al-mudharabah investment deposits and al-mudharabah project financing

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Al-mudharabah investment deposits and al-mudharabah project financing chargeback mmcis forex

Al-mudharabah investment deposits and al-mudharabah project financing

The idea of Mudarabah and sharing of risks and therefore sharing of profits means that the investors gets a return based on actual performance. Because of this, Banks recognised another type of risks for Islamic Banks i. Displaced Commercial Risks. There are 2 scenarios when it comes to Profit Smoothing Techniques. For example the indicative target returns on the investment is 5.

In general, there are 4 commonly used Profit Smoothing techniques in the market to manage the returns on Mudarabah. There is a general methodology to treating the losses for Investments, with the following steps to be met:. The current scenario since is that BNM no longer encouraged the use of PER and has placed strict requirements if a bank wants to use it.

As a result most Banks if not all have felt it is difficult to comply with the requirements and had now stop using PER as a smoothing technique, especially since the Investment Account guidelines was issued in To read the Guidelines on PER, click here. The profit from the investment will be paid at the end of the investment cycle.

The profit from the investment can be distributed based on the following scenario:. It must not diminish the pool of profits attributable to the Investors. However, this method is now no longer encouraged as it is deemed as profit smoothing technique following the introduction of the Investment Account framework in In cases where there is partial withdrawal of the principal, the Bank can provide a reduced rate of return on the amount withdrawn while the remaining portion will be entitled to the full rate of return upon maturity.

The calculation of the partial withdrawal profit will be based on the formula for premature withdrawal as above. The total profit will only be payable at the end of the investment tenure. Like Like. The usual method is daily accrual posted monthly, which gives the same effect as a Monthly Daily Average calculation. We accrued daily based on actual amount. End of the month, the accrued profit is posted. So we accrue based on this. However at the end of the month, we will calculate the profit amount based on actual performance and declare the rate of return for the depositors.

If the declared rate is higher than the rate used to accrue and paid at the end of the month, we make additional profit payment to customer. If the declared rate is lower, we should claw back reverse the amount already paid. Generally the rate declared is pretty close to the rate used for the accruals. We will then employ the declared rate to the profit sharing ratio of each customer. Under the new Investment Account guidelines, we are not allowed to manipulate or improve the returns to customer artificially; we have to flow actual returns.

So if we have overpaid, we will clawback. If underpaid, we will make additional payments. I understood it, but it will be very helpful if you can give an example to support your answers which can help me understand perfectly , which you usually do..

Thanks for visiting. My email is amiralfatakh71 yahoo. I have some basic questions in ijara. Can you please help me with that. Read some where that in an operating lease, the lessor normally holds a stock of assets with high degree of marketability to provide to other entities. Saw something similar in Musharaka contract as well. For Ijara, the underlying asset is the property or asset to be leased itself. Transaction is using the said asset. It does not require holding of other asset, unlike a Tawarruq home financing where you trade commodities although you have a tangible asset ie house.

So, under operating lease, the asset traded is the property itself where the customer pays for the right to benefit usufruct from the use of property. No other assets came into play for Ijara. Hi Smitha, not sure in which context you are referring to. Deposits or financing? In an ijara arrangement, the usufruct is rented out while Musharaka and Mudharaba, there is equity inclusion into the arrangement.

I highly appreciate your quick response. In this case i would like to know the process flow. The customer will be a shareholder and he takes an ijara financing from the bank and we can consider his share as a downpayment ,which he can withdraw anytime. This is my understanding on Ijara with Musharaka or Mudaraba pair.

Please correct me on my understanding. Ok thanks for clarifying. While it is simplistic to envision such strcutures theoretically, putting it into practice is not as simplistic. The way it is being structured is to achieve a financing result. In a Musharaka Mutanaqisah arrangement, there are multiple contracts working at the same time.

As a start, the process starts with the contracts. A Musharaka contract is entered where the customer and bank agree that each party will contribute principal equity. And if the customer do not continue to purchase the equity, it is deemed that the customer wants to exit the partnership. There is no profit consideration for this portion just purchase of equity at par value. An Ijara contract where the Bank earns a return. Theoretically, if a bank and customer enters into a Musharakah arrangement with customer for the purpose of investment, whatever rental amount collected from a third party will be shared between the Bank and customer based on equity ratio.

