Mudarabah and Its Application in Islamic Banking

Mudarabah and its
Application in Islamic
Banking
Outline
Mudarabah
1. Definition of Mudarabah
2. Types of Mudarabah
3. Difference b/w Mudarabah & Musharakah
4. Different Capacities of Mudarib

5. Mudarabah Application in Islamic Banking
6. Pool Management
7. Distribution of Profit & Loss
8. Termination of Mudarabah
Mudarabah (A Partnership based Mode)
 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 “Rab-ul-
Mal” (Investor)
 The management and work is an exclusive responsibility of the

other, who is called “Mudarib” (Working Partner)
 Profit is shared as per pre-agreed ratio
 In case of Mudarbah all losses are borne by Rab-ul- Maal

Mudarabah
•The Prophet (‫ )ص ل یہللا عل یہ و س لم‬used to work as a Mudarib for Hazrat
Khatijah
•Ibn-e-Abbas reported that when ever his father Al-Abbas bin Abdul
Muttalib gave money for mudarabah , he stipulated some conditions that
the mudarib will not take his money across sea, into any valley or buy any
animal with a soft belly. If mudarib does any of those mentioned acts then
he is liable. The Prophet (‫ )ص ل یہللا عل یہ و س لم‬herd of this practice and
permitted it. (Al-Bayhaqi, Al-Sunnan Al-Kubra, 6/184 (no 11611)).
Difference between Shirkat and Mudarabah
Shirkat/Musharakah Mudarabah
Investment from each partners Investment from one partner while
other is working partner
Every partner can work for business Investor cannot work for business
Every partner bears loss according to Only Rabb-ul-Mal suffers loss
ratio of his investment
Every partner’s liability is unlimited Investor is liable up to the amount
of investment
Asset given by the investor as an Asset given by the investor as an
investment, all partners will be co- investment, remains in the ownership of
owners of that asset so if value of investor before sale. Therefore, if
that Asset is increased, all will get Mudarabah is terminated at this stage,
benefit. Mudarib is not entitled to share in the
exceeding price of that asset.
Types of Mudarabah
1. Al Mudarabah Al Muqayyadah
(Restricted Mudarabah)
2. Al Mudarabah Al Mutlaqah
(Unrestricted Mudarabah)
Types of Mudarabah
1. Al Mudarabah Al Muqayyadah (Restricted
Mudarabah):
• Rab-ul-Mal may specify a particular business
or a particular place for the Mudarib(working
partner), in which case he shall invest the money
in that particular business or place.
Example: Mudarib will work only in Islamabad
city or Mudarib will only do the business of Rice.
Types of Mudarabah
2. Al Mudarabah Al Mutlaqah (Unrestricted
Mudarabah):
• Rab-ul-mal gives full freedom to
Mudarib(working partner) to undertake
whatever business he deems fit.
Example: No restriction of place or specific

business
Authority of Rab-ul-Mal
Rab-ul-Mal (Investor) has authority to:

1. Oversee the Mudarib’s(working partner)
activities and
2. Work for business subject to Mudarib
consents.
Capacities of Mudarib (Working partner)
1. Ameen (Trustee): The money given by Rab-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 Rab-ul-Maal.
3. Shareek (Partner): In case the enterprise earns a profit, he is
a partner of Rab-ul-Maal who shares the profit in agreed ratio.
Capacities of Mudarib
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
services.
Distribution of Profit and Loss
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. .(e.g 50/50 or
60/40)
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.
Some incentives my be given to the Mudarib.
 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 & Rab-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.
EXAMPLE
If the capital is Rs.100,000/-, they cannot agree on a conditions
x Rs.10,000 out of the profit shall be the share of the Mudarib
x 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.
 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, if any, shall be
distributed between the parties according to the
agreed ratio.
Termination of Mudarabah
 Each partner can terminate Mudarabah at any time.
 If a time period is fixed in Mudarabah, then, all partners will be responsible for the
completion of this period.
 Physical liquidation is not necessary. Constructive liquidation can also be conducted
 Mudarib will bear all those expenses, which are normally considered the responsibility
of Mudarib (in direct expenses . However, those expenses which are not considered the
responsibility of Mudarib (direct expenses) will be deducted from the total capital.
Mudarabah contract on Deposit/Liability
Side of Islamic Banking
Islamic banks need to disclose 4 things to customers
while opening the customer deposit account:
1. Type of contract.
– Saving Account under Mudarabah and Current Account
under Loan/Qard contract.
2. Profit sharing ratio between Mudarib & Rab ul Mal.
– e.g (60% Rabbul Maal and 40% Mudarib).
3. Weightage assignment according to product features
– (0.90 of normal Saving Account and 1.20 of 1 year Islamic
Certificate)
4. Profit calculation based on pool working
– As per Actual Profit earned by the Investment Pool
The Gross Income (Distributable Profit) will be shared
between the bank (as Mudarib) and Depositors (Rabul Mal)
in a predetermined ratio (%) of the actual profit earned
This ratio of profit for bank & Investment Pool (for

