Day-Four : Islamic Financing modes (Equity based, long term, short term)

‘’Islamic Banking Professional Development Program”

(IBPD)

A five-day module for Islamic banking professionals

 Agenda

• Musharakah (partnership financing )

• Diminishing Musharakah ( joint ownership)
• Mudarabah (trust financing )
• Deposits in Islamic banks
• Profit and loss distribution
• Pool management
 Financing Needs of a client

Islamic Financing Modes

Partnership
Sale Based Rental Based
Based

- Diminishing - Mudarabah
- Salam
Musharakah - Musharaka
- Istisna
Sale and Lease Back
 Islamic Modes of Financing

Islamic Modes of financing

- Mudarabah ‫المضاربة‬ - Shirka ‫المشاركة‬ - ‫السلم‬ - ‫االستصناع‬

Salam Istisnaa
Restricted

Unrestricted
Permanent
Declining
Working
Islamic Modes of Financing
Shirkah / Musharaka
Shirkah / Musharaka
 Shirkah / Musharaka
• The word sharikah is used in the literal sense to mean mixing or mingling.
• Sharikah or Partnership implies an underlying idea of mixing share in such a way
that one of them cannot be distinguished from the other.

• In its technical sense, sharikah or Musharaka signifies a particular relationship

that exists between contracting parties to participate in a property/asset without
business intention or in a business to generate profit.

• Only reason of profit entitlement of partners is sharing of capital of Musharaka.

 Musharaka

Partnership is one of A joint enterprises It is an ideal Musharakah may be

the main formed for alternative for the used for:
transactions in all conducting some interest based • Long-term Finance.
• Investment
societies since the business in which all financing with far
Banking;
advent of Islam. This partners share the reaching effects on
• Project Financing
constitutes, profit according to the economy.
• Private Equity
therefore, a practical an agreed ratio Placement
consensus for the while the loss is • Redeemable capital
permissibility and shared as per the investment.
validity of ratio of investment
partnerships
01 02 03 04
 Nature of Musharakah
Non-Binding:
➢ By nature, Musharakah is a non-binding contract. This means that any partner has the
right to terminate or exit the partnership at any time, provided they give due notice to
the other partners.
➢ However, scholars allow modern binding partnerships.
Binding:
➢ Binding Musharakah refers to a partnership agreement where the partners are legally
bound to remain in the contract until its completion.
➢ However, a binding Musharakah can be terminated prematurely, but only under specific
conditions agreed upon by all partners (Exit Clause) or due to valid reasons such as
insolvency, or mutual consent etc.
 Types of Musharakah
Al Inan )‫(العنان‬
Shirkat-ul- Shirkat-ul
Aqd Amwaal
)‫(شرکۃالعقد‬ )‫(شرکۃ االموال‬ Al
Mufawadah
)‫(المفاوضۃ‬

Al Inan )‫(العنان‬
Shirkat-ul-
Aamaal
Shirkah )‫(شرکۃ‬ )‫(شرکۃ االعمال‬ Mufawadah
)‫(المفاوضۃ‬

Shirkat-ul- Al Inan )‫(العنان‬

Wujooh
)‫(شرکۃ الوجوہ‬
Mufawadah
compulsory )‫(المفاوضۃ‬

Shirkat-ul-
Milk
)‫(شرکۃ الملک‬ voluntary
 Shirkah / Musharaka

Shirkah

Shirkat-ul-Milk Shirkat-ul-Aqad

Joint ownership of two or more persons in a Joint venture of two or more persons
particular property with out any with commercial intention.
commercial intention.
 Difference Between
Shirkat-ul-Aqd and Shirkat-ul-Milk
Shirkat-ul-Milk Shirkat-ul-Aqd
1. It is a contract that can be established 1. It is a binding contract always established
with or without mutual agreement. through mutual agreement.
2. It creates joint ownership of an asset 2. In this the parties intend to share profits
without the intention to earn profit. earned from the Shirkat asset.
3. Each partner is stranger with respect to 3. Each partner acts as an agent for the
other’s share. others.
4. Both the profit and losses will be 4. Profit will be distributed as per agreed
distributed according the ratio of ratio and loses according to investment
ownership. ratio.
5. Dissolution happens through the 5. Dissolution depends on the terms of the
division of the jointly-owned asset contract & mutual consent of the parties.
 Musharaka
Basic conditions
 Musharaka
Rights of partners

