A reader has asked an important question related to last week's article. Since this question is likely to be on the minds of many other readers, it is appropriate for us to take it up.
The question is this: how is a customer's deposit channelled through an Islamic bank's system en-route to deployment and the subsequent retrieval?
Another question sent by a reader is as follows: what happens in a situation where an Islamic bank may incur a loss in deploying money as a Mudareb (fund manager) on behalf of the Rab Al Mal (fund providers)?
To shed light on these questions, we need to consider the Mudaraba concept in its historical context.
As readers already know, a Mudaraba is a marriage of convenience and provides benefits for both parties, i.e. the fund provider and the fund manager. The fund provider may not have the time or the expertise to efficiently utilise his capital and earn profits.
Similarly, an entrepreneur may have potentially profitable ideas and skills, but lack the needed capital.
Mudaraba allows the fund provider to hand over funds to the fund manager under an arrangement which safeguards the interests of both parties and, at the same time, provide an adequate and Halal return.
The residents of Makkah had practised Mudaraba even before the advent of Islam, due to their location at the crossroads of ancient trade caravan routes.
Credible Mudarebs carried goods and/or money for investors and had to be accountable to them.
Upon return of the caravan, the profit and loss account was prepared, allowing the Mudareb to claim his share of profit and then return the original capital, along with the profit, to the investor be it in cash or kind.
In ancient Makkah, almost every investor knew every Mudareb. Credibility in the community was key for anyone hoping to conduct Mudaraba transactions.
Islamic era
In the Islamic era, the Mudaraba was fine-tuned to eliminate certain elements which were not compliant with Islamic principles.
These included making the Mudareb liable for any financial losses, even in the absence of misconduct. This meant Mudarebs became liable for losses due to theft or robbery while goods or capital were in transit.
Mudarebs also became liable to pay interest on the capital invested if they failed to produce the returns desired by the original fund provider.
In today's world, Islamic banks have found ways to credibly fulfill the roles of Mudareb and investor at the same time.
Islamic banks are ideally positioned to aggregate capital from small and large depositors alike, while researching and discovering lucrative investment opportunities where this capital can be profitability deployed.
The writer is the vice-president, Sharia structuring, documentation and product development, Dubai Islamic Bank.
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