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Nature of Mudharabah Financing

Topic 3:
Mudharabah is a contract in which one party
Mudharabah provides capital (Rabbul mal/capital provider)
and the other party provides work
Financing (Mudharib / entrepreneur)

ACC 3161 Profits : Shared between the parties according

Accounting for Islamic Bank to a predetermined profit sharing ratio

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Some Legal Principles of

Losses : To be borne by the capital providers Mudharabah Transactions
Offer and Capital (can be
Violation of the stipulated contract by the trade &
Acceptance
entrepreneur, the entrepreneur bears such loss non-monetary assets)

Manner of disbursement
No debt to be
Is the capital provider a sleeping partner? (lump sum or in several
treated as capital
installments)

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Profit: the amount received that
exceeds the capital
Profit Sharing Ratio should be
determined at the time of
contracting and profit to be shared
should be known
Capital provider bears the loss
unless due to trespass or omission
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No work interference by capital
provider
The entrepreneur should comply with
Shari’ah rules
The entrepreneur should comply with
capital provider’s instructions
No guarantee of recovery of fund
except for betrayal guarantee
(performance bond)
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Types of Mudharabah Financing Profit Recognition

Bilateral Mudharabah 1.Realisation Method: according to Hanbali and

Shafie is when the revenue is earned i.e. after
determining its costs

Multilateral Mudharabah 1.Distribution Method: according to Maliki it is

realised upon distribution between the two parties
Two-tier Mudharabah
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Profit Calculation Method Journal Entries

Dr Mudharabah Financing
Cr Cash

1. End of 2. End of (Being provided Mudharabah financing to Mudharib)

each period contract

Dr Cash
Cr Mudharabah Financing
(Being repayment or Mudharabah repaid by Mudarib)

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Recognition and Measurement of

Dr Cash
Mudharabah Financing
Cr P&L
(Being received profit from Mudharib) FAS 3, Mudharabah Financing is a standard for
the provision of Mudharabah financing by the
Dr P&L
Islamic banks and does not deal with the deposit
Cr Mudharabah Financing
(Being set off Mudharabah loss borne by side of receiving the funds on Mudharabah basis.
Rabbul Mal

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Measurement of Mudharabah capital If the whole of Mudharabah

at the end of the financial year. capital is lost, Rabbul Mal must
Measured at initial carry value except for repayment of capital bear the loss and terminate the
which should be deducted from the Mudharabah financing. contract
However if the partial loss of the capital occurs (eg. theft and Any unpaid amounts remaining
fire) before the work on the Mudharabah is started (and not
becomes a receivable of the bank
due to negligence of the Mudharib), this should also
from ex-mudarib.
be deducted from Mudharabah financing account
and debit to P&L.

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Non Monetary Mudharabah Capital AAOIFI :Presentation and Disclosure of

Mudharabah Financing
Is discouraged by fuqaha
Valued at fair value , any
difference between fair value
and book value goes to the
profit and loss

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Example
Bank Syari’ah Berhad contributed RM1,000,000 for a four-year
Mudharabah financing at the profit sharing ratio of 70:30 between the Bank
and Ihsan Corporation (Mudharib) respectively.
Assume that the venture incurred a loss of RM100,000 in the first year;
realised a profit of RM150,000 in the second year; incurred a loss of
RM50,000 in the third year; and realised a profit of RM350,000 in the
fourth year.
Required:
a. Calculate the profit/loss earned/incurred by the bank for the Year 1 to Year 4
b. Prepare the necessary journal entries for Year 1 and Year 2
The
end..
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