Mudarabah in Islamic Banking - Admission/Application Essay Example

It is the means by which bonding is done between two participants such that one of them is the financer and the other is the manager or the mudharib. While the investor or the RabbulMal is responsible for any losses made in the transaction the Mudharib suffers only the loss of the efforts put by him. The bank often acts as the Rabbul Mal or the capital provider who provides capital to the entrepreneur. The funds provided by the bank can be used by the entrepreneur upon his discretion. The profit attained by using rabbul mal’s funds would be divided amongst the investor and the user with respect to a pre-decided profit sharing agreement.

While the bank provides the investment, the entrepreneur is responsible for all the skill and the expertise incorporated within the project. The part of profit that is attained by the bank becomes his right only by virtue of the fact that he is the sole entity responsible for any losses that incur within the business. This relationship of profit sharing by the bank and the entrepreneur continues until the loan is not paid back in full by the entrepreneur. The role of Bank in the type of Mudharabah discussed above may be demonstrated in figure 1.

Figure 1: Mudharabah Apart from the role of the bank as highlighted in the above text it is imperative to understand that acting as a Rabbul Mal is not the only role a bank can perform with respect to the Mudharabah transaction. The bank can even act as a Mudrib or the manager/entrepreneur with the investing party or external unit acting as rabbulmal. The series of processes in this form of mudarabah, where the bank acts as a manager may be described in the steps below: Customers place deposits in the bank by undertaking an agreement of the Mudharabah.

The funds submitted by the customer/rabbulmal are invested by banks in different ventures which necessarily have to be Shariah (Islamic law) compliant. These investments may or may not be another mudharabah agreement in which the bank indulges as a rabbulmal with other entrepreneurs. The investments done by the bank are returned with income/profit. The rabbulmal’s share of profit is paid to the customer on a monthly basis with respect to the percentage of share which was decided at the time of the undertaking of the mudharabah agreement.

Thus, it may well be ascertained that a bank may act on both sides of a Mudharabah system, both as an entrepreneur and a rabbulmal/investor. BANK AND MUDHARABAH TYPES The bank may indulge in two types of Mudharabah with the customer. The first types in conditional while the second is unconditional as narrated below: Mudharabah with Restrictions- Often termed as Mudharabah Muqyyadah. In this type of agreement the bank is liable to impose certain restrictions upon the customer in the running of the business venture.

Mudharabah without restrictions- This type of Mudharabah agreement between the customer and the Bank does not enjoin any type of restrictions that may have been imposed by the bank on the customer. MUDHARABAH IN DAILY TRANSACTIONS AND MARKETPLACE In the normal daily routine Mudharabah may help individuals in the form that an individual may be able to purchase an asset such as a vehicle or a house by taking money from bank as a loan on the Mudharabah basis. The asset is kept as a mortgage with the bank until the customer returns the complete amount of loan to the bank.

As per an agreement made at the time of taking of the loan a payment of profit is made to the bank every