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Mudarabah Mushtarakah

In: Business and Management

Submitted By tartori90
Words 4229
Pages 17


SUBMITTED TO: Prof. Dr. Abdul Rahim Abdul Rahman

Basheer Hussein Altarturi G1111009

Semester 1
Contents 1 Introduction 3 2 Mudarabah in a Traditional Viewpoint 4 2.1 Traditional Mudarabah; an Overview 4 2.2 Business Issues in the Traditional Mudarabah 5 3 Introduction to the Joint Mudarabah (Mudarabah Mushtarakah) 6 3.1 The Joint Mudarabah (Mudarabah Mushtarakah) Concept 6 3.2 Main Features of the Mudarib Mushtarak 8 3.2.1 The Conditions Issue 8 3.2.2 Capital Guarantee Issue 8 4 Accounting Issues in Mudarabah Contract 9 4.1 Profit Distribution 9 4.2 Reporting and Presentation 12 4.3 Agency Problem 13 5 Conclusion 14 6 Bibliography 16

Islamic banking and finance (IBF) emerged as an alternative from conventional banking and finance. IBF are different from conventional banking and finance as their objectives, operations, principles and practices must compliance with Islamic ethics and Islamic law (Shari’ah). Among other things, Shari’ah prohibits dealing in interest (riba), gambling and undertaking speculative transactions which subject matter and outcome are unknown (gharar), while it requires transactions to be lawful (halal).
Therefore, IBF have tended to modify the conventional banking and finance, interest model to non-interest operations. So, paying and receiving of interest unallowable in IBF because of interest, again, is prohibited (haram), thus how do IBF operate? Here partnership financing arrangements come in, substituting profit-loss sharing for interest as a method of resource allocation. Although a large number of different contracts feature in Islamic financing, one of these Islamic financial contracts is mudarabah contract as a financial product instead of receiving deposits and making loans.
A bank, as what is basically known, is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities. Deposits and investments from depositors and investors, subsequently, are the main sources of funds for conventional banks or Islamic banks. So, IBF use mudarabah, regardless is it an investing or a financing account, as an alternative for conventional deposits and investment account, which are interest-based accounts.
This paper aims to shed some lights on the nature of mudarabah as a traditional viewpoint and suggests new model or form for mudarabah, which is called joint mudarabah (mudarabah mushtarakah). This mudarabah mushtarakah as a financial product leads to skip or mitigate that current finance and accounting issues related to mudarabah in a traditional viewpoint.
Therefore, this paper introduces three main parts. First part is an overview of a traditional mudarabah concept, and how it is failed in some current accounting and finance issues. An introduction to the new form of mudarabah which is mudarabah mushtarakah, and show the main features of mudarabah mushtarakah are a second part. Finally, how mudarabah mushtarakah solve the current accounting and finance issues on traditional mudarabah, and how it becomes more compliance with current investment’s requirement.
Mudarabah in a Traditional Viewpoint
Traditional Mudarabah; an Overview
Mudarabah is a special kind of partnership where one partner who owns capital (rabb-ul-maal) gives a specific amount of capital to another partner (mudarib) for investing it in that field he is skilled. The profit from this partnership is shared between capital provider (rabb-ul-maal) and entrepreneur (mudarib), in case of loss; however, capital provider will entirely bear these losses, while entrepreneur will suffers the fruitless effort. Any negligence or breach of the terms of mudarabah contract, the entrepreneur becomes responsible for these losses (Abdul Rahman, 2012, p. 76).
Mudarabah meets the interest of both parties, in which the rabb-ul-maal has capital but doesn’t have enough time or experience or skills to invest this money, and the mudarib has experience in businesses but doesn’t have the capital. Therefore their interests will be met in mudarabah.
The rabb-ul-maal may specify a particular business for the mudarib, in which case he shall invest the money in that particular business only. This is called restricted mudarabah (al-mudarabah al-muqayyadah). But if he has left it open for the mudarib to undertake whatever business he wishes, the mudarib shall be authorized to invest the money in any business he deems fit. This type of mudarabah is called unrestricted mudarabah (al-mudarabah al-mutlaqah) (Usmani, 2004, p. 32).
Business Issues in the Traditional Mudarabah
Mudarabah contract, as what mentioned above, is one of financial tools which are accepted by shari’ah as a tool to invest the money. Therefore, the traditional mudarabah was convenience with needs and wants of people who lived in that time. The initial of investment in that time which was so simple helped the mudarabah in a traditional viewpoint to become convenience, too. However, many challenges, referring to some factors, are obstructing mudarabah, in traditional concept, to become an efficient financial product and one alternative for interest-based deposit and investment accounts.
First, mudarabah, in simple words again, is a bilateral contract between two parties where first party, one or more, provide capital to the other party, also one or more, to invest this capital. Buhuti (2000, p. 430) mentioned that when mudarabah began, it may not allow for a third party to join mudarabah, as consider him one of the money providers and he wants to join previous parties with new money. Indeed, it should not allow for rabb-ul-maal to give money for the mudarib later to add it to the previous amount, where is not allow by shari’ah to mixing money amount of two separate contracts in one contract.
Moreover, there is one kind of mudarabah is called restricted mudarabah which is the rabb-ul-maal may specify a business in which to invest to protect his money from lost, in this case the mudarib is restricted only to such businesses as pointed out by rabb-ul-maal. Also, rabb-ul-maal can terminate mudarabah contract any time and asks mudarib to liquidate the capital. Furthermore, mudarabah cannot renew the contract periodicity by just add a new capital as what is mentioned above.
Finally, regarding to profit sharing, Hmoud (1982, pp. 385-386) stated that traditional mudarabah is not compliance with new structure of investment nowadays; this is because of the profit-sharing in a traditional mudarabah, it is based on completed liquidation for the capital. The aim of that is to return the capital to money form as what it was. It, therefore, allow rabb-ul-maal to recover his capital first, then the reaming amount after this recovered capital will be shared between the two parties according to agreed profit sharing ratio of their agreement.
However, it is known that the corporation, nowadays, is based on the idea of continuing investment, which is known as going concern concept, on the one hand. On the other hand, profit distribution, almost, is a periodic, where cannot make total liquidation at the end of each period to share the profit with investors or shareholders.
These above issues that were presented, are not mentioned in order to prove the failure of this kind of contract for the current requirement of investment, as far as they are featured for show that this traditional mudarabah is only for a certain type of bilateral contract between the rabb-ul-maal and mudarib according to what was known and popular in that time. While these issues are presented to find a new kind of contracts in the scope of traditional mudarabah contract to be valid with investment requirements nowadays; As long as there is not specified and restricted in the contract forms by shari’ah.
Introduction to the Joint Mudarabah (Mudarabah Mushtarakah)
The Joint Mudarabah (Mudarabah Mushtarakah) Concept
The contracts and contractual forms in the perspective of shari’ah are not words and phrases, but they are purposes and considerations, and there is nothing to prevent the existence of new contract types that are emerged from traditional contract as long as the environment conditions and situation are changed. Therefore, as business environment was changed, it is naturally to change the business tools to compliance with these changing.
Accordingly, this paper has tended to look for mudarabah as new way in new form that can compliance with the requirements of investment nowadays as long as compliance with shari’ah. New model of mudarabah, thus, will be known as the Joint mudarabah (mudarabah mushtarakah) as a new contract that fits current investment requirement (Hmoud, 1982, p. 393).
