Profit and Loss Sharing (PLS) as Basis Characteristic of Islamic Banking: An Analysis of Mudharâbah Contract

Abstract

Mudhârabah constitutes one of the products in Islamic banking. It is a cooperation
contract between two parties, where one party (rabbul mâl) provides 100% fund and
other (mudhârib) provide work. Profit will be shared between two parties according to a
pre-determined profit sharing ratio contract known as nisbah. In the case of loss, the
capital owner shall bear the monetary loss and manager or entrepreneur shall loose the
reward of his effort unless caused by negligence or violation by mudhârib. This is core
concept of mudhârabah, which gives fair business cooperation between two parties. This
study will explore basis characteristics of mudhârabah in Islamic banking. The findings
are that Islamic banking has certain basic characteristics from PLS such as as just
system, as tool of efficient allocation of capital, as productive contract that support who
have business either micro, middle or macro level, and as medium to reach the objecticve
of Islamic economics.