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International Journal of Business 
Management & Research (UBMR) 
ISSN(P): 2249-6920; ISSN(E): 2249-8036 
Vol. 4, Issue 2, Apr 2014, 81-92 
© TJPRC Pvt. Ltd. 




THE CONCEPT OF MUDARABAH INVESTMENT DEPOSITS 

RUSNI BT HASSAN 1 & SHAFI'I ABDUL AZEEZ BELLO 2 

'Associate Professor, Department of Islamic Law HUM, Institute of Islamic Banking and Finance, Tamil Nadu, India 
Postgraduate & Research, Ahmad Ibrahim Kulliyyah of Laws HUM, International Islamic University, Malaysia 



Islamic finance is emerging as a rapidly growing part of the financial sector in the Islamic world as it has become 
a global phenomenon. Moreover, both Islamic and western countries have been embraced it. The mudarabah contract 
refers to an agreement made between a capital provider and another party who acts as the entrepreneur. Therefore, this 
paper attempts to analysis the concept of mudarabahin investment deposit. The characteristics of Investment deposit in 
both banks was briefly explained while its classification critically analysis. Furthermore, the mudarabah deposit and its 
categories mainly clarify. Also, the essential elements, condition of mudarabah and calculation of profit were elicited. 
In addition, the basis from primary and secondary sources was given to authenticate the practice of mudarabah. 
The explanation of guarantee returned in mudarabah, administrative costs, indirect expenses, modus operandi as well as 
difference between mudarabah and musharakah were shortly enlightened. It concluded with results. 

KEYWORDS: Mudarabah, Investment, Deposit 

JEL Classification: G21 _ G28 _ K12 _ K41 

INTRODUCTION 

Investment deposits represent the case when owner of funds for seek a return on their funds, and are willing to 
spare these funds for an agreed period. Moreover, is the third category of deposit facility and is for those who keep money 
for investment motives. Customers who have idle funds usually want better returns. 1 Investment deposits are Islamic 
banks' counterparts of term deposits or time deposits in the conventional system. They are also called (PLS) Accounts or 
Participatory Accounts. However, they can be distinguished from traditional fixed term deposits in the following manner: 

• Fixed term deposits in the conventional system operate on the basis of interest, while investment accounts in 
Islamic banks operate on the basis of profit sharing which is a straightforward (mudarabah). Mudarabahis where 
the provider of the funds, 'the saver' entrusts their money to an expert the investor, 'the bank' so that they can 
make a profit from it. Instead of promising depositors a predetermined fixed rate of return on their investment, the 
bank tells them only the ratio in which it will share the profits with them. How much profit each depositor earns 
depends on the final outcome of the bank's own investment. 



1 Lee Mei Pheng & Detta Ivan Jeron, Islamic banking & Finance Law, (Selangor: Pearson Longman, 2007), at 67. 
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ABSTRACT 



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• While fixed term deposits are usually distinguished from each other based on their maturities; investment deposits 
can be distinguished based on maturity as well as based on purposes, as it is possible to give special instructions to 
the bank to invest a particular deposit in a specified project or trade. 2 

Characteristics of Investment Deposits 

The main characteristics of investment deposits can be described as follows: 

• Investment accounts can be opened by individuals or companies either in domestic or foreign currency if the bank 
is allowed to operate in foreign exchange. 

• Deposit holders do not receive any interest. Instead, they participate in the share of the profits or losses. 

• Usually these accounts are opened for a specific period, e.g. three months, six months, one year or more. 

• The return on investment is determined according to actual profits from investment operations of the bank and 
shared in an agreed proportion by depositors according to the amount of their deposits and the period for which 
they are held by the bank. As an accounting practice, the amount held in the account is multiplied by the period 
for which it has been employed and profits are distributed on a pro rata basis. 

• Generally speaking, depositors do not have the right to withdraw from these accounts as is customary in time 
deposits in conventional banks. 

However, withdrawals may be made under special circumstances with the depositor forfeiting his share of the 
profit for the withdrawn amount. 

• Usually, banks insist on a specified minimum amount to open and maintain the investment account. 

