1

ACCOUNTING FOR ISLAMIC FINANCIAL

INSTITUTIONS

ISF 3106

Madam Ros Aniza binti Mohd. Shariff Prepared by: ‘Ain Najihah binti Ahd Suhami 1320930 Nurul Nadia binti Mohamad Hanipah 1324592 Syed Muhammad Al Wafa bin Syed Ahmad Afandi 1217181 Nur Ilyani binti Zulkefli 1320802 Nahdia binti Roslizar 1327704

TITLE: MUDHARABAH

(Section 1: Group 2)

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TABLE OF CONTENT

NO TITLE PAGE

1 Abstract 3

2 Introduction 4

3 Literature review 5-6

4 Methodology 7-8

5 Analysis 9-10

6 Findings 11-13

7 Conclusions 14

8 References 15

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1. ABSTRACT

Purpose: The purpose of this paper to introduce readers with deep understanding on

Mudharabah, its applications in the real world, and some issues that may related to this

contract.

Methodology: The paper consist of several outcomes from our survey

Findings: Mudharabah contract has been aware by people today especially among the

students however several improvements need to be done to the system that has been

practiced nowadays. The role of Rabbul Mal also quite be questioned in the survey

whereby there is only Rabbul Mal who responsible on the loss that have been occur to the

business. Comparatively, Musyarakah is much more high demand instead of Mudharabah

Research limitations: The paper is only conceptual, issues and theories and ot does not

aim to examine the new solution for the product itself. However, the paper might be

useful to develop hypothesis for future research.

Practical implications: The contract of Mudharabah nowadays has widely provided by

most of banking institutions. This paper will also be a good introduction to practitioners

in the banking sectors.

Originality: Mudharabah seems to have several arguments on its moral and ethical

attributes. These matters require several specialize skills in managing the quality and

reliability of the users towards Islamic finance product.

Keywords: Mudhrabah

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2. INTRODUCTION

Mudharabah is one type of partnership in Islamic Finance. It consist of two parties which

known as Rabbul Mal as capital provider and Mudarib as entrepreneur. Mudharabah contract

only involve 1 parties as the one who in charged in managing the business. Rabbul Mal will

contribute 100% capital for the business. Mudarib is the one who should involve in business

while the Rabbul Mal cannot involve in the business at all. The profit ratio will be shared by both

of the parties. However the loss only will be beared by Rabbul Mal only.

Mudhrabah contract is not the same as Musyarakah. Musyarakah is different from

Mudharabah with several elements. First, the capital contribution for Musyarakah comes from all

the partners, while Mudhrabah the capital contributor is a sole responsibility of Rabbul Mal.

Second, all partners in Musyarakah can involve in business management activities while in

Mudharabah contract, only Mudarib is allowed to manage the business. Thirdly, the loss occur

by Musyarakah partnership will be under all partners responsibilities in contrast from Mudhrabah

where only Rabbul Mal will responsible on the loss from the business exceptional for the

negligence made by Mudarib. Forth, the liability of partners in Musyarakah is normally

unlimited. Therefore if the liabilities of the business exceed its asset, the business goes in

liquidation, all the exceeding labilities shall be borne by all partners. Contrary from Mudharabah,

the liability of Rabbul Mal is limited to his investment, unless he has permitted the Mudarib to

incur debt on his behalf.

There are two types of Mudharabah. Firstly, restricted Mudharabah whereby Rabbul Mal

can specify a kind of business that Mudarib will run later on. Mudarib only allowed to use the

contribution from Rabbul Mal based on specification that has been stated. The second type of

Mudharabah is unrestricted Mudharabah whereby the Rabbul Mal did not specify the type of

business that the Mudarib can operate. It is also known as Mudharabah al-Mutalaqah.

In terms of the profit distribution, both Rabbul Mal and Mudarib will share the profit based

on pre-agreed ratio. The Shari'ah does not restrict or specify proportions to be distributed

between the parties, leaving it to the best judgement of the two independent parties.1

1 https://cief.wordpress.com/2006/04/02/mudarabah/

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3. LITERATURE REVIEW

Mudharabah is the partnership contract in Islamic finance. Technically, mudhrabah is a

partnership in profit whereby one party provides capital known as capital providers (rabbul mal)

and the other party provides labor called mudarib. Some jurists like Hanafi and Hanbali scholars

used the term mudhrabah and the other term used by Maliki and Shafii’i scholars are qirad. The

classical scholars used another terms but carry the same meaning of mudharabah are qirad and

muqaradah. Both terms are derived from the word qarada which means to cut off. This is simply

because the capital provider cut off some of his money to be utilized by the mudarib in business

transactions.

