Professional Documents
Culture Documents
ON
Submitted By:
Tanveer Ahmad
Exam# 394
MBA (B/F) Final
Submitted To:
S.N Page
Title
o #
1 Introduction 1
2 Prohibited Elements 1
3 Mudarabah Financing 2
6 Termination of Mudarabah 4
7 Musharakah Financing 5
8 Forms of Musharakah 5
9 Permanent Musharakah 5
10 Diminishing Musharakah 6
13 Sharing of Loss 7
16 Benefit on Society 9
Mudarabah and Musharakah
The Financial markets and the financial industry are witnessing the growth
of Islamic banking and finance. Although an Islamic banking and finance is
a relatively new force in the world of banking but it surely is a force to
reckon with. Especially after the recent financial doom which slumped
markets world-wide and triggered the global financial crisis.
Islamic financial institutions have demonstrated significant resilience and
have been less affected compared to the conventional financial institutions
because of the prohibitions on excessive leverage. The growth, in both size
and in diversity in the Islamic finance industry has been especially robust
over the past few years.
It is today a USD 1 trillion industry and is growing at a phenomenal pace of
15 percent annually. Apart from its traditional strong hold in the Middle
Eastern countries, it has spread its wings to Western countries as well.
Islamic finance has a significant presence in Europe and England is touted
to be the Islamic finance hub of the western world. Many leading and
popular international banks have established Islamic banking ‘units’ or
‘windows’ to provide financial services and products that conform to
shariah.
There are various modes of financing in Islamic finance and Mudharabah
and Musharakah fall within this ambit. They are essential modes of
financing and are very widely used by Islamic banking and financial
institutions. It goes without saying that all the modes of financing adhere
to Shariah principles.
The 4 basic elements prohibited in Islamic mode of financing are
• Riba (Interest),
• Haram (Forbidden or impermissible goods),
• Maysir (Gambling)
• Gharar (Ambiguity)
Mudarabah financing:
The term refers to a form of business contract in which one party brings
capital and the other personal effort. The proportionate share in profit is
determined by mutual agreement. But the loss, if any, is borne only by the
owner of the capital, in which case the entrepreneur gets nothing for his
labour.
The financier is known as ‘rab-al-maal’ and the entrepreneur as M
‘ udarib’.
As a financing technique adopted by Islamic banks, it is a contract in which
all the capital is provided by the Islamic bank while the business is
managed by the other party.
The profit is shared in pre-agreed ratios, and loss, if any, unless caused by
negligence or violation of terms of the contract by the ‘mudarib’, is borne
by the Islamic bank. The profits in a Mudarabah agreement may be shared
in any proportion agreed between the parties beforehand. However, the
loss is to be completely borne by the owner of the capital.
In case of loss, the capital owner shall bear the monetary loss and
entrepreneur shall loose the reward of his effort. Mudarabah could be
individual effort or a joint one. Islamic banks practice Mudarabah in both its
forms. In case of individual Mudarabah, an Islamic bank provides finance to
a commercial venture, run by a person or a company on the basis of profit
sharing.
The joint Mudarabah may be between the investors and the bank on a
continuing basis whereby the investors keep their funds in a special fund
and share the profits. Many Islamic funds operate on the basis of joint
Mudarabah
• Permanent Musharakah
• Diminishing Musharakah
Permanent Musharakah:
Diminishing Musharakah:
Sharing of losses: