Chapter 8 “Reverse Mudarabah” An Alternative of Classical Mudarabah for Financing Small Businesses

No one denies that Islamic finance has grown during the last 40 years and numerous Islamic financial instruments have innovated and developed in order to cater to the needs of Muslims. However, the sale- and service-based contracts remain dominant in the market and contribute to creating more debt. Partnership contracts such as mudarabah or musahrakah are least popular due to several practical problems. This chapter examines and identifies the practical challenges of classical mudarabah and proposes a new Islamic financing model – reserve mudarabah with appropriate examples. The model can be a useful tool for SME financing and in Islamic microfinance.