Mudarabah mushtarakah is varying from traditional mudarabah, as the later does not depart from the scope of the bilateral relationship between those who have the money (rabb-ul-maal) and whose who have to work in this capital (mudarib). While mudarabah mushtarakah, or what Abdul Rahman (2012, p. 96) called it as a re-mudarabah, it comprises three interconnected relationships, namely: 1. Investors, who are providing money, unilaterally, to invest their capital (rabb-ul-maal), 2. Entrepreneurs, who are taking money, also unilaterally, to work and invest the money, according to the agreed agreement (mudaribs); and 3. Financial intermediary and in this case is IBF (joint mudarib or mudarib mushtarak). A mudarib mushtarak is one of the parties that his mission is to mediate between two parties to achieve compatibility and regularity in receiving money, and give it to the second party who are willing to work as a mudarib, but each of them is considered individually mudarib.
Therefore, this financial intermediary and how receiving money from these multi-investors is consider it away from the traditional mudarabah, and bring it closer to mudarabah mushtarakah, because this kind of mudarib mushtarik, IBF, does not adhere to work as a mudarib to a particular person, but is offering financial services to all those who wish to invest their own money (Hmoud, 1982, p. 394).
While the mudarib mushtarak (joint mudarib) is considered as a capital provider in perspective of entrepreneurs in which mudarib mushtarak gives them the money as a restricted mudarabah; since there are agreed conditions in this mudarabah contract with every entrepreneur who are looking for a capital (Hmoud, 1982, p. 394).
The relation between investors among them it is considered as they are partners in the profit that may be obtained, despite the absence of any relation between them. Entrepreneurs (mudaribs) party, however, they are completely independent from each other, whether at work, profit or contract conditions.
Main Features of the Mudarib Mushtarak
The main distinguishes between mudarib mushtarak in mudarabah mushtarakah and mudarib in traditional mudarabah are in two issues, namely, the conditions and capital guarantee.
The Conditions Issue
In restricted mudarabah, rabb-ul-maal can require conditions to mudarib within the limits of what is permitted according to the shari’ah. Although these requirements are correct and permitted in the field of traditional mudarabah, but the situation for the joint mudarib looks different. This difference, indeed, due to structure and regulatory controls of mudarabah mushtarakah that make it impossible to restrict mudarib mushtarak with such these restrictions.
Therefore, it is inevitable to give joint mudarib the right to determine the conditions that are compatible with the common nature of nowadays’ investment. This means that the joint mudarib enjoys full independence with respect to the conditions that could have been for the investor (rabb-ul-maal) that it imposes on the mudarib in traditional mudarabah (Hmoud, 1982, p. 399).
As for the relation of mudarib mushtarak with entrepreneurs (mudaribs), it remains entitled to the right of restriction of mudarabah, in part what shari’ah determine in this regard, that it deems appropriate to save money from loss, because mudaib mushtarak is considered, for entrepreneurs or mudaribs, as capital provider (rabb-ul-maal).
Capital Guarantee Issue
The issue of capital guarantee from mudarib mushtarak on that money provided by investors is an important issues on a practical level, because this issue, in fact, is an important element in the success of the joint mudarib (IBF) compared with conventional banks.
Al-Sadr have tried in his book (Unriba Bank in Islam, 1990) to solve the issue of the capital guarantee on deposits are received by IBF for the purposes of investment, as the basis of donation (hibah) provided by IBF to the investors, because this mudarib mushtarak, and in this case is IBF, is not working in the money, the real mudarib, but it is the intermediary between the investors (rabb-ul-maal) and entrepreneurs (mudaribs); since that it is not permissible in shari’ah for mudarib to guarantee the capital.
However, Hamud (1982, pp. 400-401) argues that mudarib mushtarak like the joint employee in Islam. It is well known that the private employee as long as there is no dereliction from him, he does not guarantee any damages will be happened; however scholars differed about the guarantee of joint employee. But the preponderant opinion is Maaliki opinion which is more realistic and proper application of the weighting of interests, so Maaliki considers the joint employee is guarantor.
Therefore, the mudarib mushtarak resemblances joint employee, where mudarib mushtarak is managing the investors’ money by giving this money mudaribs who are looking for capital. Ibn Rushd argues in his book (Bedayat Almujtahid wah Nihayat Almuqtasid, 2006, p. 238) that Maliki, Shafi’ei and Hanafi said if the mudarib give the capital provider’s money to another mudarib, he will be guaranteed for capital provider in case that another mudarib loose. Thus the mudarib mushtarak should be guaranteed the principal of investors.
Accounting Issues in Mudarabah Contract
Profit Distribution
There is different in profit distribution between traditional mudarabah and joint mudarabah, due to the difference of contract nature and parties. So, joint mudarabah has two types of relationships, namely, relationship of mudarib mushtarak with mudaribs, second relationship is between investors and mudarib mushtarak.
For the first relationship, relation of mudarib mushtarak with mudaribs, there is no difference between traditional mudarabah and joint mudarabah in profit-loss sharing or profit distribution, because each mudarib in his relationship with mudarib mushtarak it is entirely the same relationship of mudarib with rabb-ul-maal in traditional mudarabah, as what is mentioned in the previous part “the joint mudarabah (mudarabah mushtarakah) concept”.
Accordingly, the recognized profits as a result of contracted mudarabah by mudarib mushtarak, in this case is IBF, with mudaribs, it must remain on the same bases of what jurists mentioned, where, first, the capital must be recovered, then divide the remaining amount (profits) according to the agreement between them.
While for the second relationship, relation of mudarib mushtarak with investors, the situation is different, because it could not be imagined that the entire mudarabah contracts will be liquidated at one time on the end of the fiscal year, on the one hand. On the other hand, also it is inconceivable that the joint mudarib will return the capitals to owners, investors or rabb-ul-maal, in order to be sharing the remaining profit in a manner what jurists discussed about profit distribution or profit-loss sharing in the traditional mudarabah. So, joint mudarabah, through its nature, is a continuing mudarabah, therefore, it does not stop or liquidate unless the entire project will be liquidated (Hmoud, 1982, pp. 411-412).
In this point, is mudarabah mushtarakah compliance with shrai’ah? To answer this question, it is clear that profit realization and distribution in this case are compliance with what was said by jurists, as they considered profit as a capital protection, and they considered that if dividing profit happens before returning capital, it may lead the mudarib to take part of the capital, and this is not the mudarib’s right, instead of taking part of the profit. Thus, if we look to investors’ relation with their mudarib mushtarak, we can find that their capitals which are holding by mudarib mushtarak are protected by the organizing of these capitals, which the joint mudarib has become a guarantor for investors’ capitals.
Accordingly, profit distribution that was actually achieved with continuing of the mudarabah mushtarakah is not incompatible with what scholars have been established as long as what they aim is protecting the capital of capital provider, therefore, this protecting capital aim is achieved in mudarabah mushtarakah by another way as what is mentioned above.
In terms of how to divide the recognized profits, Hamoud (1982, p. 412) said that the continuing work in mudarabah mushtarakah makes it appropriate to distribute the profits periodically in order to achieve some kind of regularity. At the end of each period, the profits are counted to divide these profits.
