So far we
know Islamic banking purely deals with welfare. This Pure Islamic mode of
finance completely depends on the honesty and skill of the person who wants to
business by dealing with others money. Here the provider of the fund in “Shahib
al mal” or “Rab-ul- mal” and the person who wants utilize the funds for
business purposes is called “Mudarib”.
The main
notion is to do welfare of those needy persons who have no fund of their own
but have skill and experience to manage a business. It is has no time limit.
There is a contract between Shahib al mal and mudarib which concludes the
necessary conditions of the operation of the business. Shakib al mal will bear
the loss if it is incurred without any intentional negligence of the mudarib.
If profit is earned than it will be distributed as per contract. So, it can be
called a profit sharing but loss bearing mode of finance. The proportion of
profit is dependent on various conditions. Such as the distance of the place
where the business will be occurred. The goods which will be death with, the
risk involved is the business. The effort which will be exerted by the Mudarib.
The reason, the geo-political condition, the volatility of the market, the
availability of the raw materials, the existing rules of the society is of also
a great concern. But the first and for most condition is the faith of the
Shakib al mal on the Mudarib and at the same time the honesty and integrity of
the Mudarib. The best example of this financing mode from the history is our holy
prophet (SAW) and Ummul Muminin Khadizatul Kubra (RAW). The .....this great
....with utmost honesty and sincerety. They made a historic bandage in their
social, financial and family life this their great .........
There are
so many talks on Mudaraba is vouge. But nothing to be worried to execute
Mudaraba. It executed it can be the best mode of Islamic mode of finance. The
essence of “Islamic banking does not lie in extending fund for a certain period
and earn some profit. Its .........lies within the style of executing it as per
shariah requirements which emerged from Islamic economy roof of which is
Islamic scriptures. The main motto of Islamic economy is to accelerate and
speed up the flow of funds and to make the economy more vibrant than any other
economy. But its success lies in the hidden characteristic which people beer in
their hearts.
Actually,
Mudaraba does not need so many scientific models, formulas, analysis, theory
and corollary. It only requires a solid and valid contract between two parties
who are involved in this transactions and operations. Generally a tested person
can be selected as Mudarib and person with proper sense, realization and
rationality should be involved with the business.
Definition of Mudaraba:
As per Blom
Development Bank, Mudaraba is
a special kind of partnership where one partner gives money to another for
investing it in a commercial enterprise. The investment comes from the first
partner who is deal rab-ul-mal, while the management and work is an exclusive
responsibility of the other, who is called mudarib.
It may be
add here that mudaraba is a trust financing contract.
Features of Mudarabah:
i.
Mudaraba is partnership where capital is provides in
cash or assets (no debt is accepted) by one party the fund provider and labour
is provided by the other party mudarib.
ii.
Both parties can appoint agent on their behalf.
iii.
Both parties can appoint agent on their behalf. A
mudaraba contract could be terminated, unilaterally except when a term has been
agreed by both parties, in which case the mudaraba could only be prematurely
terminated by mutual agreement. In addition, if the mudarib has already started
the business in the mudaraba contract. It becomes binding until actual or
contractive liquidation is a trust based contracts,
iv.
Mudaraba: The mudarib is not liable for losses except
in case of branch of the requirements of trust or misconduct. Guarantees
against negligible or misconduct could be taken loan the mudarib as long as they
are not excessively used by the capital provider.
v.
The contract should specify whether the mudaraba
instrument unrestricted or restricted (to specific location or type of
investment as agreed between parties). It should also indicate the distributes
ratio of profit between both parties (which can not be a lump-sun or a
percentage of capital). The distribution could be revised at future dates by
agreement of both parties.
Types of Mudaraba:
The
rab-ul-mal may specify a particular business for the mudarib in which case he
shall invest the money in that particular business only. This is called
mudaraba al muqayyadah (restricted mudaraba). But if he has left it open for
the mudarib to undertake whatever business he wishes, the mudarib shall be
authorised to invest the money in any business he deems fit. This type of
mudaraba is called al-mudaaba al-mutlaq (unrestricted mudaraba).
