Islamic Finance-3rd week Islamic Finance-3rd week

Islamic Finance-3rd week

1. Islamic Finance Supplement of chapter Two: Murabaha Exercises Chapter Three: Mudaraba as a Mode of Islamic Finance 3

2. Calculations of cost and profit Bullet Payment at the end of tenure Financing Amount : 100mn (Jan 1) Profit Rate (IRR) : 16% p.a. Tenor : 1 year Payment of : Bullet payment Murabaha Price Cost : 100 mn Profit : 16mn (100 x 16%) Contract Price : Cost + Profit : 100 + 16 : 116mn ( Murabaha Selling Price for declaration- Jan 10) Payment of Price : 116 mn (Dec 31)

3. Calculation of cost and profit Payment in Installments Financing Amount : 100mn (Jan 1) Profit Rate (IRR) : 16% p.a. Tenor : 1 year Murabaha Price : Four unequal installments Cost : 100 mn Profit : 16mn (100 x 16%) Contract Price : Cost + Profit = 116mn (Jan 10) Payment of Price : 4mn (=0.16/4*100) March 31 4mn (=0.16/4*100) June 30 4mn (=0.16/4*100) Sept 30 104mn (=100+4) Dec 31.

4. Calculation of cost and profit Payment in Four equal installments Financing Amount : 100mn (Jan 1) Profit Rate : 16% p.a. Tenor : 1 year Payment of Murabaha Price :Four equal installments Cost : 100 mn Profit : 16 (based on n=4, r=4%, PV=100) Contract Price : Cost + Profit = 100 + 16 : 116 mn (Jan 10) Payment of Price : 29mn - March 31 29mn - June 30 29mn - Sept 30 29mn - Dec 31.

5. Exercise Financing Amount : 40mn (Jan 1) Profit Rate (IRR) : 9% p.a. Tenor : 6 months Payment of : (1)Bullet payment Murabaha Price (2)unequal installments (3) equal installments Cost : Profit : Contract Price : Cost + Profit : : ( Murabaha Selling Price for declaration- _______ ) Payment of Price : ( )

6. Chapter Three: Mudaraba Introduction Mudaraba is a partnership in profit between capital and work. It is conducted between investment account holders, as owners of capital, and the Islamic bank as a Mudarib (managing partner ). A Mudaraba contract may also be concluded between the Islamic bank, as a provider of capital on behalf of itself or on behalf of investment account holders, and business owners .

7. DEFINITION OF MUDARABA Mudaraba The term refers to a form of business contract in which one party brings capital and the other brings personal effort and time to a business transaction . The financier is known as Rab ul Mall and the entrepreneur as Mudarib . 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 other party manages the business for an agreed wage. The profit is shared in pre-agreed ratios, and any loss, unless caused by negligence or violation of terms of the contract by the Mudarib .

8. Mudaraba Mudaraba is an Islamic contract in which one party supplies the finance and the other party provides management expertise in order to undertake a specific business transaction . The party supplying the capital is called the owner of the capital. The other party is referred to as the worker or agent ( the Mudarib )

9. Mudaraba An important characteristic of Mudaraba is the arrangement of profit sharing. The profits in a Mudaraba 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. Mudaraba terminology • Mudarib : Working partner (brings effort and entrepreneurial skills) • Ras ul Mall : Investment funds • Rab ul Mall : Investor (brings capital) • Wakeel : Agent • Ameen : Trustee • Kafeel : Guarantor

10. Types of Mudaraba There are two types of Mudaraba : Mudaraba Al Muqayyadah (restricted Mudaraba ). Under this scheme the Rab ul Mall may specify a particular choice of business or a particular place of business for the Mudarib , in which case he must invest the money in that particular business or place . Mudaraba Al Mutlaqah (unrestricted Mudaraba ). Under this scheme the Rab ul Mall gives full freedom to the Mudarib to undertake whatever business it deems fit . Without the consent of the Rab ul Mall , however, the Mudarib cannot invest money with anyone.

11. Restrictions on Mudarib The Mudarib is also not authorised to 1-keep (work with) another Mudarib or a partner; 2-mix its investment in that particular Mudaraba without the consent of the Rab ul Mall .

12. WHAT MAKES MUDARABA SHARIA’A COMPLIANT? Origin of the term Mudaraba The word Mudaraba is derived from the Arabic term darb fi al- ard , which means those ‘ who journey through the earth ( yadribuna fi al- ard ) seeking the bounty of Allah’ ( Qur’an , S. 73:20). Because of his work and travel, the Mudarib becomes entitled to part of the profits of the venture. In terms of the Sunnah , Jurists rely on the precedent of the contract of Mudaraba concluded by the Prophet Mohammed with Khadija prior to his marriage to her, as a result of which he travelled to Syria. Thus the legal evidence employed in support of the Mudaraba mode of finance comes from both the Qur’an and the Sunnah .

13. PRACTICALITIES OF IMPLEMENTING MUDARABA There are several stages of the Mudaraba contract to be implemented : 1. The establishment of a Mudaraba project: the bank provides the capital as a capital owner. The Mudarib provides the effort and expertise for the investment of capital in exchange for a share in the agreed upon profits . 2. The results of Mudaraba : the two parties calculate the earnings and divide the profits at the end of the Mudaraba . This can be done periodically, in accordance with the agreement, along with observance to the Sharia’a rules . 3. The participation in capital: the bank recovers the Mudaraba capital it contributed before dividing the profits between the two parties given that profit is deemed in the Sharia’a as the ‘protection of capital ’.

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