3. Contents Introduction Mudarabah; Profit / Loss Distribution;
Kinds of Mudarabah Termination of Mudarabah Mudarabah Vs Musharakah
Scope of Mudarabah for Banking System Risks Practical examples
4. Mudarabah - Introduction Mudaraba is a kind of partnership
where partner involve in business; Mudarabah is partnership between
persons in which one partner gives money to another for investing
in profitable avenues. The investor (fund provider/supplier) is
called Rabb-ul-Maal while the person who utilizes this fund (the
fund manager) is called Mudarib; Mudarib is exclusively responsible
for management of the business. Rab -ul- Maal (fund supplier) does
not have any right to interfere in business affairs.
5. Mudarabah - Introduction Mudarabah Capital: In principle,
the capital of Mudaraba should be provided in the form of cash.
However, it may be presented in the form of kind i.e. tangible
assets which will be valued as per mutual consent; The value (in
cash) of the assets will be the Mudaraba capital; The Capital of
Mudaraba should be clearly known to the contracting parties and
defined in terms of quality and quantity in a clear manner; Debt
(receivable) can not be the capital of Mudarabah.
6. Mudarabah - Introduction Mechanism of Profit and Loss
distribution: The contracting parties should stipulate in the
contract the profit shares (in defined terms) for each one; The
profit sharing ratio should be: Specific; and of the profit
expected to be earned by the venture; Therefore following method is
not allowed: Unknown ratio; A ratio attributed to future
settlement; A ration linked with the capital (in terms of x% of the
capital); A lump sum settlement as profit;
7. Mudarabah - Introduction Mechanism of Profit and Loss
distribution: Losses in Mudaraba shall only be born by Rabb-ul-Mal
and not by the Mudarib; Mudarib will also suffer loss in shape of
not receiving anything as profit; The Mudarib shall only be
responsible for losses if the loss happened due to his negligence
and willful misconduct.
8. Mudarabah - Types There are two types of Mudarabah:
Restricted Mudarabah (Mudarabah Muqayyadah): It is a kind of
Mudarabah in which the capital provider restricts the Mudarib to
perform business with certain restrictions. These restrictions may
be for place (geographical restriction), particular type of
investment (sector wise restriction) or any other restriction
provided these restrictions do not unduly constrain the Mudarib
from business operations. Unrestricted Mudarabah (Mudarabah
Mutlaqah): It is a kind of Mudarabah in which the capital provider
(Rabbul Maal) does not put any restriction the Mudarib.
9. Mudarabah - Rules Supply of funds: The basic feature of
Mudaraba is that the the capital is provided by Rabbul Maal and the
Mudarib is responsible for the management only; However, it is
allowed for Mudarib to add capital into the business of Mudaraba if
agreed with Mudarabi; In such cases Musharaka and Mudaraba are
combined. For example, Zuhaib gave to Rahman Hayder Rs.100,000/-
for Mudaraba. R. Hayder added Rs. 50,000/- from his own with the
consent of Zuhaib; This type of partnership will be treated as a
combination of Musharaka and Mudaraba; Here the Mudarib may
allocate for himself a certain percentage of profit on account of
his investment as Sharik, and at the same time he may allocate
another percentage for his management and work as a Mudarib.
10. Mudarabah - Rules Termination of Mudarabah: The contract of
Mudaraba can be terminated at any time by either of the two parties
after giving a notice to the other party. If all assets are in form
of cash and some profit has been earned on the principle amount, it
shall be distributed between the parties according to the agreed
ratio. If the assets of the Mudaraba are in other form the Mudarib
shall be given an opportunity liquidate them and the actual profit
may be determined.
11. Mudarabah Vs Musharakah Mudarabah: The contribution comes
from Rabbul Maal (the investor). The Rabbul Maal (investor) is not
permitted to manage the business. The Mudarib will only manage the
business. The Mudarib can also invest in the capital of Mudarabah.
Musharakah: The contribution comes from all partners in form of
cash, commodities, services or liability in the case of reputation
partnership. The work, as a general rule, is to be done jointly by
the parties. A partner or some partners may be sleeping.
