profit and loss sharing in islamic framework

"Is having Fixed Profits in Businesses forbidden HARAM in Islam Dr Zakir Naik"

TERMINATION OF MUDARABAH AND MUSHARAKAH TERMINATION OF MUDARABAH 1)Mudarabah is terminated when it is cancelled or when a mudarib is prevented from using the fund or when he is dismissed. In this case, the mudarib is entitle to his claim in the profit. If capital is in the form of goods cancellation of mudharabah, prevention of mudarib, or his dismissal can only take place after the good are sold. The action of the mudarib who is unaware of the cancellation, prevention, or dismissal is binding on the sahih al-mal. 2)When mudharabah which is for the fixed period of time expires. 3)If either party loses its legal capacity. 4)If one of the conditions in restricted Mudharabah is violated. 5)If Mudarib fails in his duties due to his negligence or deliberate loss. 6)If the capital is destroyed in the hands of mudharib. 7)If either parties dies and if the investor dies the mudarib has no right to continue mudharabah.Any further use of the capital depends on the permission of

Four main types of contractual partnership: -Sharikah al-Abdan -Sharikah al-Wujuh -Sharikah al- Mufawadha -Sharikah al-'Inan  Sharikah al-Abdan  Can a partnership where two or more professionals agree to work in partnership and share their earning together by contributes their skills and effort but not capital ? and the profit distributed among partner according to an agreed ratio (distributed between them irrespective of the volume of the work each partner has actually done).? Shafie school: Rejected because of uncertainty(gharar), absent of capital and the labour and efforts cannot  be calculated. Hanafi : According to Hanafi school, the contract is designed to gain profit, which is possible to attain. Sharikah al-Wujuh Can two person become partners by agreeing to purchase goods jointly upon their personal credit and to sell them on their joint account.However, both partner do not contribute any capital and they purchase commodities at a deferred price and sell the

Venture capital organization (VCO) is a group of Islamic banks establishes a venture capital fund which purpose to invest in troubled companies acquire public corporations facing privatization. This organization will help if the company hold only a small proportion of equity along with the management and the institutional investors. Debt instrument which implies in his model is no based-interest since they are Islamically accepted mode of financng like leasing and mark-up. The VCO provides a balance of power between management and other owners who have a financial stake in the firm. the shareholders are passive capitalist and share decision making with management to run the organization. the value of this organization is more better than other organization. Managers who hold shares in VCO, will be productive because they hold private information about the project.In addition, joint ownership between managers and other shareholders affect alignment of interest between them. VCO strateg

Mudharabah profit Such profit is shared based on agreement (profit and loss sharing) loss  Any losses will be borne by the owners of capital  (shahibul maal), given that the loss is not due to deliberate action of the fund manager (mudharib), while the fund manager suffers from loss of time, energy and mind. If the loss cause by the negligence of the fund manager (mudgarib), the fund manager must bear the loss. Musharakah profit The profit-sharing is based on the mutually agreed percentage loss In the event of loss, it is bone jointly in accordance with the amount of capital each party has. Reference: article on principle of justice in transaction based on profit and loss sharing in sharia banks by Trisadini Prasastinah Usanti, A.shomad & Ari Kurniawan

   Justice is one of the goals of every religion in the world, including the Islamic religion which puts justice at a very important place in the life of the nation. According to Ibn Qudamah who is an expert in Hambali school of Islamic Law, justice is something that is hidden, motivated solely due to fear of Allah SWT. Justice is strongly associated with right and obligations. Those rights and obligations are associated with a mandate, while the mandate must be given to those who deserve it.    The principle of justice requires and teaches four terms in the management of sharia banks which are transparency and honesty, fair transaction, healthy competition and mutually beneficial agreement.    One of the underlying principles of sharia agreement is the principle of Al-adalah. The implementation of this principle is an agreement or contract requires the parties to do what is right in expressing the will and circumstances, meeting all its obligations. Agreements must always be