Deprived
Every partner has right to take part in management
unless he expressly withdraws this right and opt for
nonworking status

No partner can be deprived from (1) share in profit, (2) Management

share in assets

No partner has priority over other partner in (1) claim

on assets and (2) claim on profit No Guarantee

No Priority
Any term that provides guarantee from one partner to
other of capital, part of capital, profit or part of profit
is invalid
 Capital of Mushraka

1. It should be known, ascertained, and available at the time of contract.

2. The capital of Musharakah should be in the form of cash.
3. Capital paid in different currencies should be valued in the currency of
Shirkah.
4. In case of Share capital in a Musharakah is in the form of commodities:
➢ The market value of the commodities shall determine the share of the
partner in the capital.
5. Capital should be under the disposal of the manager.
6. Capital can be equal or varying among the partners.
 Management of Musharaka

✓ Each partner has the right to take part (manage) in Musharakah

management.

✓ The partner may appoint a Managing partner with mutual

consent.

✓ One or more partners may decide not to work for the Musharakah
and work as a Sleeping partner.
 Sharing Musharaka Profit
➢ It is not allowed to specify a fixed remuneration to a partner of Musharaka who
manages funds or provides some form of other services, such as accounting.
➢ However, it is permissible to give him a greater share of profit than he would receive
solely on the basis of his share in the partnership capital.

➢ The ratio of profit distribution must be agreed at the time of execution of the contract.
It must not link with capital ratio.

➢ The ratio must be determined as a proportion on the actual profit earned by the
enterprise.

➢ Sleeping partners cannot get more percentage than their capital share.

➢ No guarantee can be given by the partners for the payment of Principal or Profit.
 Sharing of Loss in Musharaka
➢ As a matter of principle the loss has to be shared according to the
ratio of capital contribution;

➢ Partners are not allowed to adopt any other mechanism except the
mechanism that ensure distribution of loss among partners on pro
rata basis

➢ Any other arrangement, even agreed upon by partners, will be invalid

and void.

➢ It is not allowed to hold one partner or group of partners liable for

entire loss.
 Guarantee in Musharaka
- All partners in Shirkah maintain the assets of the partnership as a trust.

- No one is liable except in cases of breach of the contract, misconduct or proven negligence.

- Negligence will be considered to have occurred in any of the following three cases:
(i) A partner does not abide by the terms and conditions of thecontract;
(ii) A partner works against the norms of the concerned business;and
(iii) The established ill-intention of a partner.

- The profit or even capital of any partners cannot be guaranteed by the

co-partners.

- One partner can demand from another partner to provide any surety, security or pledge to
cover the case of misconduct and negligence.
 Musharaka termination
➢ Musharakah terminates in any of the following event:
Death of a partner during the Musharakah;
➢ Heirs of the deceased partner have option either to draw the share of
the deceased from the business, or to continue with the contract of
➢ Musharakah;
➢ If any one of the partners becomes insane or otherwise becomes
incapable of effecting commercial transactions, the Musharaka stands
➢ terminated.
➢ In normal course of business, every partner has a right to terminate the
Musharakah at any time after giving notice to other partner;
➢ In this case, if all the assets of the Musharakah are in cash form then they
will be distributed pro rata between the partners;
➢ In case they are mixed assets the partners may agree either on:
Physical distribution of the assets among partners; or
➢ Liquidation of the assets in open market (market price); or
➢ Internal liquidation i.e. purchasing from one partner share of other at
any agreed price between them;
 Musharaka termination
➢ In case a partner wishes termination of the Musharakah, while
others do not, this can be achieved by mutual consent;
➢ The partners who wish to run the business may purchase the
share of the other partner who wants termination;
➢ The reason is that the termination of Musharakah with one
partner does not imply its termination between other partners;
➢ However, in this case, the price of the share of the leaving partner
has to be determined by mutual consent;
➢ In case of dispute on the valuation of the share the leaving
partner may compel other partners on the distribution of the
assets;
➢ However, if they are not divisible then the partner may an
arbitrator to solve the dispute;
 Musharaka – uses in banking
➢ Musharakah is top preferable mode of financing recommended
by Islam;
➢ It one of the important factors that help in achieving ‘distribution
of wealth’ which is a key feature of Islamic financial and economic
➢ system;
➢ As Mudarabah, Musharakah is also not a vastly practiced Islamic
mode of financing by Islamic banks due to certain reasons;
However, Musharakah could easily be used as a vast mode of
➢ financing for almost every financial need;
➢ Below are some fields where this mode can easily be applied:
Long-term Finance;
➢ Running Finance (limited scope);
➢ Investment Banking;
➢ Project Financing;
➢ Private Equity Investment;
➢ Redeemable capital investment.
 Diminishing Musharakah
Diminishing or declining Musharakah is just a
Shirkat / Musharakah (partnership) between
two or more persons
The additional feature of DM is decreasing
ownership of one party through purchase by 01
one and selling by other

