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What is Mudarabah? Kind of partnership One person gives money to another for investing Investor ------> Rab-bul-Maal Or Mudarabi Fund Utilizer -------> Mudarib Rabbul Maal---------> No Right in Management
Mudarabah v/s Musharakah1. Investment2. Participation in Management3. Loss Share In Partnership Rabbul Maal Mudarib4. Liability5. Appreciation in the value of the assets
Types of Mudarabah Al Muqayyadah ( Restricted Mudarabah) Al Mutlaqah ( Un-Restricted Mudarabah)
Profit Distribution in MudarbahAt the Beginning : Definite Profit Ratio agreed by Mutual Consent No Particular Proportion has been prescribed by theShariah May agree on different ratio of Profit 40 % Mubarib,60% Rabbul Maal or viseversaLump sum Amount of Profit Not Allowed:Capital ---------------> Rs. 100,000Profit ----------------> Rs. 10,000 of the MudaribProfit 2 --------------> 20 % of Capital of Rabbul Maal
Profit Distribution in Mudarbah Loss in Some Transactions and others in ProfitOffset the Loss FirstRemainder Distributed
Termination of Mudarabah Can be terminated at any time Give Notice to other PartyAsset in form of Cash ---------> Distribute accordingto the agreed RatioAsset in other Form ------------> Mudarib may sell itliquidate them , Distribute it
Combination ofMusharakah & Mudarabah In Mudarabah, Fund Provider -----> Rabbul Maal Mudarib add Capital, if agreed with MudarabiCombination:Rabbul Maal -------------------> Rs. 100,000Mudarib Add Own -------------> Rs. 50,oooProfit Distribution Mudarabi: Certain Percentage of Profit as Mubarib Another Percentage of Profit as Sharik
PROJECT FINANCING “Financer want to finance whole project” Mudarabah & Musharakah both easily adoptedMusharakah: Investment comes from both sides Management both responsibilityCombination: Management responsibility of one party Investment comes from both
PROJECT FINANCINGWithdraw One Party from Musharakah Other party want to continue Purchase the shares.Financial Institution Don’t want remain partner forever Sale of share as one unit is lack of liquidity Financer divide into smaller unit and may sell it
SECURITIZATION OF MUSHARAKAH Big Project , Huge Amount Required Limited No. of people cannot afford to financeMusharakah Certificate: Each certificate represent his proportion ofownership in the asset of musharakah. Negotiable Instruments Buy or Sale in Secondary Market
SECURITIZATION OF MUSHARAKAHNOT ALLOWED Certificate Trading other than Par Value Assets are in Liquid Form Cash , Receivables or Advances dueExample:No. of Share -------------------------> 100 SharesValue of Share ------------------------> 01 MillionTotal Worth of Project --------------> Rs. 100 Million Nothing Purchased by this Money Not Allowed Sale other than Par Value Money Exchange with Money, excess side ----------> Riba
SECURITIZATION OF MUSHARAKAHExample:Musharkah ProjectNon - Liquid Assets ----------> 40%Liquid Assets -----------> 60 %Face Value of Share ------------> Rs. 100If Sold Higher PriceSold Price -------------------> Rs. 110It Represents:Liquid Assets ------------------> Rs. 60Non – Liquid Assets ----------> Rs. 50 ( Previous was Rs. 40 )
SECURITIZATION OF MUSHARAKAH Sold Less than Rs. 60 Not Allowed Rs. 60 Liquid Assets ( Cash , Receivables etc) Money Exchange with Money, Low / High side ----> Riba
Financing of a single Transaction Mudarabah & Musharakah both may be UsedImport Financing : Letter of Credit( L/C )without Any Margin ---------> MudarabahWith Some Margin ------------> CombinationExpiry of Term Imported good are not sold Importer may himself purchase the share of Financer Pre-Agreed Price or Market Price
Financing of a single TransactionExport Financing : Exported has a specific order from abroad Export goods Price is known Easily Calculate Expected ProfitFinance on the basis of Mudarabah & MusharakahPre-Agreed Ratio of Profit on Export BillIn Order to Secure Financer Himself , Put Condition: Export goods with Full Conformity, will be responsibility of exporter If Some Disturbance found, exporter will be responsible only( Mudarabah ) If Some Disturbance found other than Negligence, All Partners bear theLoss ( Musharakah )
SHARING GROSS PROFIT ONLY Financing on the basis of MusharakahProblem: Difficult to valuate All Assets & Depreciation /Appreciation CostSolution 1 : Pay Agreed Rent to Client of All fixed assets(Machinery , Building ) from Musharakah fund Remain distribute , according to agreed Ratio
SHARING GROSS PROFIT ONLYSolution 2 : Gross Profit will be distributed Higher Profit Ratio of Client Gross Profit Means Only Direct Expenses will bededucted from the Sales ( Material, Labor, Electricity)
RUNNING MUSHARKAH ACCOUNTON THE BASIS OF DAILYPRODUCTS
RUNNING MUSHARKAH ACCOUNTMusharakah: Opening Running A/c Deposit & Withdraw Amount any time Profit on Average BalanceMusharakah Rulings: % for Management % for Investor Loss , same as investment proportion Average Balance per day --------------> Profit
RUNNING MUSHARKAHACCOUNTArgument:Why share Profit when other Party, during a period had no Moneyinvested in the Business ?Example :A & B Agreed ----------------> MusharakahEach Contribute --------------> Rs. 50,000When A didn’t invest his money into Join PoolEarn Profit --------------> Rs. 10,000 on Rs. 50,000Distribute --------------> Agreed RatioMusharakah Contract Made: Subsequent Transaction effected Regardless, Whose Money Utilized
WORKING CAPITAL FINANCEMusharakah: Contribute in Cash or Non-liquid Value of Business Assets ---------> Working partnerProfit : On the Basis of Value of Business Exceed Profit of working Partner ( 70% 30%)Termination or Expiry: Purchase share of Financer
Risk of Loss:Argument:“Musharakah is more likely to pass on losses of thebusiness to the bank . This loss will be passed on todepositors “Answer: Study the feasibility If Business is not profitable, Refuse it Diversified Musharakah Portfolio
DISHONESTY Argument: not paying any return to the financiers Claim that it has suffered a lossSolution:1. well designed system of auditing2. Profit on the basis of gross margins only3. Punitive Step: Unable to avail any facility from theBank.
Secrecy of the Business: it may disclose the secrets of the business to thefinancier,Solution may put a condition that the financier will notinterfere with the management affairs, and he will not disclose anyinformation about the business to any person without prior permission of the client.
Client’s Unwillingness to Share Profits: clients are not willing to share with the banks the actualprofits of their business. passed on to the tax authorities and Clients’ taxliability increases.Solution:clients need to be convinced and persuaded that borrowingon interest is a cardinal sin,The governments should also try to appreciate the fact thatifrates of taxation are reasonable and if tax-payers areconvinced that they will benefit