In the previous articles, we have discussed the traditional concept of mudarabah and the basic rules of Shariah for governing mudarabah contract. Now we need to know how mudarabah is used in modern Islamic financial institutions. Mudarabah is commonly used as underlying contract for various Islamic deposit and finance products such as saving account, investment account, project financing, working capital financing, mudarabah sukuk and takaful products etc. In the following, we are going to explain two examples among these mudarabah based products. In first scenario, the customer acts as financier / rabbul mal and in the second example, the customer acts as manager / mudarib, whereas Islamic bank plays its role as financier.
Mudarabah structure for investment account
1. The customer and Islamic bank enter into mudarabah contract, where customer places an investment of USD $1000 (for instance) in mudarabah investment account.
2. In this case, the customer is rabbul mal or financier and the Islamic bank plays its role as mudarib or fund manager.
3. The customer and Islamic bank mutually agree on the profit-sharing ratio at the time the contract is concluded.
4. The Islamic bank as fund manager invest this money in Shariah compliant business or investment avenues.
5. If this investment generates profit, it will be distributed among the parties according the predetermined profit sharing ratio. However, if loss occurs, the customer shall bear the loss as he is the financier in this case. The Islamic bank will not be held responsible unless the loss occurs due to negligence or misconduct of Islamic bank.
The mechanism of Mudarabah for project financing
1. The Islamic banks and customer enter into a mudarabah contract for financing mudarabah venture. The Islamic bank contribute 100% capital in mudarabah venture. The customer acts as fund manager and provide his management and labour skills.
2. As per the mudarabah contract, both parties agree on profit sharing ratio at the time of contract execution.
3. If Islamic bank wants to put some other conditions whether this contract is restricted or unrestricted etc., the bank has to consult with customer before the signing of mudarabah contract. So, there would be no ambiguity and dispute among the parties with regard to terms and conditions.
4. When mudarabah venture generates profit, it will be distributed among the parties according to pre-agreed ratios. In the case of loss, only Islamic bank as a financer shall bear the loss.
5. At the maturity of mudarabah contract, the parties are at liberty whether they dispose of mudarabah asset by selling it in the market or fund manager (customer in this case) buys the asset at the marker value.
These two examples give us an overview and basic understanding how to incorporate traditional concept of mudarabah in modern Islamic finance products.