This differs from normal Musharakah, where 02

decrease in ownership is not the objective of
the contract 03
DM is possible in both Shrikah-tul-Aqd and
Shrikah-tul-Milk 04
 Diminishing Musharakah
Diminishing Musharaka is a combination of
different products/agreements

Diminishing Musharakah as a product could be

offered in several ways. Normally it is presented
with combination of Shirkat + Ijarah + Sale. 05
Several agreements take place in DM offering. 06
Shariah prohibits Combination of two agreements
in one, a well-known principle in Islamic finance
07
A basic rule for combined products is that every
agreement should be independent of the other 08
 Diminishing Musharakah
All other agreements should conform to this rule
that all undertakings/promises should also be
separate from each other.
Agreement for Shirkah should not be affected by
agreement for Ijarah and/or agreement for sale 09
It is necessary that this buying and selling should
not be stipulated in the partnership contract. In 10
other words, the buying partner is allowed to give
only a promise to buy. 11
It is not permitted that one contract be entered
into as a condition for concluding the other 12
 Featuring Diminishing Musharakah

Two partners purchase any asset (machinery/property) and their

intention is that one or both partners will use this asset
or they rent out their share and one Shareek undertakes to
purchase the share of other gradually.
Featuring Diminishing Musharakah
Featuring Diminishing Musharakah
Featuring Diminishing Musharakah
Featuring Diminishing Musharakah
 Featuring Diminishing Musharakah
Ownership Transfer
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
----------Time------->
Customer Bank
 Featuring Diminishing Musharakah
Monthly Rentals

