, no.2, International Islamic University of Malaysia. Pg. 3

Tanzilur Rahman, 1999, Mudharabah and The Pakistan Perspective, retrieved 24 March 2009 from www.irtipms.org/OpenSave.asp?pub=67.pdf

SME Annual Report 2007 by Bank Negara Malaysia (BNM), retrieved 23 March 2009, from http://www.smeinfo.com.my/



6.0 APPENDIXES

Mudharabah Solution to Unemployment Crisis

Documents

Transcript of Mudharabah Solution to Unemployment Crisis