Mudaraba

Mudaraba

v Mudaraba Contract

Mudaraba could be a contract of participation, a partnership wherever capital is provided, in money or assets (no debt is accepted) by one party – the fund supplier – and Laboure is provided by the other party – midrib. Both parties agree beforehand to the proportion profit to be received by the bank.

As mudaraba could be a trust-based contracts, the mudarib is not liable for losses except in case of breach of the requirements of trust or misconduct. Guarantees against negligence or misconduct could be taken from the mudarib as long as they are not excessively used by the capital provider. The contract should specify indicate the distribution ratio of profit between both parties (which cannot be a lump sum or a percentage of capital). The distribution quantitative relation might be revised at future dates by agreement of each parties.

v Mudaraba Usage in Middle Age Europe

During the age of the Muslim Civilization Italian merchants doing business within the Middle East used the mudarabah partnership, which facilitated its spread into Europe, where it came to be known as commenda

v Mudaraba structure used in Sukuk

In this structure, proceeds of the sukuk issuance are used by the issuer as capital to finance a business. Profit generated from the business is distributed in pre-agreed proportions between the entrepreneur and the issuer, the latter of which will form the periodic payments to the sukuk holders. At maturity or in the event of default, the entrepreneur will buy the issuer’s participation interest in business enterprise, pursuant to the sale or purchase undertaking; the proceeds of this sale will be transferred to the sukuk holders.

v Sources

Accounting and Auditing Organization for Muslim monetary establishments (2010), “Sharia Standards for Islamic Financial Institutions”, Bahrain.

World Bank – Sukuk markets: A projected approach for development.

Economic Development and Muslim Finance, Zamir Iqbal and Abbas Mira Khor. World Bank Publication