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Mudarabah

Contents of todays session:


1. Securitization of Musharakah
2. Mudarabah
Types of Mudarabah

3. Diff b/w Musharakah & Mudarabah


4. Mudarabah in Banking Asset and liability side

Mudarabah
This is a kind of partnership where one partner gives money
to another for investing in a commercial enterprise.
The investment comes from the first partner who is called
Rabb-ul-Maal (Investor)

The management and work is an exclusive responsibility of


the other, who is called Mudarib (Working Partner)
Profit is shared as per agreed ratio

In case of Mudarbah all losses are borne by Rabbul- Mal

Types of Mudarabah
1. Al

Mudarabah
Mudarabah)

Al

Muqayyadah(Restricted

Rabb-ul-Maal may specify a particular business or


a particular place for the mudarib.
In which case he shall invest the money in that
particular business or place.
2.

Al Mudarabah Al Mutlaqah (Unrestricted


Mudarabah)
Rabb-ul-maal gives full freedom to Mudarib to
undertake whatever business he deems fit.

Mudarib is authorized to do anything normally


done in the course of business

Rabb-ul-Maal

Rabb-ul-Maal has authority to:


a)

Oversee the Mudaribs activities and

b) Work with Mudarib if the Mudarib consents.

Capacities of Mudarib
1.

Ameen (Trustee): The money given by Rabb-ul-maal


(investor) and the assets required therewith are held by
him as a trust.

2.

Wakeel (Agent) : In purchasing goods for trade, he is


an agent of Rabb-ul-maal.

3.

Shareek (Partner): In case the enterprise earns a


profit, he is a partner of Rabb-ul-maal who shares the
profit in agreed ratio.

4.

Zamin (Liable): If the enterprise suffers a loss due to


his negligence or misconduct, he is liable to compensate
the loss.

5.

Ajeer (Employee): If the Mudarabah becomes Void


due to any reason, the Mudarib is entitled to get a fee for

Capital of Mudarabah

The capital in Mudarabah may be either cash or in kind.


If the capital is in kind, its valuation is necessary, without
which Mudarabah becomes void.

Profit & Loss Distribution


It is necessary for the validity of Mudarabah that the
parties agree, right at the beginning, on a definite
proportion of the actual profit to which each one of them is
entitled.
They can share the profit at any ratio they agree
upon.
However in case the parties have entered into Mudarabah
without mentioning the exact proportions of the profit, it
will be presumed that they will share the profit in equal
ratios.
Apart from the agreed proportion of the profit, the
Mudarib cannot claim any periodical salary or a fee or
remuneration for the work done by him for the Mudarabah.
The Mudarib & Rabb-ul-Maal cannot allocate a lump
sum amount of profit for any party nor can they
determine the share of any party at a specific rate tied up
with the capital

Profit & Loss Distribution

EXAMPLE
If the capital is Rs.100,000/-, they cannot agree on a
condition that Rs.10,000 out of the profit shall be the share
of the Mudarib nor can they say that 20% of the capital shall
be given to Rab-ul-Maal. However they can agree that 40%
of the actual profit shall go to the Mudarib and 60% to the
Rab-ul-Maal or vice versa.

Profit & Loss Distribution

If the business has incurred loss in some transactions and


has gained profit in some others, the profit shall be used to
offset the loss at the first instance, then the remainder
profit, if any, shall be distributed between the parties
according to the agreed ratio.

Termination of Mudarabah

With notice.

End of particular term

Assets are in cash form / non cash form

Collective Mudarabah
Collective Mudarabah means a joint pool created by many
investors and handed over to a single Mudarib who is normally
a juristic person.
Collective Mudarabah creates two different relationships:
Relationship between investors inter se, which is Shirkah
or Partnership.
Relationship of all the investors with mudarib, which is
Mudarabah.

