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Homework answers / question archive / Q3
Q3. You are the manager of an Islamic Bank and a client with a really attractive business idea approaches you for financing. The business is completely Shariah based and there is no element against Islamic rules in that. Upon scrutiny and detailed analysis of the case it was revealed that the chance of loss and risk is a bit higher in that business than the usual other clients for other businesses with the same bank. Customer agrees for a partnership type solution for this financing on a Prfit/Loss sharing basis. There are two solutions for the bank to offer to this customer i) Enter with the client in a Musharakah Contract with the bank acting as a dormant/sleeping partner ii) Enter with the client in a Mudarabah contract.
particular situation of the customer suggests that in this case only one of the above two contracts is safer and suitable for the bank. Discuss which one should the bank go for and why would that be suitable as compared to the other one? (10 Marks) (Not more than one Page)
Well allow us to first discuss about Musharakah Contract and Mudarabah contract.
Musharakah is analogous to a venture . It allows share participation by the parties, who invest a project in agreed proportions in either cash or kind. They each comply with accept a percentage of the returns and risk, sharing the profit and loss of a project in proportion to their investment. A participant providing management or technical expertise can also charge a fee.
Mudarabah contract may be a business partnership contract, and mudarabah in Islamic banking could also be defined as: “A partnership, where one partner invests during a business venture, while the opposite manages the business”. The person investing is named Rabb-ul-maal, the one that manages the business is named Mudharib, and therefore the investment is named “Raas-ul-Maal”.It is divided into two types: Restricted and Un-Restricted.
Restricted Mudarabah:
It is a contract, during which investor restricts the actions of working partner to particular location, or to a specific sort of business.
Unrestricted Mudarabah:
In this contract, investor permits the working partner to administer the fund, with none restrictions.
Well we sess the bak can get into Mudarabah contract which allows him to pre fix the profit share and have control on the funds. this enables the working partner to consider business and specialise in growth .
The mutal consent allows bank only in profit not in management, which is that the best choice for bank as their is restricition under Musharakah contract which says The ratio of profit for every partner must be determined in proportion to the particular profit accrued to the business, and not in proportion to the capital invested by him.
