Mudaraba Deposits – Sharia’a compliant finance

The Mudaraba contract is essentially a contract partnership in Islamic Finance, the Prophet (PBUH) forbid riba or interest, and for that reason the provision of capital for borrowers is generally not performed as a function of debt, but rather as a function of an equity investment.

In this way a Mudaraba relationship can exist with a depositor, but instead of getting interest the Islamic finance institution will invest it on their behalf. However, unlike western banking accounts, a Mudaraba account does not have capital protection as it would be in breach of the profit and loss sharing rule of sharia’a compliant finance. That is a big downside when you compare it to conventional banking.

This brand of deposit account is interesting because it has no guarantee, and yet people willingly sign up to it because it is handled in a responsible manner, shareholder funds are combined with depositor funds to make investments, and these are not securitized or sold on which encourage the probity and diligent underwriting of the investment. Conventional banking could learn a great deal from this.

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