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.

Comments

  1. Willy Wonka's Chocolate Pants

    Whilst I might be drifting from your point a tad I have read about The Mudaraba contract before in terms of purchasing a property and it made me laugh – Under Shariah, the making or receiving of interest-bearing
    loans is prohibited so when buying the house the Strictly Shariah abiding Muslim actually buys the property from the bank with a pre-determined mark up (usually a minimum of 20% of the purchase price) now correct me if i’m wrong but there really is fek all diffirence between this and buying the normal way as either way the bank is making thier interest!

    You say Tomato…..

  2. Fair point, and it is true, much of what happens in Islamic Finance is essentially not about the end result but about the process, in that respect it isn’t the end that justifies the means but rather than the means are central to the end.

    The final result is meant to be similar, it is modelled not as an alternative universe but as an alternative route which complies with Qu’uran directive to get a the result via different means.

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