Thus, when the money was paid to the mudarib mushtarak by investors, whether this money have been using actually in investment or not, the investors be worth portion of the realized profit. Thus, the declared profit at the end of each fiscal year is only for the investors who are keep their money with mudarib mushtarak from the beginning of the year until the end. While, the investors who are withdraw their capitals before the end of the year, where there is no declaration for any profit, they do not have right to share the profit at the end of that year (Hmoud, 1982, p. 414).
There has a similar application in the case what is mentioned above in traditional mudarabah, as Ramli stated in his book (Nihayaht Almuhtaj, 1992) that if owner, rabb-ul-maal, withdraw some money before any declaration of profit or loss, the remaining capital in mudarabah, however, considers as the capital of mudarabah from the beginning of mudarabah contract.
One more important issue remains in the field of mudarabah mushtarakah which is that about the investors who are providing their money to the mudarib mushtarak during the fiscal year. Do these investors have a right to share the realized profits during the same year?
The answer to this question depends on what is mentioned above in main features of the mudarib mushtarak, therefore since the invested money is guaranteed by mudarib mushtarak, so it is not fair to give the investors who provide their capitals from the beginning of the year same rate with who provide their capital in the mid of the year. Thus profit-loss sharing ration depends on the time that when the money was provide to mudarib mushtarak to invest them.
Reporting and Presentation
In theory, on the on hand, IBF do not guarantee the repayment of principal or any profits on these deposits, e.g. mudarabah investment account. If repayment of the deposits were guaranteed, then the investor would bear no risk but would receive a return. This is considered by many Islamic scholars as equivalent to earning interest.
Based on this theory, Napier (2007, p. 18) recorded three different reporting practices for mudarabah investment account in different countries in which Islamic banks operate: 1. Reporting it as liabilities, similar to the deposits in conventional banks as it is consistent with the IASB framework for preparation and presentation of financial statements, 2. Reporting it as equity (class B shares). This treatments is justified on the grounds that both investment accounts and participating shares are similar in terms of their use for raising funds, which is consistent with IAS 32; and 3. Reporting it as off-balance sheet accounts. This treatment is justified on the basis that these funds are similar to funds under management.
Abdul Rahman (2012, pp. 77-79) shows how AAOIFI FAS 6 treats mudarabah investment account in which equity of unrestricted investment account holders shall be presented as an independent category in the balance sheet of IBF between the liabilities and the owners’ equity. However, for restricted mudarabah investment accounts, AAOIFI requires a similar off-balance sheet treatment to that of IAS 30.
On the other hand, as what is mentioned above in capital guarantee issue part, Al-Sader (1990) and Hmoud (1982) suggested that deposits should be guaranteed in case of mudrabah mushtarakah. Based on mudarabah mushtarakah, therefore, this paper argues that the best reporting treatment for unrestricted investments accounts is presented under equity.
This is because as there are special kind and features of stocks called as preferred stocks, which is an equity security with properties of both equity and debt instrument, and is generally considered a hybrid instrument. Preferred stocks are senior (i.e. higher ranking) to common stock. Also, preferred stock usually carries no voting rights, but may carry a dividend and may have priority over common stock in the payment of dividends and upon liquidation.
As a result, there is no problem in presenting mudarabah mushtarakah accounts under equity instead of preferred stocks, as preferred stocks are not permissible in shari’ah as they have fixed return. So under shareholders’ equity and before common stocks, unrestricted mudarabah mushtarakah account will be presented. However, about restricted mudarabah mushtarakah account likes what is AAOIFI required in which consider it as off-balance sheet account.
Agency Problem
Agency problem or dilemma concerns the difficulties in motivating one party (the agent), to act on behalf of another (the principal). Common examples of this relationship include corporate management (agent) and shareholders (principal). The two parties have different interests and asymmetric information, which is the agent having more information. Moral hazard and conflict of interest may arise. The deviation from the principal's interest by the agent is called 'agency costs.
Investors who are deposit their money in IBF are entitled to share IBF’s profit, or loss, according to the profit-sharing ration that is stipulated in their contracts, but they have no voting rights because they do not own any portion of IBF’s equity capital. This may as what Napier (2007) argue that represent an incentive for IBF to increase the expenses attributable to mudarabah investment account holders for the benefit of the shareholders as the shareholders have the ability to monitor management; however, the mudarabah investment account holders do not have such rights.
In addition, Lewis (2001) mentioned that there is lack of protection for investors, rabb-ul-maal, IBF depositors have more incentives to monitor IBF performance than conventional depositors. Thus, information disclosure should be more important in IBF environment as a result of this special agency problem.
However, because of mudarabah mushtarakah guarantee the capital of investors, therefore, mudarib mushtarak is motivated to act on behalf of investors as he will be entitled to share investors any profits that he get, and in case of loss mudarib mushtarak will be guaranteed the capital for investors.
Moreover, the implication of Islamic accountability and Islamic social accountability on accounting are that the management need to be accountable for its actions, or inactions, both within and outside the firm by providing proper accounting and reporting, thus, they lead to the full disclosure principle. Full disclosure in Islam means disclose everything that is believed as important to users for purposes of serving Allah (Abdul Rahman, 2012, p. 32). Because of these reason that are mentioned above, mudarabah mushtarakah mitigates agency problem.
The mudarabah, as a financial product according to the general concept, is suitable to accommodate all current investment requirements, particularly banking investment condition, and is able to achieve what is the conventional banking system could not achieved in terms of convergence between money and work.
However, this mudarabah that is suitable to current investment condition and efficient to compete conventional financial products is not the traditional concept that was prevalent in the early centuries of Islamic civilization, but it is that organized mudarabah, mudarabah mushtarakah or joint mudarabah, which is based on collective or joint venture that corresponds needs and wants of the people in this decade and the current investment requirements.
Mudarabah mushtarakah structure is based on two-tier structure or re-mudarabah as what is Abdul Rahman (2012, p. 96) where three parties i.e. investors or depositor (capital provider), IBF or intermediate (mudarib mushtarak), and entrepreneurs (mudarib).
Capital guarantee from mudarib mushtarak on that money provided by investors makes mudarabah mushtarakah more efficient and can compete easily the conventional financial products. Furthermore, capital guarantee issue makes mudarabah mushtarakah to solve or mitigate the financial and accounting issue on traditional mudarabah.
Under mudarabah mushtarakah, profit distribution happens periodicity instead of what is happening in traditional mudarabah distribute profit after liquidation the project. About how to report and present mudarabah mushtarakah account it depends on considering unrestricted mudarabah mushtarakah investment account as equity and it is presented under stockholders’ equity before common stock, but restricted mudarabah mushtarakah investment account it is considered as off-balance sheet accounts. Finally, mudarabah mushtarakah minimizes agency problem by sharing profit between mudarib mushtarak and investors, also by guarantee capital from mudarib mushtarak to investors.