12. Mudarabah - Application Scope of Mudarabah for Banking
System: Mudaraba as a mode of finance used by Islamic Banks for the
following purpose: Relationship with depositors; The depositors
provide moneys to bank as Rabb-ul-Mal to be invested by bank as
Mudarib on the basis of profit and loss sharing on pre agreed
specific ratio; Islamic bank can also use this mode through
providing capital in a business and sharing in the profit with
pre-agreed ratio; Large Enterprise financing; Project Finance;
Business ventures; Private equity;
13. Mudarabah - Application Depositors and Islamic bank
relationship: Mudaraba is used by Islamic Banks for taking deposit
from depositors; The depositors provide moneys to bank as
Rabb-ul-Mal to be invested by bank as Mudarib on the basis of
profit and loss sharing on pre agreed specific ratio; ISLAMIC
BANKDEPOSITORS DEPOSITS PROFIT MUDARABAH PROFIT & LOSS
SHARING
14. Mudarabah Application (Deposit [Liability] management) A
POOL MANAGEMENT Pools according to (1) size of deposit, (2) Tenure
CB G IH M ON S UT D FE J LK P RQ V XW Time (tenure) S i z e o f D e
p o s i t
15. Issues in Mudarabah Problems and Risks for Islamic Banks:
Mudarabah is among the preferable modes of financing which is also
heavily recommended by scholars and Ulema, but certain difficulties
are there in application of this mode. Some are given below:
Mudaraba is considered to be very high risk financing activity.
Collateral can be asked but could not be used in case of real loss.
Banks existing competencies in project evaluation and related
techniques are limited. Dual book keeping trends in market. No
legal mechanism for treatment with Mudarabah.
16. Contents Introduction; Types of Musharakah; Basic Rules in
Musharakah; Termination of Musharakah; Security / Collateral in
Musharakah; Musharakah Management and Liability; Profit / Loss
Distribution ; Application of Musharakah As a Mode;
17. Introduction The actual term used by Fuqahaa (classical
Islamic scholars) was Shirkah (or Sharikah); Lexical meaning of it
is sharing/merging; Technically: Commingling by two or more persons
either their capital/money or work or obligations to earn a profit
or a benefit or a yield or appreciation in value and to share the
loss according to their proportionate ownership; Now the term
Musharakah is popular; There are different types of Shirkah which
have been explained by Fuqaha; See next slide for details:
18. SHIRKAH (Partnership) Shirkat-ul-Milk (Joint ownership)
Optional Forced Shirkat-ul-A'qd (Business partnership) A'amal
(partnership in work) Wujooh (reputational partnership)Amwaal
(partnership with capital) Mufawadah (100% equality in shares of
partners) Al Inaan (Variability in shares of partners) Mufawadah
(100% equality in shares of partners) Al Inaan (Variability in
shares of partners) Mufawadah (100% equality in shares of partners)
Al Inaan (Variability in shares of partners) Types of Shirkah
19. Basics of Musharakah There are some basic features of
Musharakah: Mixing of Capital (joint ownership); Asset or property
or anything that can accept partnership; Rights and
Responsibilities; Sharing of profit and loss
20. Basics of Musharakah According to the nature of partnership
(Musharakah) there are three possible structures of Musharakah:
Permanent Musharaka: Permanent Musharaka is a partnership of
permanent nature i.e. a going concern; Temporary (Redeemable)
Musharaka; Musharakah can be for a limited time period, after that
it will be redeemed; Redemption of Musharakah will take place
through sale of shares from one partner to other partner or third
person (in market/exchange); This type is usually used for business
ventures; Diminishing/declining Musharaka A Musharakah in which a
partner buys the share of the other partner gradually until the
ownership of the asset or property is completely transferred to
second partner; According to this concept, a financer (bank) and
its client participate in a joint commercial enterprises or
property or asset and the client gradually buys banks share.