The legitimacy of a mudharabah is valid and legal contract among the scholars of all

known fiqh schools. This view is based on the evidences from the Al-Quran, Sunnah and ijma’.

There are several verses stated that indicates of the legality of mudhrabah such as the the

following sayings of Allah the Almighty in Surah Al-Muzammil ayah 20:

“… and otherd who travel in the land seeking of the bounty of Allah”

Although the above verses do not directly state the legality of mudharabah, they have

been interpreted to include those who travel for the purpose of trading and seeking permissible

income2. In Sunnah, it is clear proof on the legality of the mudharabah is the act of the Prophet

Muhammad S.A.W who himself used to work as mudarib for Saydatina Khadijah. As for qiyas,

the analogy on the validity of Al-Musaqah that have made by some Muslim scholars which is Al-

Musaqah is an agricultural partnership by which the owner of an orchard turs over a specified

number of fruits-bearing trees to another who will tend them in exchange for a specified portion

of the total yield of the trees not the yield of certain trees. Therefore, according to some Muslim

Scholars, both of the contracts which are mudhrabah and musaqah are needed by human beings3.

Furthermore, there are some important conditions which are related to the subject matters

on mudharabah. Before that, on mudharabah, there is three pillar or arkan namely sighah( from

the contrct), the contracting parties which are rabbul mal and mudarib and the subject matter

which deal with capital, work and profit. The majority of Muslim scholars are of the opinion that

2 Al-Kasani, Bada’I Al-sana’I, 6/79 3 Al-Kasani, Bada’I Al-sana’I, 6/89

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the mudhrabah capital shall be in the form of cash money. The properties including movable and

immovable properties cannot be serving as the capital of mudhrabah due the fact that there is

ghrarar which is uncertainty in their value consequently. It will lead to uncertainty in profit and

loss calculation. In contrast, there is some other scholars such as Ibn Abi Layla and Al-Azwa’i

are the opposite opinion which the capital need not be in terms of cash money only, however, the

value of the property must be determined and agreed upon the day of the contract is concluded.

In Malaysia, according to Bank Negara Malaysia on the mudharabah contract, the capital

of mudarabah may be in the form of monetary or non-monetary assets. Monetary assets of

different currencies shall be valued according to an agreed currency at the time of signing the

mudarabah contract. Capital in the form of non-monetary assets which may include intangible

assets shall be valued based on the valuation determined by a third party which may include

authoritative bodies, experts or values, or as agreed upon by the contracting parties at the time of

conclusion of contract4.

Thus this show that the mudharabah contract is legal and permissibility because stated in

al-quran, hadith and other consensus opinion. Next, the capital must be present during the

conclusion of the contract and the value of the capital must be clearly and so that the capital can

be delivered to the mudarib. It is very important that all relevant key players in the Islamic

finance industry, be it the industry people, the users or even the consumers who use the Islamic

Finance products, have the knowledge on how these products (mudharabah) are structured and

the concept behind the application.

4 Bank Negara Malaysia (2009) Draft of Shariah Parameter. Reference 3: Mudarabah Contract (SPR3), Kuala Lumpur.

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4. METHODOLOGY

There are few techniques that being used in doing research about Mudharabah. There

materials and equipments that being used are primary data and the library search. Primary data is

mainly in form of questionnaire that consists of 6 basic questions about Mudharabah. The sample

data’s were collected using questionnaire method using the operational stage where by the test is

to know the perspective and perception people toward Mudharabah and it implication in life. The

questionnaire consisted of six multiple choice questions. The method of sampling was doing

random population of people in the social media, Facebook.com in which the respondents were

made anonymous. The data collected by the questions generated using Google form was then

presented in the form of bar chart and pie chart. With the randomization of respondents, it is able

to know the scope of people that know what is exactly is Mudharabah. Using thismethod it is

easily to test results and to replicate the experiment as it used to focus more upon findings rather

than questioning how, and why.

Our research utilize quantitative data collection tools to ensure it fulfil the purpose of our

research. We were conducting a written survey with several question about Mudharabah.

Basically, our question is more focus about the awareness of public in using Mudharabah for

their investment purposes. It is because, Mudharabah is an alternative for conventional

investment account. It fulfil the Shariah guidelines and enhance the development of Islamic

finance industries. The survey form was distributed through online google form and we get the

response from 207 respondent. All respondent have a different background and level of

knowledge.