Rs

----------Time------->
 Running Musharakah
• Running Musharakah product will enable the Customer to draw and deposit
funds against a Running Musharakah finance limit offered by Bank as an
alternative to Running Finance facility offered by Conventional Banks.
• Running Musharakah will be used to finance Customer’s Operating Activities
only based on the principles of Musharakah, in which the Customer and the
Bank will act as partners.
• The Bank and the Customer will enter into Musharakah, based on Shirkat-ul-
Aqd wherein:
➢ The Bank and the Customer will invest in the identified primary
Operating Activities (or any identifiable segment thereof) of the
Customer’s business, and
➢ Participate in the profits/ generated by the Musharakah as per agreed
Profit sharing ratio or participate in the loss generated by the Musharakah in
proportion to their respective Investment ratio.
 Application of Running Musharakah
Bank’s Running Musharakah Investment:
• The Customer may draw funds from this limit as and when required only for the
purpose of financing its operating activities and pay whenever it has excess
liquidity. Hence, Bank’s investment in this business will vary from time to time
subject to a maximum Running Musharakah Facility Limit.
• Bank’s Running Musharakah Investment will be equivalent to the average
outstanding balance of the Customer’s RM Account maintained with bank
calculated on daily product basis over the Musharakah Period.
Profit Ceiling:
The Profit Ceiling Amount will be equivalent to the product of Total Average
Musharakah Investment and the Target Profit Rate.
The Target Profit Rate may be specified for each Musharakah period and agreed
between the Bank and the Customer at the beginning of each relevant Musharakah
period. This Target Profit Rate will be linked to a well-known benchmark e.g. KIBOR.
 Application of Running Musharakah
Provisional Profit Payment:
➢ The Bank may receive a Provisional Profit Payment from the Customer based on the
Target Profit Rate at the end of each month/ quarter/ half year as agreed with the
Customer at the start of Musharakah period.
➢ However, any Provisional Profit Payment will be subject to final settlement on the basis
of actual Running Musharakah Profit computed on the basis of Customer’s books of
accounts/ financial statements for the relevant Period as soon as these are available.
Running Musharakah Profit:
➢ At the end of Musharakah Period, the Bank & the Customer will share the Profit
calculated at the end of Musharakah period after availability of monthly/ quarterly/ half
yearly/ Annual audited Accounts after adjusting for Indirect costs (such as depreciation,
rents, property taxes and repairs & maintenance) and direct expenses reported
elsewhere (such as Bad debts expense, diminution in value of stock, etc.).
➢ Adjusted Cost of Goods Sold/ Adjusted Musharakah Expense of the Musharakah Period
will be deducted from Net Sales, which will then be adjusted for Direct Expenses to
arrive at the Musharakah Profit.
 Application of Running Musharakah
Running Musharakah Profit:
➢ Adjustments for various indirect expense components need to be
determined/ agreed on customer to customer basis in consultation with
Shariah team before entering into the transaction as different customers
have different business models..
Loss Sharing:
➢ The Running Musharakah Loss (if any) shall be shared between the Bank
and the Customer in proportion to their respective Investment ratio.
 Summary for Musharaka
Capital Contribution:
➢ Each partner must contribute capital, which can be in the form of cash or non-cash
assets like property, equipment, or skills or goodwill.
➢ Capital can be contributed equally or unequally, depending on the agreement between
the parties.
Profit and Loss Sharing:
➢ The profit-sharing ratio must be agreed upon and specified at the time of contract
formation.
➢ Profit distribution can be unequal, but sleeping partners shall not take more than
investment ratios.
➢ Losses must be shared strictly in proportion to the capital contribution of each partner.
 Summary for Musharaka
Management and Decision-Making:
➢ All partners have the right to participate in the management of the venture.
➢ Alternatively, partners may choose to appoint one or more managing partners to handle
operations on their behalf.
Termination:
➢ The partnership can be dissolved upon mutual agreement, at a specified term, or when
the objective of the partnership is fulfilled.
➢ Any partner can withdraw from the partnership at any time, provided there is no clause
restricting such withdrawal.
➢ Partners can also opt to buy out each other's shares or terminate the partnership due to
certain predefined conditions.
 Musharaka vs Mudarabah

Mudarabah Musharakah
Investment from Rub-ul-Maal Investment from each partner

Mudarib is a working Partner Each partner can be a working partner

Rub-ul-Maal is a Non-working partner Any partner can be Non-working

& cannot work for Mudarabah partner at his own will

Only Rub-ul-Maal will bear loss if Each partner will bear loss according
not due to Mudarib’s negligence to investment ratio
Profit between Rub-ul-Maal & Mudarib Profit Ratio of a Non-working partner
will be according to PSR. cannot be more than investment ratio.
Mudarabah
 Mudarabah

A partnership whereby one party provides capital and the other party
provides Labor/Services.
• Investor is called “Rabb-ul-Maal” and
• The working partner is called “Mudarib”
• Investment is called “Raas-ul-Maal”.
 Mudarabah
Mudarabah Mutlaqah (Un-Restricted Mudarabah)

• No restriction from the Rabb-ul-Mal regarding investment in any specific sector/

business

• In this type of Mudarabah working partner can do any profitable business according to
its market norm.