Abdul Rahman, A. R. (2012). An Introduction to Islamic Accounting Theory and Practice. Kuala Lumpur: CERT.
Al-Sadr, M. B. (1990). Unriba Bank in Islam. Bayrut: Dar Al-Ta'arif [Arabic].
Buhuti, M. i. (2000). Kshaf Alknaa' A'n Mtn Aliknaa'. Bayrut: Dar al-Kutub al-'Ilmiyah [Arabic].
Hmoud, S. (1982). Development of Banking Operations to Accomodate the Islamic Shari'ah. Amman: Al-Sharq Print [Arabic].
Ibn Rushd, M. A. (2006). Bedayat Almujtahid wah Nihayat Almuqtasid. Bayrut: Mu'assasat Al-Ma'arif [Arabic].
Lewis, M. K. (2001). Islam and Accounting. Oxford: Blackwell.
Napier, C. (2007). Other Cultures, Other Accounting? Islamic Accounting from Past to Present. 5th Accounting History International Conference. Banff, Canada.
Ramli, M. b. (1992). Nihayaht Almuhtaj ila Sharh Almenhaj fi Alfiqh a'la Mazhab Alimam Alshafi'eh. Bayrut: Dar Ihya' Al-Turath [Arabic].
Usmani, M. M. (2004). An Introduction to Islamic Finance. Arham Shamsi.…...