• Most banks issue an investment certificate to depositors stating the terms and conditions of the deposit. 3 

Classical Investments Deposits 

Islamic banks have been experimenting with different kinds of investment deposit schemes in order to satisfy the 
needs and requirements of different kinds of investors. Some of these are discuss below, but it is necessary to mention that 
most of these innovations are bank-specific. Hence, none of the different kinds of investment deposit may be found in any 
given bank. 

Joint/General Investment Deposit 

The most prevalent practice among Islamic banks is to establish some kind of investment pool in lieu of fixed 
term deposits. The investment pool takes the form of a general investment account in which investment deposits of 
different maturities are put together. These are not tied to any specific investment project but are utilised in different 
financing operations of the bank. Profits are calculated and distributed at the end of the accounting period, which is either; 
three months, six months or one year. Another variation of the investment pool is the establishment of a "Joint Investment 
Account" which is defined by the Jordan Islamic Bank as "cash deposits received by the bank from persons desiring to 

2 Millar Roderick, Islamic Finance A guide for international business and investment Anwar Habiba, Edn.,) 

(London:GMB, 2008), at 33. 

3 

Ahmad Ausaf, Contemporary Practices of Islamic Financing Techniques, (Jeddah: Islamic Research and Training 
Institute, Islamic Development Bank, Saudi Arabia, 1993), at 9. 

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participate with the bank in multilateral and continuous investment and financing operations, whereby such deposits will 
receive a certain percentage of annual profits realised in accordance with the conditions of the account under which they 
are entered". 4 

Furthermore, Section 13(A) of the Law governing the Jordan Islamic Bank states that cash deposits in investment 
accounts opened by the bank shall constitute part of the total cash resources of the bank to be used in financing operations 
and shall be designated as "Joint Investment Account. Joint investment accounts of the Jordan Islamic Bank are further 
classified into savings accounts, notice accounts and fixed term accounts. 5 It is also necessary to mention that profits and 
losses relating to financing from joint investment accounts are kept separate as an accounting practice from other income 
and expenditure resulting from other activities and services offered by the bank. 6 

Limited Period Investment Deposit 

Investment deposits for a limited period are valid for one year and renewable only by specific instructions from 
depositors. The Bahrain Islamic Bank and the Kuwait Finance House operate these deposits. The depositor and the bank 
accept investment deposits under this scheme for a specified period, which is mutually determined. The contract terminates 
at the end of the specified period but profits are calculated and distributed at the end of the financial year. 7 

Unlimited Period Investment Deposit 

These investment deposits differ from limited period deposits in that the period is not specified. Deposits are 
automatically renewable unless a notice of three months is given to terminate the contract. No withdrawals or further 
deposits are permitted in this kind of contract, but customers are allowed to open more than one account. The profits are 
calculated and distributed at the end of the financial year. 8 

Specified Investment Deposit 

Some Islamic banks have developed an investment deposit scheme with specific authorization to invest in a 
particular project or trade. In this case, only the profits of this particular project are distributed between the bank and its 
customers according to mutually agreed terms and conditions. In the case of specified investment accounts, Islamic banks 
function as an agent on behalf of depositors. This is evident in the provisions of the Jordan Islamic Bank, which declares 
that the bank will accept cash deposits into specific investment accounts from persons desiring to appoint the bank as agent 
for investment of these deposits in a specific project or in a specific manner. On the basis, that the bank will receive a part 
of the net profits realized but without liability for any losses which are not attributable to any violation or default by the 
bank. 9 

Investment Deposit Based on Notice 

Investment deposit facilities based on notice are only available at the Islamic Bank Bangladesh and Jordan Islamic 
Bank. This deposit facility differs from other deposits based on duration since depositors are not allowed to withdraw their 

4 The Jordan Islamic Bank for Finance and Investment Law, (2 nd edn.,) (Amman: The Jordan Islamic Bank, not dated), at 4. 

5 Section 13(b) of the Jordan Islamic Bank Law, at 10. 

6 Ibid, Section (18), at 12. 

7 Ausaf, Ahmad, Development and Problems of Islamic Banks, (Jeddah: Islamic Research and Training Institute, Saudi 
Arabia, 1987), at 10. 

