Mudarabah

Contents of today’s 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 contrat 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 Al Muqayyadah(Restricted
Mudarabah)

• 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 Mudarib’s 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 his
 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.
 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
 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
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-ul-
Maal
How profit is distributed?

 Pre agreed profit Sharing ratio C:B where C is

customer and B is Bank
 Portfolio yield determined as:
Portfolio Profit/Deposit Base = R%
 Customer profit = Deposit Amount x R% x 0.C x t
 • 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 Deposit Base:
 Other Profits
Retail Mudarabah
Treasury Mudarabah
Managing Rate of
Return in Mudharabah
1. Profit varies and is not certain
2. Profit Equalization Reserve
15% of the total gross income every month
3. Hibah from Bank to Customer
 Termination of
Mudarabah

With notice.

End of particular term

Assets are in cash form / non cash form

 Risks For Islamic Banks
CREDIT
risk
OPERATION
AL
shared MARKET

Displaced
SHARIAH
Commercial COMPLIANCE
Risk
RISK

SOLVENCY
REPUTATION RISK &
LIQUIDITY

EQUITY
RATE OF
INVESTMEN
RETURN
T 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