For example, if the Bank : Customer equity ratio is , it means for every monthly rental collected of RM2, from the property, RM1, goes to the Bank and RM goes to Customer. But in this case, the customer is the lessee renting the property , so the Customer needs to only pay the rental of RM1, to the Bank RM technically belongs to Customer ie Customer paying to himself.

Also, as person renting and enjoying the beneficial ownership usufruct , the Bank and Customer agrees that the Customer is to pay for the utility bills and any assessment payments. To maintain the property in good condition, the Bank and customer agree that the customer will become the agent of the Musharakah to do what is necessary to maintain the house.

This means repair and maintenance. Theoretically, the Customer can withdraw his share of equity anytime, but that means finding another party to purchase his equity. That means the dissolution of the partnership arrangement for the bank as the party is now different, with a dissimilar credit standing as the original customer.

Could you please provide the vedio link on your seminar on Deposits. I am aware that Mudharabah is used in the Islamic interbank money market also. There is one instrument called Mudharabah interbank investment MII which the tenor may be overnight up to a year.

My question is, if MII is used overnight bcs thats what commonly happen , how does the bank borrower manage the funds that they borrowed to earn profit since they have to pay back to the lender, also that the instrument is overnight. Bcs the only way to earn fast profit is by trading with insterest, which is haram.

I am not privy to the exact workings of MII overnight, but generally an overnight arrangement is not necessarily is an overnight investment. It may or may not be that the investment is for a month or more and when a bank comes in for the night, it replaces or takes over the principal of the borrower, therefore entitled to share the overnight return. Imagine buying into a 5-year Sukuk portfolio but only for 1 day. The portfolio therefore only pays you for 1 day because you only participate in the portfolio for only 1 day.

Now, if it is a restricted portfolio, then the arrangement will be different, as you should not be able to enter and exit the portfolio as and when you intend to. Under restricted investment, you need to match tenure and stay until end of tenure, before realising the profit at that point. Even if it is for 1 day. Just as you mentioned about the sukuk, sukuk as we know is a long term investment. Well technically YES, depending on the terms of the Sukuk, you can actually buy a 5 years Sukuk today and sell it the next day.

But Sukuk is an investment product, and to sell the next day it will be valued based on Marked-to-Market, which may result in a loss or maybe a gain because it depends on the market. Dear Amir, in gold investment through Mudarabah how does the mudharib manage the investment as it is act as a commodity not as currency?

Thank You. Hi Jenn, in its simplest structure, Gold Investment via Mudarabah works exactly how you described. A small manager fee for the Bank, and the customer takes the market movement and performance. Could be loss or gain depending on market. Thats the real investment structure. So the application more towards using Wakalah contract then Mudarabah? And why the application of mudarabah in financial institution become lesser?

It is because of the risk? Thanks again. Hi Jenn, my personal opinion is that the market is more familiar with the concept of Wakalah as it is common when you are used to purchasing Unit Trust investments. The fee can be agreed upfront and the investors enjoy the market movements. Yes the risk is there for the bank as well, especially when market performance is down.

Yes you can fix the terms for short and long term deposit. It may even be Restricted Investment where the deposit tenure is matched perfectly. Hibah generally is a gratuitous contract and is discretionary in the eyes of Shariah. It is usually not given as a commitment or promise on a deposit.

From customer perspectives, it really depends on customer risk profiles. If the customer is risk taker then it is the Mudarabah. Otherwise Wakalah is lower risk but not totally risk-free. Mudarabah min use is to cater for sharing of risk investments, mainly in projects or short business ventures.

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 before hand. 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 agent shall lose the reward of his effort. Mudaraba could be individual or joint. Islamic banks practice Mudaraba in its both forms. In case of individual Mudaraba an Islamic bank provides finance to a commercial venture run by a person or a company on the basis of profit sharing.

The joint Mudaraba may be between the investors and the bank on a continuing basis. The investors keep their funds in a special fund and share the profits without even the liquidation of those financing operations that have not reached the stage of final settlement. Many Islamic Investment Funds operate on the basis of joint Mudaraba.

Profits arising from the project are distributed according to a predetermined ratio. Any losses accruing are borne by the provider of capital. The provider of capital has no control over the management of the project. Secondly, the investor's stipulating that the agent-manager pay a certain amount; when such a condition invalidates the contract because it means that the two partners will not share in the profits. A - The jurists of all the major legal schools are agreed on the legitimacy of mudarabah transactions.