Use of Mudaraba:
Mudaraba is
widely used for equity financing in the form of start up capital, venture
capital or a mixture of both.
Condition of validity:
It is necessary
for the validity of mudaraba that the parties agree, right at the beginning, on
a definite proportion of the actual profit to which each of them is entitled.
the losses however are entirely assumed by Rabb ul mal and the mudarib looses
his time and effort only.
Contradictions:
According
to Faleel Jamal deen form Islamic Finance for Dummies, all mudaraba contracts
are limited by a specific time period; they don’t untime indefinitely.
First ties and two tier mudaraba:
The
mudaraba contract is applied when someone deposits money in an Islamic bank
with the
expectative of getting a return,. In most causes, the contract applied is a
first tier (or sample) mudaraba contract, meaning that only the customer and the
bank are involved. (The bank serves as fund manager for whatever money is
deposited).
However,
another type of contact exits: a two-tier (or termediary) mudaraba contract. In
this cause, the bank acts as an intermediary between the depositor and the bank’s
clients to whom it provides money. Islamic scholars promote using this kind or
mudaraba model is two scenarios:
The bank on
its own does not have the capacity to serve as the investor (the rab al mal).
This scenario may mean that the bank does not have enough liquidity to enter a
mudaraba contact with an entrepreneur of fund manager. The bank lacks the
expertise to serve as the land manager (mudarib) for an investment.
The
financier can also be called the investor or silent partner. The person who
manages the fund can also be called the fund manager or working partner.
* Mudaraba
contract have three basic factors Capital, labor and entrepreneurship.
* The
bank invests the depositors money according to sheria guidelines.
* When
a mudaraba contract is used us a source of bank funds (when the customer
deposits money in the bhank), the unrestricted mudaraba is most often used.
* When
the contract supports a banks equity financial product (when the bank supplied
funds to a working partner), the restricted mudaraba is most often in play.
* The
Mudarib (manager or working partner) also receives a fixed free for managing
the project, in addition to a share of any profits.
* It
the economic venture results in a loss, that loss is absorbad salary by the
investor as the capital provider unless the mudarib (fund manager) has acted
negligently or has engaged in misconduct.
* In
a two tier mudaraba contract, two contracts must be executed.
* The
two-tier method of mudaraba is less frequently applied than the first tier
method. That’s because barks usually have the liquidity and/or expertise o
enter is to a first tier contract and because the two-tier method is not quite
as profitable for the bank as the first tier method.
Examples of different methods of
Mudaraba:
One between
the depositor as investor (rab al mal) and the bank as a fund manager
(mudarib): The depositor signs a contract with the bank for a two-year sharia
Capliant project. The investor and the bank agree to share the profit is a 60:40
ratio (60 percent of profit goes to the investor and 40 percent to the bank).
The investment made by the depositor for this specific project is $1 million.
One between
the Islamic bank serving is the capacity of investor (rab al mal) and the
project client as the working (mudarib): This contract initiates that the two
parties will share the profit on a basics of 70:30 ratio (with the Islamic
......getting 70 percent and the client getting 30 percent) Assume that the
client is not making any capital contribution but is insted investing time,
effort, and expertise in the project.
The project
earns $1.5 mollion by the final contact date. The fund manager an entrepreneur
gets 30 present of the profit is $1,50,000 based on the second contract. The
bank recovers the capital $1 million plus a $ 3,50,000 profit.
The $ 1
million principal is returned to the initial investor, along with 60 percent of
the banks profit from the second contract. ($3,50,000´60 percent equals
$2,10,000). The bank holds on to the receiving 40 percent of $ 3,50,000 on $
1,40,000. So, the bank earns $ 1,40,000 for serving as intermediary between the
depositor and the entrepreneur.
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