Investment Based Financing

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Mudarabah

Mudarabah is a contract between a capital provider (rabbul-mal) and the bank (mudharib) under which the rabbul-mal provides capital to be managed by the mudharib and any profit generated from the capital is shared between the rabbul-mal and the mudharib according to a mutually agreed profit sharing ratio (PSR) whilst financial losses are borne by the rabbul mal provided that such losses are not due to the mudharib‟s misconduct, negligence or breach of specified terms

 It is categorized into two types

  • Unrestricted Mudarabah – a contract in which the rabbul mal permits the mudharib to manage the mudarabah capital without any specific restriction,
  • Restricted Mudarabah – a contract in which the rabbul-mal imposes specific restrictions on the mudarabah terms. The rabbul-mal may specify conditions restricting the mudharib such as the determination of location, period for investment, type of project and commingling of funds

Musharakah

 It is a partnership between the bank and one or more parties to conduct investment or trade. In Musharakah Profit will be distributed according to the pre-agreed terms while losses are shared strictly in the proportion of investment of partners