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Guide to Islamic Banking Islamic Banking TABLE OF CONTENTS Preface 7 SECTION I INTRODUCTION TO ISLAMIC ECONOMIC SYSTEM 1 2 3 Chapter 1: Chapter 2: Chapter 3: The Islamic Economic System Factors of production in Islam The objectives of the distribution of wealth in Islam 11 19 29 SECTION II RIBA, ITS PROHIBITION & CLASSIFICATIONS 4 5 6 7 8 Chapter 4: Chapter 5: Chapter 6: Chapter 7: Chapter 8: Riba in the Qur'an Riba in Hadith Riba and its types Commercial interest and usury Simple and compound interest 34 36 42 53 62 SECTION III ISLAMIC CONTRACT 9 10 11 12 Chapter 9: Chapter 10: Chapter 11: Chapter 12: Islamic contract Sale Valid Sale Five khiyars 66 68 70 77 SECTION IV ISLAMIC MODES OF FINANCING 13 Chapter 13: Musharakah 14 Chapter 14: Mudarabah 4 81 98 Meezan Bank’s Guide to Islamic Banking 15 16 17 18 19 20 21 Chapter 15: Chapter 16: Chapter 17: Chapter 18: Chapter 19: Chapter 20: Chapter 21: Diminishing Musharakah Murabaha Salam Istisna’ Istijrar Ijarah (Leasing) Ijarah Wa Iqtina 108 118 126 131 135 138 151 SECTION V BANKING IN ISLAM 22 Chapter 22: The features of a conventional Bank 23 Chapter 23: Musharakah in bank deposits 155 161 SECTION VI APPLICATIONS OF ISLAMIC FINANCING 24 25 26 27 Chapter 24: Chapter 25: Chapter 26: Chapter 27: Project financing Working capital financing Import financing Export financing 171 175 180 182 SECTION VII ISLAMIC INVESTMENTS 28 Chapter 28: Securitization 29 Chapter 29: Islamic Investment Funds 30 Chapter......