Briefly, in the survey form, there was 6 question related to mudharabah. First question is

about the respondent’s awareness of Mudharabah. Next, our survey also need a data about which

bank in Malaysia offer Mudharabah. Malaysia also known as Islamic countries, so the level of

alertness for their citizen about Mudharabah is important for our survey. Our questions also need

to know the respondent’s opinion about their knowledge for profit sharing in Mudharabah.

Another question is to know the public preference in using either mudharabah or musharakah.

All of this question will come out with a statistic and present in a useful form.

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Our next methodology in doing this research is referred to the primary sources. It was a

key for our research. We need to know the legitimacy of mudharabah from the perspectives of

Al-Quran, Sunnah and Ijma’. It can strengthen our research to know the validity of using

mudharabah in the growth of Islamic Finance industries. We also referred to certain information

from authorized website like Bank Negara Malaysia. It is because they have a certain

information about the relevant of mudharabah for our industries.

Using the data gain from the questionnaire and evidence from the articles, the result is the be

channel into simple findings that allow what the actual happen in term of Mudharabah in

Malaysia and also to know how extensive people toward the actual Mudharabah concepts.

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5. ANALYSIS

Based on the survey that we had done, we found that most of the respondents use to

subscribe on Mudharabah product base through Bank Islam and Bank Muamallat. Bank Islam

Malaysia Berhad today had introduced an innovative Mudharabah-based account that gives their

customer the opportunity to win cash prizes.

Al-Awfar was introduced to the Malaysian market in June 2015 in line with

implementation of the Islamic Financial Services Act (IFSA 2013). Besides, Al-Awfar account

offers an unrestricted account which is a type of investment account where mandate is given to

the bank to manage portfolio of Financing Accounts. Basically, their fund investment strategies

it to invest in a secured retail financial asset which is currently the underlying asset is a House

Financing Portfolio of the bank where the customers are able to withdraw at anytime.

The bank will allocate investors’ funds in an existing performing House Financing

Portfolio that is generating stable income and their targeted for retail investors are for those

investors with either a short or medium term investment horizon, investors who require a

portfolio of Syariah compliant investments as well as investors with low-risk tolerance.

Furthermore, income is to be distributed on a monthly basis but the profit will be calculated on a

daily basis and the income is based on the performance of the House Financing Portfolio.

AL-AWFAR INVESTMENT ACCOUNT

PROFIT & LOSS STATEMENT FOR THE 3RD QUARTER 2015

JUNE 2015

RM

JULY 2015

RM

AUGUST 2015

RM

SEPT 2015

RM

INCOME FROM

FINANCING

47, 927 1,383,780 2,654,328 2,729,938

DIRECT ESPENSES - - - -

ALLOWANCE FOR

IMPAIRMENT ON

FINANCING

(3,878) (10, 629) (202,415) (184,850)

TOTAL INCOME 44,050 1,277,151 2,451,912 2,545,088

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ROA 6.25% 6.20%

ROI 0.12% 0.12%

From the profit and loss statement above, we can see that the income from financing

increased for every month which also indicates that mudharabah- based product is getting

popular and can be accepted by Malaysian.

While in Bank Muamalat, bank will carry out business using the capital and the profit

will be shared between the two according to a pre-agreed ratio which currently is 60:40 where

60% for the depositor and the 40% is for the bank. Besides, the actual profit will be known on

maturity date based on the prevailing gross rate of return for the contracted PSR and the

minimum amount will be RM5, 000,000. There are two types of mudharabah products that Bank

Muammalat offer to their customers which are Mudharabah General Investment Account (GIA)

and Mudharabah Special Investment Account (SIA).

In Bank Muamalat, the income financing also keep increasing for every year as

significant growth in mudharabah shows the success of implementation. It also enjoys high

profitability.

Nevertheless, to relate with the review, the contracting parties that involve with the

mudharabah are rabbul mal (capital provider), mudharib and the subject matter which deals with

the capital, work and profit. Immovable property cannot be serving as the capital in Mudharabh

contract as it is uncertainty in their value consequently. It will lead to uncertainty in profit and

loss. Bank Negara stated that, the capital for mudharabah contract may be in the form of

monetary or non monetary asset. However, monetary asset of different currencies must be valued

according to the agreed currencies at the time of signing the contract.

Lastly, mudharabah contract is legal and permissible because it is stated in al-Quran,

hadith as well as other consensus opinion. It is really important for the bank that practice

Mudharabah conract to ensure that both parties follow all the rules and the principle must be in

line with Syariah. They also should avoid from involving into contract that is prohibited by

Islam.

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6. FINDINGS

Response from the public is very important for the contribution of this research. The

survey was made to 207 respondents from various background and level of knowledge. This

survey was more focus on the public awareness of mudharabah as one of Islamic finance

facilities. Based on pie chart below, it shows that only quarter of them did not recognize what

mudharabah is all about. Hence, almost 75% respondent familiar with this product. It gives a

good sign for the development of Mudharabah in finance industries.

