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Mudharabah

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  • Feb. 16, 2009
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DEFINITION OF MUDHARABAH A Mudharabah transaction is derived from a partnership based on risk and profit sharing. This partnership is a collaboration between an investor (Rabbul Mal) and an entrepreneur (Mudharib) under which the former provides funds to the latter for the purpose of investment and profit sharing. This is how it works in practice - you, the investor will deposit an amount of money with the bank, which acts as the entrepreneur. This investment is utilised as business capital by the bank. In this contract we have no authority to interfere in the management of our investment. On the other hand, the bank will have the right to manage our investments as it thinks fit by placing it into businesses that are permissible in Islam, and which it thinks are profitable. Depending on the tenure of our investment, we will be offered a profit sharing ratio which will form the basis of the agreement made between us and the bank. On the date that our investments mature, the bank will distribute our share of accumulated profit into our investment account. As in Musyarakah financing, Mudharabah financing is a form of partnership where the Bank will provide the capital and the customer will provide the expertise. Both will agree on a profit sharing ratio. The customer will be solely responsible for running the business, project or contract without interference from the Bank. All forms of capital loss, if any, will be borne by the Bank and all forms labour loss, if any, will be borne by the customer. ISSUES ON MUDHARABAH Government Investment Certificates were introduced in 1983, with the establishment of the Islamic bank. The government issued for the first time non interest bearing Government Investment Certificate to meet the special needs of the bank and other corporations who are interested in these securities. The Islamic bank governed by Shariah law, is not allowed to hold interest bearing government securities. The Government Investment Act 1983 under...