depositors) is announced at the beginning of the month and is
available at the website of the bank or can be obtained from
the bank upon request
Profit Distribution – Account holders
• The profit is distributed among the customers/account holders

on the basis of predetermined weightages, announced 3 days
before the commencement of the month, based on their
respective category.
• Weightages are used for distributing profits among different

types of depositors having different maturities and values.
• Loss Sharing:
• In case of any loss, it will be shared by the members of Investment
Pool in ratio of their investment.
Profit Sharing in Mudarabah based
Structure
Depositors
Rab-ul-Mal
Profit share Islamic bank
Weightage System
Deposits Mudarib
Profit Share
Distributable income
Pool of Funds
Financing
Profits
Businesses/Corporates
Important points to remember
It is important to remember that since weightages is (only) a

profit distribution mechanism used for profit distribution
among Rab ul Maal (only) .
weighages are not used for loss sharing among the Raab ul
Maal nor does it affect the profit of the Bank. Any change in
the weightages shall effect the Rab ul Maal only.
Investment Pool & Relationship
between Investors
• The Investment Pool will operate on Musharakah basis and

different categories of depositors in the Investment Pools will
be assigned different weightages based on:
 Investment tenure
 Profit payment option
 Amount tiers
 Management discretion
 & Market trends
Profit Distribution - Problems
Following factors complicate the profit sharing mechanism of

Musharakah Pool:
• Large number of partners (Account holders)
• Account holders continually join and leave the Musharakah
pool
• Investment of Account holders also fluctuates
Simple profit sharing mechanism with this continual

fluctuation of investment and profit ratios is impractical
Does Bank invest in pool?
The bank can also participate in the Investment Pool (as an

investor) in any proportion, as mentioned in the AOF
(reference T&C 1.1).
However Income allocation should be in proportion to

commingled funds with the Depositors funds.
Pool Distribution
Source: SBP Pool Management guidelines for
Islamic Banks

Mudarabah and Its Application in Islamic Banking

Uploaded by

Copyright:

Available Formats

Mudarabah and Its Application in Islamic Banking

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Mudarabah and Its Application in Islamic Banking

Uploaded by

Copyright:

Available Formats

Mudarabah and its

3. Difference b/w Mudarabah & Musharakah

4. Different Capacities of Mudarib

 This is a kind of partnership where one partner gives money to

 The management and work is an exclusive responsibility of the

 Profit is shared as per pre-agreed ratio

 In case of Mudarbah all losses are borne by Rab-ul- Maal

Example: No restriction of place or specific

Rab-ul-Mal (Investor) has authority to:

1. Ameen (Trustee): The money given by Rab-ul-Maal

5. Ajeer (Employee): If the Mudarabah becomes void due

If the capital is Rs.100,000/-, they cannot agree on a conditions

x Rs.10,000 out of the profit shall be the share of the Mudarib

x 20% of the capital shall be given to Rab-ul-Maal.

 If the business has incurred loss in some

 Physical liquidation is not necessary. Constructive liquidation can also be conducted

This ratio of profit for bank & Investment Pool (for

• The profit is distributed among the customers/account holders

• Weightages are used for distributing profits among different

It is important to remember that since weightages is (only) a

• The Investment Pool will operate on Musharakah basis and

Following factors complicate the profit sharing mechanism of

Simple profit sharing mechanism with this continual

The bank can also participate in the Investment Pool (as an

However Income allocation should be in proportion to

You might also like