As earlier mentioned, Mudharabah is a high risk mode of financing. Additional risks associated with this product, apart from other financing risks are:
i) Asymmetric Information
This occurs as the customer may possess greater or better material knowledge about the undertaken business than the bank. This asymmetry creates an imbalance of power and control in the business, which may cause the business to go awry, hence benefit the client at the expense of the bank.
ii) Moral Hazard
This is the risk that a customer has not entered into the contract in good faith, has provided misleading information about his assets, liabilities or credit capacity. Moral hazard may also lead a customer to have an incentive to take unusual risks in a desperate attempt to earn more profits from the contract as the capital is not originating from him.
iii) Fiduciary Risk
This is a risk which is directly related to the nature of the Mudharabah contract and it can be described as objective possibility for losses on the Mudharib (agent) in the case of negligence, malfeasance or breach of contract on the part of management of Mudharabah.
iv) Displaced Commercial Risk
It is a risk related to “smoothing” the financial returns to investment account holders by varying the percentage of profit taken as the Mudharib share, which can be compared to an arrangement or agency fee.