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...proportionately share loss with the respective depositors. The depositors shall have the right to check the accounts of the business or industrial entity as well as to see that loss is not due to negligence of the bank or the illegitimate activities of the entities. Mudarabah: It will be similar to the case described above, except that the bank will not take part in the management of the entity by appointing directors on the Board. In this case it is a Mudarabah between the depositors and the bank as well as a Mudarabah between the user of funds and the bank. It is a form of partnership where one party provides the funds (Rabb-ul-Maal/Depositors) while the other party provides expertise (Mudarib/Banks). There are two types of Mudarabah: Al-Mudarabah Al-Muqayyada: Rabb-ul-Maal specifies a particular business or a particular place for the Mudarib (bank), in which case he shall invest the money. This is called Al-Mudarabah Al-Muqayyada (restricted Mudarabah). Al-Mudarabah Al-Mutlaqah: In case where Rabb-ul-Maal (depositor) gives full freedom to the Mudarib (bank) to undertake whatever business he deems fit, this is called Al-Mudarabah Al-Mutlaqah (unrestricted Mudarabah). It is necessary for the validity of Mudarabah that the parties agree on a certain formula of sharing the actual profit right at the beginning of the contract. The Shari’ah has prescribed no particular proportion of profit sharing rather it has been left to the mutual consent of the parties For the deposit......