8 Ibid., at 18 

9 Jordan Islamic Bank Law, at 4. 

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deposits without submitting a notice prior to withdrawal. Customers of Islamic Bank Bangladesh must give seven days' 
notice and ninety days' notice is required at the Jordan Islamic Bank. 10 

Investment Deposit with Stable Income Flow 

The goals at the depositor's end in this case are tow fold: security of their capital, and stable-rather, fixed-income 
flows. These twin goals may be achieved as follows: 

• The deposits can be invested in Shari 'a/z-compliant fixed income securities, such as those based on leasing. 
Alternatively, funds can be utilised in relatively low-risk Shari 'a/z-compliant investments. There may also be the 
possibility of having a diversified investment portfolio to minimise risk. 

• The contract between a bank and a depositor may stipulate withholding and reinvestment (by the bank) of any 
excess profits due in favour of the depositor. Moreover, the contract may have provision for temporary loan from 
the bank to the depositor to cover any shortfall when the profits eared fall short of the prescribed amount. Such a 
loan can be adjusted against the profits realised in subsequent periods. 11 

MUDARABAH DEPOSIT 

The mudarabah contract can be defined as a 'aqad between two persons that consists of the asset from someone 
to another for doing business by sharing the profit and loss according to certain conditions. The main purpose of 
mudarabah contract is cooperation between the owner of the asset that can be used as a capital but does not have the skills 
to do the business, with someone who has the skills but does not have the capital. Through mudarabah contract, the skills 
and the wealth can be benefited. Form the finance perspectives, those with capital are known as surplus units and those 
with skills are as dearth units. This surplus unit and dearth unit can work together to make full use of these funds. 12 

When the principle of mudarabahis applied, the bank becomes an entrepreneur or 'mudarib' and the savings 
account customers becomes investors or 'sahib al-mal\ or 'rabbul al-maV banks then employ the deposited funds into 
various business activities and share any profit which based on a pre-agreed ratio. In the case of loss, the entire loss will be 
borne by depositors. 13 Like current accounts, various elements of contracts are applied between the bank and the savings 
account holders. These elements include specification on the type of contract between the bank and the customer, 
procedures relating to deposits and withdrawals and regarding rewards distributed to customers. 

Similarly, some of the features imposed upon current account facilities are applicable to savings accounts. For 
example, the bank is entitled to establish a minimum balance of deposit required to open an account, the types of customers 
acceptable andother operational procedures. A minor sometimes is allowed to open a savings account with the bank but 
account is opened in the name of his or her parent or guardian. 14 



LEE Mei Pheng & DETTA Ivan Jeron, Islamic banking & Finance Law, (2007), at 67. 
n 'Ali Salman Syed & Ahmad Ausaf, (ED.), Islamic Banking Finance: Fundamentals and Contemporary Issues, (Jeddah: 
Islamic Research and Training Institute A Member of the Islamic Development Bank Group, 2006), at 89. 
l2 Husniyati bt'Ali, Jaizah bt Othman & Hasbullah Bin Othman, Islamic Financial Services, (Shah Alam: Upena, 
Malaysia, 2008), at 71-2. 

13 LEE Mei Pheng & DETTA Ivan Jeron, Islamic banking & Finance Law, (2007), at 65. 



Impact Factor (JCC): 4.9926 



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The Concept of Mudarabah Investment Deposits 



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Categories of Mudarabah 

In term of the powers or authority given to the entrepreneur: Mudarabah may be categorised into two types: 

• Mudarabah Mutlaqah (Unrestricted Mudarabah). The bank has the freedom to utilize the funds without 
restrictions. (Without restrictions means the restrictions of mudarabah muqayyadah are not in force, not that the 
bank can invest in anything it likes). 

• Mudarabah Muqayyadah (Restricted Mudarabah). The bank is limited by how it can deploy the funds. 
Such limitations could be on the period of time, the type of business location or the kinds or service. 15 

Essential Elements of Mudarabah 

• The capital 

• Capital provider 

• Entrepreneur 

• Utilisation of funds 

• Profit 

• Contract - Offer and acceptance (ijab & qabul). 16 

Condition of Mudarabah Contracts 

The investment account normally operates under the contract of mudarabah (Trustee Profit Sharing). The bank 
will accept deposits from its customers who look for investment opportunities. It acts as the 'entrepreneur'. Both parties 
need to agree with the profit distribution or the sharing ratio. The customer does not participate in the management of the 
funds. In the event of a loss, the customer bears all the losses. Profits generated form the use of the customers' funds will 
be distributed according to the predetermined ratio. Only the distribution ration is predetermined and not the actual amount 
of return. The return will only be known upon maturity or the agreed ratio and not less. If the mudarabah venture results in 
a loss, the owner of capital bears the loss entirely, namely the amount invested or the principal amount. On the other hand, 
the entrepreneur does not get anything from the venture. 17 

