Amuslima has once featured Al Wadiah as a way to safely keep your money in the Islamic bank. Another way is by using the Mudharabah contract. This contract is usually applied to savings account
and time deposit account.
What is Mudharabah and how does it work?
Mudharabah is a profit sharing agreement between two parties, the investor (rabb-ul-mal) and the entrepreneur (mudharib). The rabb ul mal provides some money to the mudharib to be managed in a business. The business can either be restricted, in which the business is specified by rabb-ul-mal (mudharabah muqqayyadah) or unrestricted (mudharabah muthlaqah), in term that the mudharib can manage the fund given to run any proper business (which are halal, of course).
Therefore, as any other business, profit and loss may incur. If loss is incurred, then the investor will bear all the loss. The mudharib, having run the business at his/her best, shall not carry any losses except the fact that his/her effort has been gone in vain. Hence, it is necessary that the mudharib has goodwill in managing the fund.
In the case of profit, it shall be shared in an agreed proportion in the beginning of the contract, but not a predetermined amount. And there is no particular law governing how much is the proportion, it is only by the consent of the two parties.
In matter of time limit, there is a difference in opinion among the Muslim jurists about whether a period of mudharabah contract can be specified. However the difference relates only to the maximum time limit of the contract, while the opinion on fixed minimum time limit has not been found in the books of Islamic Fiqh. It appears from general principles that no such limit can be fixed. However, in modern business circumstances, it will be difficult for the mudharib to bring fruits if the investment is withdrawn in the beginning of an enterprise. Therefore it should be agreed in the beginning of the contract by both parties, that in entering into mudharabah, no party shall terminate the contract during a specified period, as long as it is not violate any principle of Shariah.1
Mudharabah Contract in Islamic Banking
In practice, Islamic banks offer mudharabah mutlaqah contract in the forms of both saving account and time deposit account. Since the saving account is usually only short term investment, i.e. the customer can withdraw money anytime s/he wants, banks only offer small proportion to their customer. For instance, a bank offer a proportion of 20:80, which means the investor/customer gets 20% and the bank/mudharib gets the 80%.
For the time deposit account which requires a customer to bind his/her money to a certain period of time, banks offer higher portion of profit sharing for the customers. The longer the period, the higher the proportion, e.g. for a 12-month placement, a bank offers 60:40 proportion of profit sharing.
The 60% means that the investor will get 60% of the PROFIT the bank earned from managing the fund s/he placed in time deposit for 12 months NOT 60% from the FUND placed. Hence, the amount of profit received will always be different every specified period (usually a book month) and only known after trade has been done, as opposed to the fixed amount of interest given up front by the conventional bank. Why? Because as normal trade goes, a business will always face ups and downs and so will its profit. It is also important to note for profit sharing, that a trade or transaction has to occur first, before profit can be distributed.
This method is fair for all partners in the following way. First, let see a simplified calculation example for a product of time deposit with 12 month period placement. An Islamic bank I offered for example 60:40 per year, and a conventional bank C offered 5% per year interest for that product. For a $1,000 placement, every month Bank C would give $50 interest. While in bank I, the profit would differ each month depending on how much the profit they earned from managing the fund. For instance last month Bank I earned $100 profit from $1000 the fund, so it would give the customer a $60 profit in the beginning of current month. When it earned $80, it would only give $48, and so on.
Then, further we can see that, Bank I did not hold back the profit nor did it suffer by giving more than it has earned to its customer. On the other hand, if Bank C for instance generated the same amount of profit from the same amount of money, then it held back the $10 profit that could be earned by the customer. While when it only earned less, it must “dug” somewhere in its asset to pay for the $2 deficit, or even more took a loan from other banks.
That is only 1 simple example. Imagine that it is what happened nowadays in the current world. Can we see now, how the “so-called” perfect conventional banking system collapsed? Unfortunately there is not many Islamic bank in a country and in the world compared to the conventional ones, so it can not make a big difference. Yet, we see now, many countries also countries like UK and Switzerland, where Muslims are minority, start building some basic structure in Islamic finance.
That is about profit. What about loss? Will we incur any losses when we are bound in the mudharabah mutlaqah contract with an Islamic bank? The answer is simple. Would a bank (or any other legit business) lose customer and go bankrupt? As aforementioned, with goodwill, an Islamic bank would give its best effort to manage the fund invested by its customers, insya Allah. However the answer is still yes, we could incur any losses if we bound ourselves in mudharabah contract, as mentioned above.
The mudharabah contract also allows bank to become the rabbulmal and invests in halal businesses and hopefully will lead halal enterpreneurs in real economy to develop more, instead of investing into dubious business such as derivatives, swaps, futures, options, etc.
1. An Introduction to Islamic Finance, Muhammad Taqi Usmani
Sources:
www.bankinginfo.com.my
Commercial banks websites