Mudarabah Muqayyadah (Restricted Mudarabah)

• Business avenues/ sector specified from the Rabb-ul-Mal (Investor)

• Mudarib is bound to comply to these restrictions. However they should not unduly
constrain the Mudarib from general business operations.
 Capacities of Mudarib

AMEEN (Trustee)
WAKEEL (Agent) Mudarib will not be responsible for any loss in
business without his negligence.
Mudarib is bound to comply with the instructions of
Rub-ul-Maal as an agent / wakeel. SHAREEK (Partner)
In case of profit, Mudarib is partner in that
ZAMIN (Liable) businesses to the extent of his profit share.
If Mudarib do not comply with the instructions of
Rab- ul-Mal, he is liable for loss.
AJEER (Employee)
If Mudarabah ends then Mudarib is entitled to get
compensation as if he was an employee (Ujrat-e-Misl).
Mudarabah
Rules in Mudarabah
Mudarabah
 Mudarabah
Mudaraba Capital:
➢ The capital of Mudaraba should be in form of known cash as a
matter of principle;
➢ However, tangible assets could also be accepted if valued with
mutual consent.
➢ In such case the determined value of the assets will be the
Mudaraba capital;
➢ The Capital of Mudaraba should be clearly known to the
contracting parties and defined in terms of quality and
➢ quantity;
➢ The capital should be in hand, therefore, receivables (debt
etc.) can not be capital of Mudaraba;
 Mudarabah
Mudaraba Capital:

➢ The capital should be handed over to Mudarib;

➢ Simple segregation of funds for Mudaraba is not
enough;
 Mudarabah
➢ Mixing of funds by Mudarib
➢ The basic feature of Mudaraba is that the Mudarib performs only
business operations and does not add capital;
➢ The capital is provided by Rabbul Maal and the Mudarib is
responsible for the management only;
➢ But the Mudarib may also add capital into the business of Mudaraba
with permission of Rabbul Maal;
➢ In such cases Musharaka and Mudaraba are combined;
➢ For example, “A” gave to “B” Rs.100,000/- in a contract of Mudaraba.
B added Rs. 50,000/- from his own pocket with the permission of A;
➢ This type of partnership will be treated as a combination of
Musharaka and Mudaraba;
➢ Here the Mudarib may allocate for himself certain percentage of
profit as partner (Sharik), and at the same time he may allocate
➢ another percentage for his management and work as a Mudarib.
 Mudarabah
➢ More than one Rabbul Maal

➢ Mudaraba can be between two prsons: Rabbul Maal and

Mudarib;
➢ But Rabbul Maal may also be more than one;
➢ If a Mudaraba starts by provision of funds from one Rabbul
Maal and after the start Mudarib wishes to add some more
➢ funds from others, this would be allowd if Rabbul Maal
permits;
➢ In such case all funds providers (Rabbul Maals) are partners
among themselves;
➢ The share for Rabbul Maal will be divided among them as
per their contribution ratio;
 Mudarabah
➢ Termination of Mudarabah:
➢ The contract of Mudaraba can be terminated at any time by either of the
parties;
➢ This termination should be with consent of concerned parties;
➢ A notice to the other party is also sufficient if it was agreed at the time of
inception of Mudaraba;
➢ Termination of Mudaraba means that the Mudarib cannot purchase new
goods for the Mudaraba. However, he may sell the existing goods that were
➢ purchase before termination.
➢ If all assets are in form of cash and some profit has been earned on the
principle amount, it shall be distributed between the parties according to
➢ the agreed ratio;
➢ If the assets of the Mudaraba are in other form the Mudarib shall be given an
opportunity liquidate them and the actual profit may be determined after
➢ liquidation:
➢ If there is a profit, it will be distributed between Mudarib and Rab-ul-Maal.
If no profit is left, Mudarib will not get anything.
 Profit and loss Mudarabah
Unknown ratio or
ratio attributed to A lump sum
future settlement or settlement as profit
ratio linked with the is not allowed.
The profit sharing capital (in terms of
ratio should be x% of the capital) is
The contracting specific & of the not allowed and the
parties should profit expected to be transaction becomes
stipulate in the earned by the void.
contract the profit venture.
shares (in defined
terms) for each one.
 Profit and loss Mudarabah
Increase in value of
Mudaraba capital
before start of
business without any
The Mudarib shall efforts of Mudarib,
only be responsible will be considered
for losses if they part of capital and
Losses in Mudaraba
occur due to his will not be treated as
shall only be borne
negligence and wilful Profit.
by Rabb-ul-Mal and
misconduct.
not the Mudarib.
 Profit and loss Mudarabah

➢ Example

➢ If the capital is Rs. 100,000/- they cannot agree on a

➢ condition that Rs. 10,000 out of the profit shall be the share
of the Mudarib nor can they say that 20% of the capital shall
be given to Rab-ul-Maal. However they can agree that 40%
➢ of the actual profit shall go to the Mudarib and 60% to the
➢ Raab-ul-Maal or vice versa.