Calculation of Profit 

Calculation of profit is as follows: 

Principal (P) x Time (T) x Rate (R) /1200 

Where: P = Capital by customer 

T = Period (Month) 

Rate = Monthly Rate of Profit 

15 Abdullah Daud Vicary & Chee Keon, Islamic Finance why it makes sense, (2010), at 124. 

I6 Saat Mohammad Khairi, Ramli Razli & Aminuddin Haryani,Zv/am/c Banking Practices from the practitioner's 
Perspective, (201 l),at 48. 



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Example 




Principal 


= RM10, 000 


Tenure 


= 9 months 


Rate 


= 4.00% p.a 


Profit 


= 10,000x9x4.0/1200 




= 300 



Interim profit is a profit given to an investment of 15 months and longer. The interim profit will normally be paid 
every 6 months. Profit due upon maturity is the Total profit less Total Interim Profit paid. 18 

Options Available Upon Maturity 

Upon maturity, the customer may choose either to come personally to the bank, write a letter of instruction or 
send a person bearing a letter of authority to renew or withdraw the deposits. The customers is given option whether to 
renew the principal and profit, renew the principal and withdraw the profit or to withdraw the principal and the profit 

Conditions for the premature withdraw are as the following: 

• For the amount of RM5,000 and above, profit has been made for at least 1 month; and 

• For the amount less than RM5, 000 and a minimum of RM5, 000, profit will only be distributed if the investment 
has been made for at least 3 months. 19 

The Basis of Mudarabah 

Majority of 'Ulama unanimously agree that mudarabah contract is permissible in Islamic law based on evidences 
form Qur'an, Hadith, and Ijma' as follows: 

Qur'an 

• ". . .and others travelling in the earth in quest of Allah's bounty". 20 

• "Then when the prayer is finished, then disperse through the land (to carry on with your various duties) and go in 
quest of Allah's bounty and remember Allah always (under all circumstances), so that you may proper 
(in this world and the Hereafter)". 21 

Based on the first verse cited above, the word (djlj^i) means permissibility to travel in managing wealth to seek 
the bounty of Allah (SWT). Whereas the second verse cited above generally refers to the command to humankind to 
disperse on the earth in effort to seek wealth and bounty provided by Allah (SWT), including by joint venture and trading. 
Even though these verses do not directly refer to mudarabah, both verses refer to permissibility of conducting business. 



Ibid., at 49. 
Ibid., at 49-50 

"Abdullah Yusuf 'Ali, English Qur'an Translation, 73:20. 
Qur'an, 62:10. 



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Hadith of Prophet (S.A.W) 

Reported by Solih bin Shu'ayb from his father, he said: Rasulullah (s.a.w) once said: there are three blessed 
things; deferred sale, muqaradah and mixing barley and wheat (for household consumption) and not for sale. 22 

The above hadith states three things, which are deemed as, blessed and one of them is muqaradah? 3 The term 
muqaradah originates from the word qiradh that is commonly used by scholars in Hijaz while 'Iraqi scholars termed it as 
mudarabah. Thus, muqaradah and mudarabahaie two synonymous terms having the same meaning. 
The word al- mudarabahis synonymous with two other 'Arabic terms, which are used to designate this contract: al-Qirad 
and al-Muqaradah. These three terms are interchangeable, there being no essential difference in meaning or connotation 
between them. 24 

The divergence in terminology was probably originally due to geographical factors. The terms al-Qirad and 
al-muqaradah apparently originated in the 'Arabian Peninsula, especially al-Hijaz, 25 while the term al- mudarabah was of 
'Iraqi provenance. 26 According to as-Sarakhsi, the term al- mudarabahis derived from the expression al-Darbfial-Ard 
(making a journey). This term is used because the agent-manager (al-Mudarib) has the right to claim the profit by virtue of 
his effort and work. Indeed, he is regarded as the investor's partner in in matters relating to the profit and capital used on 
the journey and for arrangements or ancillary expenses. 27 