In this regard they cite texts from the Qur'an and the Sunnah. In the Qur'an, the root for the word mudarabah, d-r-b, is used in a verse that clearly indicates the lawfulness of trade: And others who go forth in the earth, seeking the bounty of the Almighty In the Sunnah, it is related that Ibn 'Abbas said, "Our tribal leader, al 'Abbas ibn 'Abd al Muttalib, whenever he paid money out in mudarabah, would stipulate to his partner that he must not cross over water with his money, or make camp in a dry riverbed, or buy a fractious mount with it.

If his partner did any of those things, he would be held personally responsible. When news of these conditions reached the Prophet of Allah, upon him be peace, he endorsed them. Given the lawfulness of mudarabah from a Shari'ah perspective, the Board sees no impediment to the bank's purchasing goods on the international market with funds gathered from other Islamic banks and financial institutions in partnership, and then its assuming the responsibility of managing the operation as agent-manager as a mudarabah in which it also participates as an investor, regardless of whether its dealings are undertaken on a short or a long-term basis, or take the form of either a sale of trust, such as murabahah, or an ordinary bargained sale.

A - There is no legal impediment to taking payment from a client in return for actual consultation presented to the bank in regard to the study and evaluation of projects for mudarabah, musharakah, ijarah, etc. Services performed after a contract has been signed, however, will be shared equally by the client and the bank; except in regard to interest-free loans in which case all fees will be paid by the client alone after the contract has been signed.

A - There is no legal impediment to the bank's paying zakah from the accounts of its investors so long as it does so with the approval of investors who have authorized it in writing to deduct their zakah portions from their investment accounts; either from their profits or, if no profits are realized, then from the capital investment itself.

A - The Board sees no legal impediment to combining the capital from two or more mudarabah operations in a single account that is maintained in accordance with the Shari'ah of Islam, so long as the profits and losses are distributed in proportion to the percentage of each shareholder's investment in the mudarabah.

A - There is no legal impediment to placing a minimum on the daily balance in the conditions of the contract. If the balance falls below one hundred, the account will be treated like an ordinary current account because a musharakah may be dissolved by means of such a condition. A - It is lawful to transfer mudarabah contracts in the light of the legal principle which states that the agent-partner in mudarabah transactions may be engaged under the following conditions:.

A - Such an investment is not lawful, regardless of whether the deposit is kept in a current account or in an investment account. This is because the deposit is a the client's guarantee against payment and, if it is to be invested, it should be invested to the benefit of the client. A - There is no legal impediment of setting limits on the extent the bank is willing to Finance a client in their original agreement, or to specify the percentages of profit for each and every murabahah deal when the bank receives the client's order, in the understanding that the order represents the clients pledge to purchase.

A pledge to buy, however, is not the same as a sale, but rather a binding agreement to but at the time the sale is ready to be completed. A - There is no legal impediment to an agent-manager's distribution of profits from long term mudarabah operations to investors, by periodically paying investors in the for of interest free loans guaranteed by their capital investments.

The periods for such payments may be determined by the agent manager. Furthermore the loans will be debited at the final accounting of the profits. A - It is legally required that whatever is specified as profit for both the bank the agent-manager and the investor the bank's client be for-mulaled precisely from the joint share, that it be known to both parties, and that it remain intact throughout the mudarabah operation period.

Such a determination, moreover, must be included in the mudarabah contract either at the time it is entered into or when it is renewed. A - It is not lawful for the working partner in mudarabah to sell his own possessions in exchange for mudarabah money that he is administering , regardless of whether those possessions are lar removed from the wealth of the mudarabah financed company operation , or actually considered a part of it.

It is likewise unlawful for the partner to buy merchandise from the mudarabah operation for himself. In both cases, however, if the financing partner gives special permission, the sale will be lawful. What is Mudarabah?

Mudarabah: The term refers to a form of business contract in which one party brings capital and the other personal effort. Mudarabah: In the theoretical model of Islamic banking Mudaraba has been suggested a technique which shall provide the basis for the Islamic re-organisation of commercial banking sector. Regardless of the amount financed, and regardless of whether the operation is profitable or not? Back to Top Q - Where an Islamic Bank owing to its position in the international banking community, undertakes mudarabah operations in partnership with several other banks and financial institutions, some of which are Islamic and some of which are not.

And that the bank serves as agent-manager for the group, using the funds they invest to purchase goods and then sells them by means of murabahah, such that the bank authorizes an international firm, as its agent, to purchase goods on behalf of the bank by means of a murabahah sales contract with that company.

Is this permitted under the Shariah?

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