➢ If the business has incurred loss in some transactions and

has gained profit in some others, the profit shall be used to
➢ offset the loss at the first instance, then the remainder
profit, if any, shall be distributed between the parties
according to the agreed ratio.
 Mudarabah
➢ Scope of Mudaraba for Banking System:
➢ Mudaraba is second preferable mode of financing recommended by
Islam;
➢ It helps in achieving ‘distribution of wealth’ which is a key feature of
Islamic financial and economic system;
➢ Mudaraba as a mode of financing used by Islamic Banks for the
following purpose:
➢ Relationship of Islamic banks with depositors, depositors provide
deposits to bank as Rabb-ul-Mal, these deposits are to be invested
➢ by Islamic bank as Mudarib;
➢ Islamic banks sometimes use Mudaraba with some of their
customers;
➢ Islamic bank provides the adequate finance as a capital owner in
exchange of a share in the profit to be agreed upon;
➢ Mudaraba can be easily used for Large Enterprise financing;
➢ Project Finance does have potential for financing on Mudaraba
basis;
 Mudarabah – uses in banking
➢ Asset side:
➢ Short / medium / long term financing;
➢ Project financing;
➢ Small and medium enterprise setup financing;
➢ Large enterprises setup financing;

➢ Import bills drawn under import Lcs;

➢ Inland bills drawn under inland Lcs
➢ Bridge financing;
➢ LC without margin;
➢ Export financing;
➢ Working capital financing;

➢ Running accounts financing/ short term advances.

 Mudarabah
➢ Liability side:
➢ All types of saving / investment accounts;
➢ Inter- bank acceptance and placement;
➢ Term Finance certificates;
➢ Certificate of investment;
➢ Special rate deposits;
Islamic Modes of Funding/Deposits
 Nature of Deposit in Conventional Banking according to Shariah

Deposit can be defined as a sum of money placed or kept in a bank account usually to
gain interest. (Oxford Dictionary)

▪ Deposits made in the conventional banks are Qard according to Shariah not
Amanah as generally believed since according to Shariah
✓ Amanah cannot be used by the holder.
✓ Bank cannot be held responsible for any loss or damage suffered by
Amanah without his negligence.

▪ Both of these characteristics are missing in conventional deposits.

 Deposits

Loan Based Mudarabah

Based Mudarabah
• Current-Non Based
Remunerative
• Saving
• Current
Remunerative
• TDRs
 Investment Accounts
Investment accounts are further divided into two types i.e...:

Types of Investment
Accounts

General Investment Specific Investment

Accounts Account
 Types of Deposit Accounts

Investment
Certificates
Remunerative
Savings
Types of Deposit Accounts

Non – Remunerative Current

 Islamic Deposit Products

• Current Accounts The Islamic current account products are offered on the
basis of Qard where the principal amount of the customers are
guaranteed.

• Saving Accounts/Islamic Investment Certificates

The Islamic saving products are offered on the basis of Mudarabah-

Musharakah model where in Mudarabah the Bank acts as Mudarib and
the account holder acts as Rabb-ul-Maal.
The profit earned on Mudarabah based products is distributed as per the
pre-determined profit sharing ratio and weightages
General Modes used on Deposit Side

Tawarruq Mudharabah

Qard Wakalah
 Recap

Sr. No Type of Deposit Account Mode of Islamic Finance Applied

1 Current Account ➢ Qard

2 Saving Account ➢ Mudharabah

➢ Wakalah

3 General Investment Account ➢ Mudharabah

➢ Wakalah
➢ Commodity Murabaha

4 Special Investment Account ➢ Mudharabah

➢ Wakalah
➢ Commodity Murabaha
 Pool management

Deposit Pools are made up of funds received from

customers in different remunerative schemes such as:

• Saving Account;

• Certificate of Investment (COIs); and

• Term Deposit Account.