21. Basics of Musharakah Capital of Musharakah should be in
cash form; It may be in kind; In such case the value should be
agreed; Different currencies should be converted or valued into the
currency of Shirkah; Capital should be under the disposal of the
manager; Debt alone can not be contribution in Shirkah; Capital can
be varying among the partners;
22. Basics of Musharakah Management of Partnership: In
principle each partner has right of Musharakah management; The
partners may appoint a managing partner by mutual consent; Some of
the partners may decide not to work for the Musharakah and work as
sleeping partner; It is not allowed to specify a fixed remuneration
to a partner Musharaka who manages funds or provides some form of
other services, such as accounting; However, it is permissible to
give him a greater share of profit than he would receive solely on
the basis of his share in the partnership capital; According to a
view it is also permissible to appoint his as an employee and
giving him remuneration for his services;
23. Basics of Musharakah Profit Sharing ratio: Ratio or the
basis for sharing profit should be decided in the beginning of
partnership; Profit should be allocated in percentages of earning
and not in a sum of money or a percentage of the capital or
investment; It is not necessary for sharing profit according to
proportionate capital contribution; A sleeping partner cannot share
in the profit more than the percentage of his capital; The partner
may at the later stage agree to change the profit sharing ratio,
and on the date of distribution, a partner may surrender a part of
his profit to another partner;
24. Basics of Musharakah Sharing of Loss: As a matter of
principle the loss has to be shared according to the ratio of
capital contribution; No partner can make his share or portion of
share guarabteed from loss; Any such agreement will make the
Musharakah void and null Guarantee of principle: Guarantee from one
partner to other partners profit or capital or part of capital is
not allowed; Security can be asked for misconduct or negligence; A
third party may provide a guarantee to make up losses of one or all
partners;
25. Basics of Musharakah Termination of Musharakah: Every
partner has a right to terminate the Musharaka at any time after
giving notice to the partner and the Musharaka will come to an end.
In this case, if all the assets of the Musharaka are in cash form
then they will be distributed pro rata between the partners. In
case they are mixed assets the partners may agree either on: The
liquidation of the assets (market price), or On their distribution
among the partners as they are; or Purchasing from one partner
share of other at any agreed price between them.
26. Application of Musharakah Musharakah could easily be used
as a vast mode of financing for almost every financial need. Below
are some fields where this mode can easily be applied: Long-term
Finance Running Finance (limited scope) Investment Banking Project
Financing Private Equity Placement Redeemable capital
investment
27. Long-term Finance As the name suggests, Long term financing
is a form of financing that is provided for a period of more than a
year. Long term financing services are provided to those business
entities that face a shortage of capital. It is different from
short term financing which is normally used to provide money that
has to be paid back within a year. The period may be shorter than
one year as well. Examples of long-term financing include - a 30
year mortgage or a 10-year Treasury note. Equity is another form of
long-term financing, such as when a company issues stock to raise
capital for a new project.
28. Running Finance (limited scope) The running finance is
offered by the financial companies against the creation of charge
on inventory or debtors which are of short term nature. The charge
can be of any type say 1st charge, Ranking charge, charge, etc.
mortgages . It usually comes under the heading of the working
capital financ Investment Banking An investment bank is a financial
institution that assists individuals, corporations, and governments
in raising financial capital by underwriting or acting as the
client's agent in the issuance of securities (or both). An
investment bank may also assist companies involved in mergers and
acquisitions (M&A) and provide ancillary services such as
market making, trading of derivatives and equity securities, and
FICC services (fixed income instruments, currencies, and
commodities).
29. Project Financing Project finance is the long- term
financing of infrastructure and industrial projects based upon the
projected cash flows of the project rather than the balance sheets
of its sponsors. Usually, a project financing structure involves a
number of equity investors, known as 'sponsors', as well as a
'syndicate' of banks or other lending institutions that provide
loans to the operation. They are most commonly non-recourse loans,
which are secured by the project assets and paid entirely from
project cash flow, rather than from the general assets or
creditworthiness of the project sponsors, a decision in part
supported by financial modeling
30. Private Equity Placement The sale of securities to a
relatively small number of select investors as a way of raising
capital. Investors involved in private placements are usually large
banks, mutual funds, insurance companies and pension funds. Private
placement is the opposite of a public issue, in which securities
are made available for sale on the open market. Redeemable capital
investment The return of an investor's principal in a fixed income
security, such as a preferred stock or bond; or the sale of units
in a mutual fund. A redemption occurs, in a fixed income security
at par or at a premium price, upon maturity or cancellation by the
issuer. Redemptions occur with mutual funds, at the choice of the
investor, however limitations by the issuer may exist, such as
minimum holding periods