An Economic Analysis of Mozarbeh and Mosharekat Contracts

An Economic Analysis of Mozarbeh and Mosharekat Contracts in Islamic Banking: The Imbalance of Information and Ensuing InjusticeAbstract  After half century from the launch of Islamic Banking, it is now the right time to evaluate and assess this method of finance and banking in the light of economic analysis and theories of justice.  In the current model of Islamic banking which is based on the elimination of interest and avoidance of Reba, the sharing of profit and loss is the cornerstone of Islamic banking. However, both in practice and theory the application of the above contractual frameworks to modern financial and economic conditions faces challenges.  While in a world where there was no money on credit, corporations or securities, the use of above contract forms between parties with equal information and bargaining power would not lead to any major injustice, the use of the same contracts in a modern financial world which is based on financial credit, corporations and securities has lead to injustices in the allocation of the losses and profits of financial transactions.  This failure to achieve justice has been proved both by the practical record of Islamic banking and also as a result of theoretical analyses. Keywords: Mozarbeh, Mosharekat, Islamic banking, Profit-loss sharing system, Economic analysis of Law, Imbalanced information, Efficiency.