 Pool management
Common types of investment pools

General Deposit
Pools (PKR & FCYs)

Islamic Export Treasury / Financial

Refinance Scheme Institutions (F.I.)
(IERS) Pool Pools

Specific
Equity Pool Customers’
Pools
 Pool management

CREATION OF POOLS
• IBIs shall have a well-defined profit and loss distribution and pool
management framework for creation of one or more pools of assets to
be financed by different types of Mudaraba-based (individual,
corporate or financial institutions) deposits. The framework shall
interalia specify the objectives, investment strategy, and risk
characteristics of each pool.

INCOME & EXPENSES

• The direct expenses shall be charged to respective pool, while indirect

expenses including the establishment cost shall be borne by IBIs as
Mudarib.
 Pool management

Investment & Financing Losses

• The losses on financings and investments due to misconduct/negligence/breach
of contract by IBI shall not be charged to the pool; the IBI as Mudarib shall be
responsible for absorbing such losses.
 Pool management

Weightages

• The more risk, the more weightage.

• The longer the period, more the risk.
• More the uses of Bank’s facility, less the weightage.
• Less the Uses of Bank’s facility, more the benefit weightage.
• Moral Dimension / Ethical values
• Any other
 Pool management

Weightages
• The weightages to different categories of deposits in a pool shall be
assigned based on parameters / criteria defined in the pool
management framework.
• The weightages shall be announced at least 3 working days before the
beginning of period concerned and shall not be changed during the
period.
• The maximum weightage to the Mudaraba based deposit of any nature,
tenor and amount shall not exceed 3 times of the weightages assigned
to saving deposits.
 Disclosure requirements
Disclosures in Notes to Financial Statements:
• The number and nature of pools maintained by the IBI along with their key features and risk & reward
characteristics.
• Avenues/sectors of economy/business where Mudaraba based deposits have been deployed.
• Instructions For Profit & Loss Distribution and Pool Management for Islamic Banking Institutions (IBIs)
• Parameters used for allocation of profit, charging expenses and provisions etc. along with a brief description of
their major components.
• Mudarib Share (in amount and Percentage of Distributable income).
• Amount and percentage of Mudarib share transferred to the depositors through Hiba (if any).
• Profit rate earned vs. profit rate distributed to the depositors during the year.

Disclosures on IBI’s website and notice board of each branch:

• Percentage of Mudarib Share for period concerned and at least two previous periods in each category of
deposits.
• Weightages assigned to each category of deposits for period concerned and at least two previous periods.
• The actual monthly/periodic profit/loss distributed to each category of deposits during last 2
• years.
 Pool management

Example of General Deposit Pool

DEPOSITS ASSETS

►Saving Deposit 75 % ►Murabaha 60 %

►Bank Equity 25 % ►Cooperate Ijarah 40 %

 Pool management

Example of General Deposit Pool

Income Expenses

►Murabaha 60 ►Broker fee 5

►Taxes 5
►Corporate Ijarah 40 ►Takaful 10
✓ Declared Profit Sharing Ratio (PSR)Profit
40:60 and loss distribution
✓ Declared Weightages as per Schedule.
• Different Average Deposits Step – 1 Step – 2
• Different Deposit Products Income distribution between Income distribution
• Different TDRs tenors. among Rub-ul-Maal
• Different profit payment frequencies TDRs Mudarib & Rub-ul-Maal
through PSR through Weightages.

Sharia’ah PKR 40,000/- Clients

Income 100,000/- PKR 60,000/-
Compliant Rub-ul- Maal
Islamic Bank
Assets
The Mudarib Loss among
Funds / Investment Funds / Deposit
Rub-ul-Maal will be
distributed as per
Capital / Investment
Loss PKR 100,000/- (Without Negligence of Mudarib)
Ratio.

Note: The above example is of a Profit Distribution scenario, where the Bank’s own equity is not involved.
Statement of Inventory of an Islamic Bank
Conclusion