Mudharabah

In Mudharabah, the Islamic bank contributes funds, and the client contributes expertise and works to execute a potentially successful project. Profits are distributed in percentage agreed beforehand. The bank shall bear any loss if the client is not negligent or in violation of the terms. Mudharabah can cover one deal, several deals, or a specified period of time up to a specified ceiling.

The Practical steps of Mudharabah:

1. Establishing a Mudharabah project

The bank: provides the capital as a capital owner.

The Mudharib: provides his effort and expertise for the investment of capital in exchange for a share in profit agreed upon.

2. The results of Mudharabah

The two parties calculate the earnings and divide profits at the end of Mudharabah. This can also be done periodically in accordance with the agreement and legal compliance.

3. Payment of Mudharabah capital

The bank: Recovers the Mudharabah capital it contributed before dividing the profits between the two parties because profit is protection to capital. In case of agreement to distribute profits periodically before the final settlement it must be on account until the security of capital is assured.

4. Distribution of wealth resulting from Mudharabah

• In case of loss, the capital owner (the bank) bears the loss.
• Profits are divided between the two parties in accordance with the agreement between them with observance to the principle "profit is protection to capital".

AREAS OF APPLICATION 

Mudharabah is considered to be an important mode by the Islamic banks in their relationship with the depositors who tender their moneys to the bank as capital owner. This money is invested by the bank as Mudharib on the basis of profit sharing according to specific pre-agreed raties.

The Islamic banks use this product to finance capable professionals such as physicians, engineers, traders or craftsmen. The bank provides required finance as a capital owner in exchange for a share in the profit to be agreed upon.

It is worth noting that this mode carries high risk for the bank because the bank delivers capital to the Mudharib who undertakes the work and management and the Mudharib is held responsible for loss only in case of negligence. The Islamic banks take necessary precautions to minimize risk and to ensure better execution of Mudharabah transaction.

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