Similarly, there were several traditions from the Prophet, which demonstrated his approval of this type of contract. 
The traditions attributed to the Prophet are an unequivocal endorsement and approval of those engaging in trade by means 
of al- mudarabahas follows: 

'Abd Allah bin Mas'ud, a prominent Companion of the Prophet, and al- 'Abbas bin 'Abd al-Muttalib, the uncle of 
the Prophet, engaged in mudarabah contract. The latter having obtained the Prophet's approval for the conditions he 
imposed upon his agent to whom heen trusted his money. 28 This seems to indicate that he permitted such practices, this 
permission amounting to his acknowledgment of the legality of al- mudarabah. 29 

Ijma '(Consensus of Jurists) 

It was reported that some of the companions of Rasulullah (s.a.w) invested property of the orphans based on 
mudarabah. 30 There was no dissenting view among them and it is considered as ijma'. 31 



Ibu Majah Muhammad Bin Yazid, Sunan ibnu Majah, (Beirut: Dar al-Fikr, 2003), vol. 2, at 768, Hadith No. 2289. 
23 Refers to Mudarabah. 

24 Udovitch, A.L., The Encyclopaedia of Islam (2 nd edn., 1980), vol. 5, at 130. 

25 A1-Qurtubi Abu 'Umar Yusuf Bin 'Abdullah Bin Muhammad, Kitab al-Kafi fi Fiqh Ahl al-Madinah al-Maliki, 
(Murtani Ahid Walid Madik, Mohammad Mohammad Ed.,) (Riyadh: Maktabah Al-Riyadh al- Hdithah, 1978), at 771. 
26 A1-Zurqani Muhammad Bin 'Abdul al-Baki Bin Yusuf, Shar' al-Zurqani 'ala Muwatta' al-Imam Malik, 
(Beirut: Dar- Ihya' al-Turath al-'Arabi, 1997), vol. 3, at 345. 

27 A1-Sarakhsi Shamsu Deen, al-Mabsut, (Beirut: Dar al-Ma'rifah, 1993), vol. 20, at 18-19. 
28 Ibn Hazm, 'Ali Bin Ahmad Bin Saeed, al-Ihkam fi Usui al-Ahkam, (Cairo: Dar al-Hadith, 2005), vol. 2, at 95. 
29 A1-Kasani, Abu Bakri Bin Mas'udi, Kitab Bada'i' al-Sana'i' fi Tartib al-Shara'i', (Beirut: Dar al-Kutub al-'Ilmiyah, 
1986), vol. 6, at 79. 

30 A1-Zuhaili, Wahabah, Al-Fiqh Islami wa Adillatuh, (2 nd Ed, 1985), vol. 4, at 838. 

31 Bank Negara Malaysia, Shari'ah Resolutions in Islamic Finance, (Malaysia: CBNM, 2 nd Ed., 2010), at 25-26. 



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Mudarabah Investment Certificate as Security 

The need for security in a particular financing is common irrespective whether it is for conventional or Islamic 
financing. Various assets are used as security including tangible assets and financial assets such as mudarabah investment 
Certificate. In this regard, some questions out which as following: 

• Whether mudarabah Investment Certificate may be used as security. This is due to the opinion that mudarabah 
investment certificate shall not be used as security or financing provided by financial institutions since there are 
contradiction features between mudarabah and rahn contracts. In rahn contract, if the mortgagee used the 
mortgaged asset (with consent mortgagor), the mortgagee shall guarantee the mortgaged asset from nay 
depreciation in value, loss or impairment. Such guarantee is considered as contradictory to mudarabah contract 
because its capital shall not be guaranteed by the mudarib; and 

• Whether the mudarabah investment certificate may be used as security in conventional financing. 
This may be resolved as following: 

• Mudarabah Investment Certificate may be traded and used as security or the subject matter of the mortgage; and 

• Mudarabah Investment Certificate may be used as security only for Islamic financing and not for conventional 
financing. If the certificate is used as security for conventional financing, it falls under the responsibility of the 
customers themselves and it is beyond the accountability of the Islamic financing institution. 32 

