Mudarabah- A New Paradigm for Corporate Governance

Abstract

It is increasingly believed that the shareholders have lost control over their wealth in the hands of management. As a consequent there is a need for an effective and efficient monitoring environment which can be materialized through active and effective participation of shareholders in policy making and major decision making. In this background, the purpose of this paper is to search for a new form of business organization in which the rights of all the stake holders are secured. “Mudarabah” is a basic mode of Islamic finance in which one party rabb-ul-mal (owner) provide capital to the mudarib (manager) to run business within a given paradigm. Here we are focusing on the point that how this concept can be applied in the context of corporate governance issues. Through applying this concept, much debating issue of activism of share holders can be addressed to a great extent. In addition the concept of limited liability can also be refined. As per teaching of Islam even the death of debtors can not write off the right of repayment of debt to the creditors. It may emerge into a new paradigm of corporate governance as the concept may leads to a major shift in principal-agent relationship. The concept can be successfully implemented either to structurally change the corporate form of business organization or make the way for a new form of business organization. However, there would be a need to form a global body to oversee and implement the recommendations. It will also require extensive legislation by the countries.

Keywords: Corporate Governance, Mudarabah Board, Paradigm