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...ijarah, salam, istisna’ and most prominently murabahah, the most popular and favourable instrument in the market. However, reviewers are certain that the financial experts as well as scholars are working their way from moving towards that of a more equity-based financing system and a good example is this article being reviewed. The need for an equity-based system have been mentioned by many scholars in published articles. Mufti Taqi Usmani (2002), who is one of the leading Shari’ah experts, also further mentioned this in his writing stating that the real and ideal instruments of financing in Shari’ah are musharakah and mudarabah. Hakimi (2011) asserted that even though the initial structures of Islamic banking proposed by Islamic scholars in the 1950s to 1960s were based on the concept of profit sharing and loss, which is based on the principles of mudarabah and musharakah, Islamic banks rarely offer these instruments to their customers these days. Even though profit-loss sharing is the ideal way in Islamic Finance, in reality, as of now, it is currently marginalised by Islamic financial institutions. Dar and Presley (2002), stated the failure of Islamic financial institutions in implementing the profit and loss sharing in the following: Almost all theoretical models of Islamic banking are either based on mudaraba(h) or musharaka(h) or both, but to-date actual practice of...

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...sensitive section. It is the duty of this section’s staff to satisfy their valuable customers by giving the right information.   4.2.1 Function of this section: Ø      Account opening Ø      Cheque book issuing Ø      Signature issuing Ø      Account inquiry Ø      Amendments Ø      Solvency certificate Ø      Hold statement Ø      General service Ø      Control and documentation of client file Ø      A/C transfer Ø      A/C Closing    4.3 Types of Account:  1. Al-Wadiah Current Deposit Account 2. Mudarabah Savings Deposit Account(MSD)  3. Mudarabah Special Notice Deposit Account  4. Mudarabah Term Deposit Receipt  5. Mudarabah Monthly Profit Deposit Scheme 6. Mudarabah Millionaire Savings Scheme 7. Mudarabah Education Deposit Scheme 8. Mudarabah Special Deposit Pension Saving Scheme 9. Mudarabah Monthly Savings Scheme 10. Mudarabah Bashasthan Savings Scheme 11. Mudarabah Hajj Saving  Scheme 12. Cash Waqf   A) Al-Wadiah Current Deposit Account  Drawings are allowed from such an account without any restriction within the funds available in its credit. Rules for Al-Wadiah current deposit account are as follows:                          Ø      Al-Wadiah Current Deposit A/Cs is opened on proper introduction with minimum initial deposit fixed by the Bank. Ø      Al-Wadiah deposit is accepted on Al-Wadiah Principles, which mean al Amanah with permission to use. According to this......

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...shari’ah principles and practices. Some of the popular instruments include silent partnerships (Mudarabah), cost-plus sale contract (murabaha), lease (ijarah), equity partnership (mushakah) and investment certificates (sukuk) (Dusuki and Abozaid, 2007: 8). 1. Mudarabah Mudarabah or rather silent partnership is a contractual financial transaction between two partners where one provides capital and the other partner ventures into the business as the entrepreneur. In the case of Islamic banking, the bank will act as the provider of capital and profits are shared between the entrepreneur and the bank according to predetermined ratios. Equally, in the event of a loss provided it is not a result of negligence, the bank bears the loss and the entrepreneur will equally lose their effort. Mudarabah contract is always in two forms with one between the depositors and the bank and the other between the bank and the entrepreneur (Azouzi and Echchabi, 2013: 191). The principal amount is always specified in the Mudarabah contract so as to avoid any dispute that may arise. Islamic banks employ Mudarabah contracts in generating liquidity and also earning profits by assuming the role of intermediaries between depositor-investors and the entrepreneurs. Under such principle, the Islamic banks accept money from investors through the contract and then invest in various enterprises through the same mudarabah contract, and the resulting profit from the enterprise is shared equally between the......