Basis Ruling 

The permissibility of mudarabah Investment certificate as security is based on the justification that mudarabah 
and rahn contract are two different and separate contracts. The utilisation of mudarabah capital by the Islamic financial 
institution is for investment and is based on the first contract, which is mudarabah and not rahn contract. Thus, there is no 
issue on the need of the Islamic financial institution to guarantee the value of the mortgaged asset. This situation is seen as 
similar to the usage of share certificate as security whereby the mortgagee need not necessarily guarantee the market value 
of the share mortgaged to him. In addition, the mudarabah Investment Certificate is an asset that has a value. As such, it 
may be traded and used as a security based on the following fiqh maxim: "Every asset that can be sold can be 
charged/mortgaged." 33 

Guaranteed Return in Mudarabah 

Investment deposits are modeled after the classical contract of mudarabah. As such, the depositor as the 
rabb-al-mal is exposed to the possibility of both profits and losses and the possibility of guaranteeing the nominal value of 
deposits or guaranteeing a minimum rate of return does not exist. However, local law may mandate such a guarantee 
because of this practical requirement, the question of guarantee has been repeatedly subjected to scrutiny and as a result, 
one may observe a wide range of views in this matter. One view asserts that such a guarantee could be provided by the 
state as a third party. Another view calls for a radical departure from the classical mudarabahm the light of wide spread 
fraud in dealings. Still another view calls for a special "parental" treatment of "small depositors". There is yet to be a 

32 Id., 60, at 27. 

33 Ibn Qudamah Abu Muhammad 'Abdullah Bin Muhammad, al-Mughni, (Riyadh: Dar 'Alim al-Kutub, Sauid Arabia, 
1997), vol. 6, at 455. 

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consensus on such concessions for a deposit modeled after mudarabah. A suggestion is to offer special asset-linked 
deposits where the assets are debt (murabaha and ijara) based and yield a predetermined income. Deposits, which receive 
a known share of predetermined income, can now be viewed as fixed-income or guaranteed-income deposits. This view 
fortunately has no detractors, but also no takers so far among the banking community. A general guarantee on all 
investment deposits on the other hand seems to be too susceptible to riba to gain acceptance. 34 

Administrative Costs in Mudarabah Deposit Account 

Islamic financing institution in it capacity as a fund manager does not permissible to charge administrative cost on 
depositors as investor for mudarabah investment deposit account. Based on mudarabah principles, that the fund manager 
shall manage all duties related to the investment of the fund according to legal maxim of 'urf which is (a matter established 
by custom is like a matter established by a legal text). He is not entitled to charge any fee on service or incidental 
administrative cost since it is part of his responsibilities as mudarib. Instead, any additional amount to cover the 
administrative cost should have been taken into deliberation in defining the pre-agreed income-sharing ratio among the 
contractor parties. 

Indirect Expenses in Mudarabah Fund 

Thus, indirect expense should be considered as deductible costs from mudarabah fund. Indirect expense include 
overhead expenses, staff salaries, depreciation of fixed assets, settlement expenses, general administrative expenses, 
marketing and IT expenses. The 'Ulamah have different opinion that will explain as follows: 

• Majority of scholars, among others, Imam Abu Hanifah, Imam Malik and Zaydiyyah is of the opinion that a 
mudarib is entitled to the cost of long distance travelling (musafir) expenses and not recurring cost from 
mudarabah profit (if any), and if there is none, he may take from the capital just to meet his needs for food, drinks 
and his clothing; also 

• Ibrahim al-Nakhai', al-Hasan al-Basri 35 and al-Qasim bin Muhammad 36 were of the opinion that the maintenance 
of the mudarib and his work were to be taken from the capital in a degree that is just and reasonable. It was agreed 
by Qatadah that such maintenance was to be taken from the capital. 37 

• Imam Shafi'i view that a mudarib is not allowed to charge any cost either direct or indirect expenses as the 
mudarib is already entitled to a certain percentage of the mudarabah profit; 38 and 

• In order to avoid cost manipulation and to safeguard the interest of depositors, indirect expenses shall not be 
deducted from the mudarabah fund since such cost should have been take into account in the determination of the 
pre-agreed profit sharing ration. 



" Mohammed, Obaidulla, Islamic Financial Services, (2005), at 55. 
35 A1-San'ana 'Abdul ar-Razaq, al-Musannaf, (1983), at 247-48. 

36 Sahnun Bin Saeed, al-mudawwanah al-Kubra li li-Imam Malik bn Anas. (Beirut: Dar al-Sadir, 2005), vol.5, at 93. 
37 Id., 66, at 247-50. 