Next, Mudharabah is a product that usually offered by bank to the client. In Malaysia, not

all banks offered Mudharabah especially conventional bank. So, survey was made to the

respondent to know which bank is known to offer this product. The respondent’s result shows

that most people know mudharabah is offered by Bank Islam. Next bank that was famous to

offer this product is Bank Mualamat. The other bank that offer mudharabah is Maybank, RHB

bank and Hong Leong Bank. We can conclude that public more preferred to go Bank Islam to

apply for mudharabah and this bank may have better offer for the client that can attract the

clients. From our analysis above, Bank Islam offer Al-Awfar as one of its strategies to attract

customer and some benefits were clearly explained in the analysis. Public usually will choose

Yes, I know

No, I don't

RESPONDENT'S AWARENESS OF MUDHARABAH

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bank that can give better advantages for them because it involve large amount of money to be

invest and they hope for a good return.

Furthermore, Malaysia is one of countries that have high populations of Muslim in the

world. It is an appropriate for them to have their own Islamic economics system to make sure all

transactions is shariah compliance. Nowadays, lots of bank have provide Islamic finance product

in order to support Islamic finance industries and give better alternatives to client. However, we

have made a survey to know whether the public really know about mudharabah as on the the

Islamic products. The results from respondent’s opinion in pie chart below shows that most of

Malaysians not yet really known about this product with percentage of 50.2%. It gives a small

difference from respondents that say Malaysians know about it. Islamic finance is still new to the

society. It can be conclude to us that even though the development of Islamic Finance is still new

compare to conventional finance product, it get high demand from the public. However, the data

acts as a booster for us to promote and doing awareness to the public for the presence of

Mudharabah. We should explain more about its benefits and advantages. We believe that the

progress is ongoing and it is the responsibilities of each muslim to spread it due to our goals in

Maqasid Shariah.

0

10

20

30

40

50

60

70

80

90

Bank Islam Bank Muamalat Maybank RHB Bank Hong Leong Bank

Which bank is known to offer Mudharabah(%)

Which bank is known to offer Mudharabah

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As a conclusion, we have found that Mudharabah is one of Islamic Finance product that

currently known to the public. Many people are aware of this product but it still need to be

enhance for a better system. Many things can be improve to make sure Mudharabah is keep on

demand and can give benefits to the public. More research can be done to ensure the system still

develop. It is the responsibilities of every muslim to spread, promote, use and research about

mudharabah because we want to achieve the maslahah.

No, 50.2Yes, 49.8

DOES MUDHARABAH REALLY WELL KNOWN IN MALAYSIA

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7. CONCLUSIONS

Based on this paperwork, we believe that several improvement need to be include in the

system of managing Mudharabah. Mudharabah is already a well-known among students and

users but the implication must do more research to ensure the system still develop and further

improving. It is the responsibilities of every muslim to spread, promote, use and research about

mudharabah because we want to achieve the maslahah.

According to a Islamic banking website,5 there is a suggestion to re-organize the

commercial banking sector. Although it has been known around by people, it has not made much

progress on the asset side of balance sheet, although the liability side is actually accept the

element of Mudhrabah fund.

The issue easily arise on the non existance of loss sharing elements. There is only one

party who supplies the source of funds and another party provide his expertise and management

skills.

However, we must believe that all the major legal schools are agreed on legitimacy of

Mudhrabah transactions. In Quran, there is existance of the word Mudharabah used in verse that

indicate the lawfulness of trade.

And others who go forth in the earth, seeking the bounty of the Almighty.6

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."

Several things need to be improved in this contract especially in the trust issue. Above

all, we gain a lot from this paperwork. The survey that has been done only for one day. Praise to

Allah that we able to achieve 207 respondents within 24 hours. We would love to express our

gratitude to Allah for ease the project being done smoothly.

5 http://www.islamic-banking.com/mudarabah_sh_ruling.aspx 6 (Quran,73:20).

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8. REFERENCES

1. https://cief.wordpress.com/2006/04/02/mudarabah/

2. Al-Kasani, Bada’I Al-sana’I, 6/79

3. Al-Kasani, Bada’I Al-sana’I, 6/89

4. Bank Negara Malaysia (2009) Draft of Shariah Parameter. Reference 3: Mudarabah

Contract (SPR3), Kuala Lumpur.

5. http://www.islamic-banking.com/mudarabah_sh_ruling.aspx

6. (Quran,73:20).