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...principle, according to which individual rights are given up in favors of the Waqf. In the savings/investments part, individual rights remain intact under the Mudarabah principle and the contributions, along with the profit (net of expenses), are paid to the policyholders at the end of the policy term or before, if required by them. On the other hand, for General Takaful, the whole contribution is considered a donation for protection and the participants relinquish their ownership right in favors of the Takaful Fund, and the underwriting surplus or underwriting loss belongs to the participants. Besides that, Takaful companies can arrange Retakaful on the same bases of Tabarru’, Waqf and Mudarabah for which they pay an agreed-upon contribution from the Takaful Fund to a Retakaful operator that in turn helps the Takaful Companies in case of losses. 4.1 Models of Takaful There are various models of takaful according to the nature of the relationship between the company and the participants. The two different types of the Takaful models for the management and investment of funds by a Takaful Operator are Mudarabah model and Wakalah model. Other business models such as Waqf model, Tabarru’ model and combination of models are also adopted by some Takaful Operators. 4.1.1 Mudarabah Model (General Takaful) Mudarabah is defined as the contract between participant and the Takaful Company where the profit is shared in an agreed ratio of 5:5, 6:4, 7:3 etc. Generally,......

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Islamic Finance Introduction to Islamic Finance = = = jìÑíá=jìÜ~ãã~Ç=q~èá=rëã~åá `çåíÉåíë= Foreword Some Preliminary Points _ÉäáÉÑ=áå=aáîáåÉ=dìáÇ~åÅÉ= qÜÉ=_~ëáÅ=aáÑÑÉêÉåÅÉ=ÄÉíïÉÉå=`~éáí~äáëí=~åÇ=fëä~ãáÅ= bÅçåçãó= ^ëëÉíJÄ~ÅâÉÇ=cáå~åÅáåÖ= `~éáí~ä=~åÇ=båíêÉéêÉåÉìê= mêÉëÉåí=mê~ÅíáÅÉë=çÑ=fëä~ãáÅ=_~åâë= 6 9 V NM NO NQ NR Musharakah qÜÉ=`çåÅÉéí=çÑ=jìëÜ~ê~â~Ü= qÜÉ=_~ëáÅ=oìäÉë=çÑ=jìëÜ~ê~â~Ü= Distribution of Profit Ratio of Profit Sharing of Loss 17 NV OP 23 24 24 qÜÉ=k~íìêÉ=çÑ=íÜÉ=`~éáí~ä= j~å~ÖÉãÉåí=çÑ=jìëÜ~ê~â~Ü= qÉêãáå~íáçå=çÑ=jìëÜ~ê~â~Ü= Termination of Musharakah without Closing the Business OR OU OU 29 Mudarabah _ìëáåÉëë=çÑ=íÜÉ=jìÇ~ê~Ä~Ü= aáëíêáÄìíáçå=çÑ=íÜÉ=mêçÑáí= qÉêãáå~íáçå=çÑ=jìÇ~ê~Ä~Ü= `çãÄáå~íáçå=çÑ=jìëÜ~ê~â~Ü=~åÇ=jìÇ~ê~Ä~Ü= 31 PO PP PQ PR ÅçåíÉåíë= Musharakah & Mudarabah as Modes of Financing mêçàÉÅí=cáå~åÅáåÖ= Securitization of Musharakah Financing of a Single Transaction Financing of the Working Capital 37 PU 39 42 43 pçãÉ=lÄàÉÅíáçåë=çå=jìëÜ~ê~â~Ü=cáå~åÅáåÖ= Risk of Loss Dishonesty Secrecy of the Business Clients’ Unwillingness to Share Profits House Financing on the Basis of Diminishing Musharakah Diminishing Musharakah for Carrying Business of Services Diminishing Musharakah in Trade RO aáãáåáëÜáåÖ=jìëÜ~ê~â~Ü= 52 54 55 56 RT 59 63 63 Murabahah fåíêçÇìÅíáçå= Some Basic Rules of Sale Bai’ Mu’ajjal (Sale on Deferred Payment Basis) 65 SR 66 70 jìê~Ä~Ü~Ü=......

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