38 A1-Zuhaili, Wahabah, Al-Fiqh Islami wa Adillatuh, (1985), vol. 4, at 843. 

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Rusni Bt Hassan & Shafi'I Abdul Azeez Bello 



• On the other hand, indirect expenses should be depend on the basis of 'Mrftijari of the country, if the indirect 
expenses considered deductible cost from mudarabah fund, in a country is permissible because it does not 
contradict any Shari'ah principle. Moreover, if it does not considered deductible in specific country it also 
permissible, based on legal maxim that is a matter recognised as custom amongst merchants is regarded as if 
agreed upon between them (al-Ma 'rufBayna al-Tujar kal-Mashrut Baynaum). 39 

MODUS OPERANDI 

MOM S Off RAMS 




■0- 



Customer 
Depositor 



/^"^ PiTE STME >T/\_ 
( ASSET J 



g 

F.07:r 



PRCFIT 




* 





j j Negative 

Figure 1 



Activity 



Depositor and Bank discuss terms of mudarabah; Depositor provides funds to Bank; 
Bank invests funds in assets and projects and manages its operations; 
Business generates positive or negative profits; 

Profits if positive are shared between Depositor and Bank as per a pre-agreed ratio; 

Profits if negative are absorbed by Depositor; effectively bringing down the value of the asset created with its 
investments and the value of the deposit. 

Difference between Mudarabah and Musharakah' 40 

• In mudarabahonly Rabul-maal invests. While all partners invest in musharakah. 

• Rabbul-mal has no right to participate in the management that is carried out by the Mudarib only. However, in 
musharakah all partners may participate in the management of the business and can work for it. 



: Majallah Al-Ahkam, Article 44. 

40 The term Musharakah refers to a financing technique adopted by Islamic banks. It is an agreement under which the 
Islamic bank provides funds, which are mingled with the funds of the business enterprise and others. All providers of 
capital are entitled to participate in the management but not necessarily required to do so. The profit is distributed among 
the partners in pre-determined rations, while the loss is borne by each partner in production to his contribution. 



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The Concept of Mudarabah Investment Deposits 



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• Only Rabbul-mal suffers loss because the Mudarib has worked with due diligence. On the other hand, all partners 
share the loss to the extent of the ratio of their investment. 

• The liability of Rabbul-mal is limited to his investment unless he has permitted the Mudarib to incur debts on his 
behalf. Nevertheless, the liability of the partners is normally unlimited. If the liabilities of business exceed its 
asset and the business hoes in liquidation, all the exceeding liabilities shall be borne pro rate by all partners. But if 
the partners agree that no partner shall incur any debt during the course of business, then the exceeding liabilities 
shall be borne by that partner alone who has incurred a debt on the business in violation of the aforesaid condition. 

• The goods purchased by the Mudarib are solely owned by Rabbul-mal and the Mudarib can earn his share in the 
profit only in case he sells the goods profitably. However, as soon as the partners mix up their capital in a joint 
pool, all the assets become jointly owned by all of them according to the proportion of their respective investment. 
All partners benefit from the appreciation in the value of the assets even if profit has not accrued through sales. 41 

CONCLUSIONS 

It is true that investment mudarabah deposits are risky, as there is no capital protection on safety and certainty on 
returns. This is because the mobilized under the profit-loss sharing system (PLS). Moreover, trustee partnership based on 
mudarabah is a mode of financing through which the customer provides capital finance for a specific venture indicated by 
the bank. The customer, called rabb-al-mal is the owner of the capital and the bank entrepreneur, called mudarib, is 
responsible for the management of the business and provides professional, managerial and technical expertise for initiating 
and operating the business enterprise or project. Profit is shared according to a pre-agreed ratio. Losses if any are entirely 
absorbed by the capital provider- the customer may be of two types- restricted or unrestricted. In a restricted mudarabah 
(mudarabahal-muqayyada) the customer or the financier may specify a particular business in which investments may be 
undertaken. Mudarabah may also be an unrestricted one (mudarabahal-mutlaqa); in which case the mudarib may invest 
the capital provider in any business he deem fit. 

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92 Rusni Bt Hassan & Shafi'I Abdul Azeez Bello 

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