Mudarabah
Diff b/w Musharakah & Mudarabah
Musharakah
In Musharaka both of the partners invest
Both parties can work

Mudarabah
In Mudarabah one party invest (Rabbul- Mal) and other
party work (Mudarib)
Profit is shared as per agreed ratio
In case of Mudarbah all losses are borne by Rabbul- Mal

APPLICATION

Mudarabah in Banking
Deposits (Liability)- The Bank as Mudarib
Profit from the Mudaraba activity is shared between the
Bank (as Mudarib) and the investment account holder
(as Rabb-ul-maal) in a pre-agreed ratio
The Bank does not bear any loss but remains
responsible for negligence
The Bank may receive from its investors compensation
(Mudarib fees) in return for management of their funds
The Bank is bound to return the capital to the investors
after deducting any losses or Mudarib fees at the time of
winding up the contract

Example: Dollar Mudarabah


Certificates (DMC)

The Dollar Mudarabah Certificate (DMC) is a deposit product through


which you can invest your US Dollars with Meezan Bank for periods
ranging from 3 months to 3 years and earn six-monthly or at maturity
profit payments on your investment.

Dollar Mudarabah Certificates (DMC) work on the principle of


Mudarabah under which the customer is an Investor (Rab-ul-Maal),
and the Bank is the Manager (Mudarib) of the funds deposited by the
customer. The Bank allocates the funds received from the customers
to a Deposit pool; funds from the pool are utilized to provide financing
to customers under Islamic modes that include, but are not restricted
to Murabaha, Ijarah, Istisna and Diminishing Musharakah.

The Dollar Mudarabah Certificate is an ideal investment for Individuals,


Sole Proprietorships, Partnerships and Limited Companies.

Profit Sharing Ratio


Bank will share 45% of Gross Income as Mudarib
Depositor will share 55% of Gross Income as Rab-ulMaal

Mudarabah in Banking
Investments - The Bank as the Rabb-ul-maal
Profit from the Mudaraba activity is shared between the
Bank (as Rabb-ul-maal) and the Mudarib in a pre-agreed
ratio
The Bank will bear all the loss unless the Mudarib
violates the agreement

The Bank will pay to the Mudarib, compensation


(Mudarib fees) in return for management of its funds
The Mudarib is bound to return the capital to the Bank
after deducting any losses or Mudarib fees at the time
winding up of the contract

How profit is distributed?

Pre agreed profit Sharing ratio C:B where C is


customer and B is Bank
Portfolio yield determined Portfolio Profit/Deposit Base
= R%
Customer profit = Deposit Amount x R% x 0.C
Example

Example

Customer place a RM1 million Mudharabah deposit


for 12 months
Pre agreed profit Sharing ratio between customer and
Bank is 55:45
Portfolio yield is 10%
Customer profit = RM1 mio x 10% x 0.55 x 12/12 =
RM55,000

How portfolio

How portfolio yield is


determined?
Portfolio Profit/Deposit Base = R% (R
rate)
Portfolio Profit:
Profit from Home Financing

Profit from Interbank Placement


Profit from Corporate Financing
Other Profits

Deposit Base:
Retail Mudarabah
Treasury Mudarabah

Managing Rate of Return in


Mudharabah
1. Profit varies and is not certain
2. Profit Equalization Reserve
3. Hibah from Bank to Customer

Risks For Islamic Banks

OPERATIONAL

CREDIT risk
shared

Displaced
Commercial
Risk

MARKET

SHARIAH COMPLIANCE

RISK
SOLVENCY
&
LIQUIDITY

REPUTATION RISK

RATE OF
RETURN

EQUITY
INVESTMENT
RISK

Risk Management Tools in Islamic Banking

Credit Risk
Pledge of Assets as Collateral
Third Party Guarantee
Takaful

Market Risk
Parallel Contract (if permissible)
Binding Promise

Equity Risk
Seek diversification of capital contribution
Using restricted Mudarabah
Using Musharakah than Mudarabah where possible

Risk Management Tools in Islamic Banking

Liquidity Risk
Diversify Sources of Funds
Maturity matching of assets and liabilities
Rely on Marketable Assets

Displaced Commercial Risk


Floating rentals
Hibah (Gift)

End Of Lecture