One of the key precepts of Islamic finance is that under conventional systems based on interest, neither profit and loss nor risk is shared by the contracting parties Profit Loss Sharing (PLS) dominates the theoretical literature on Islamic finance. Broadly, PLS is a contractual arrangement between two or more transacting parties, which allows them to pool their resources to invest in a project to share in profit and loss. Most Islamic economists contend that PLS based on two major modes of financing, namely Mudaraba and Musharaka, is desirable in an Islamic context wherein reward sharing is related to risk-sharing between transacting parties The most important feature of Islamic banking is that it promotes risk-sharing between the provider of funds (investor) and the user of funds (entrepreneur). By contrast, under conventional banking, the investor is assured a predetermined rate of interest. Since the nature of this world is uncertain, the results of any project are not known wi

there are two type of contract involve : MUDARABA MUSHARAKAH In both of these forms, the financier makes the funds available,  not as a lender, but rather as an investor.   Losses must be shared by him in proportion to his share in the total financing while profits may be shared in any mutually agreed ratio. for more information can watch the video  in the link provided  https://www.youtube.com/watch?v=hv1wdVLEXog

The Islamic financial system promotes the concept of participation in a transaction backed by real assets, utilizing the funds at risk on a profit-and- loss-sharing basis . Such participatory modes used by Islamic banks are known as Musharakah and Mudarabah. This by no means implies that investments with financial institutions are necessarily speculative which can be can be excluded by careful investment policy, diversification of risk and prudent management by Islamic financial institutions. The two basic categories of financing which are:  1) profit-and-loss-sharing (PLS), also called participatory modes, for example musharakah and mudarabah   2) purchase and hire of goods or assets and services on a fixed-return basis, such as murabaha, istisna'a,              salam and leasing. A pyramid of financial assets can be built based on liquidity and profitability, which are the criteria of prudent banking. At the top would be high-risk and less-liquid assets, such as long-term i

MUDARABAH  Literally, the word mudarabah comes from the phase al-fi'l-ard which means to make a journey from verse " Others travelling through the land seeking fo Allah 's bounty ". It derives from the root word  'daraba'  which mean sharing. Technically, mudaraba is a partnership for participation in profit in which capital is provided from one party whereas labour or skill is from another party. i) Imam Hanafi They describe it as a partnership for participation in profit in which capital is provided from one side whilst labour or skill is from the other side. ii) Imam Maliki According to Malikis, mudarabah is where a capital provider surrenders a specific and identified amount of money to a person (mudarib) who will manage a project and the former will enjoy a proportionate profit gained from the business. iii) Imam Shafi'is It is agreement whereby the capital provider will assign the capital to the worker who trades with it and t

Perspective on Islamic Finance: What is Risk Sharing? by Prof Abbas Mirakhor Theory of Profit in Islam 

1.        It assists in financial inclusion The conventional banking system is based on paying interest at a pre-determined rate on deposits of money. As both payment and receipt of interest is prohibited by the Shariah law, Muslims generally abstain from banking. Bu using Islamic banking, financial inclusion can be promoted and a larger pool of saving s can be brought into the economy. 2.        It promotes the principle of financial justice Financial justice is a basic requirement for the functioning of Islamic finance products. Western or conventional financing looks forward to profit through interest payments and makes the beneficiary completely liable for any risk. Contrary to this, Islamic financing paves way for the sharing of net profit/loss and the risk involved in a proportional manner between the lender and the beneficiary. Therefore, if a financier is expecting a claim on profits of a project, it is necessary that he/she should also carry a proportional shar

1) A limited liquidity function A limited liquidity function is associated to PLS intermediation since the value of the bank depositors’ funds represents the real assets value of the Islamic banks. Islamic banks less exposed to liquidity shortage problem since the remuneration of deposits does not guarantee fixed yields. From the PLS perspective, the less exposition is more linked to the less risk transformation compare maturity transformation. To extend the maturity deposits, Islamic bank can use instruments of management of displaced commercial risk. For instance, Islamic banks do not use all investment deposits for financing and a part is unaffected and remains unused.  2) Less money creation In Islamic finance, money is a medium of exchange and unit of account. Money creation reveals the bank to a significant risk of liquidity. The exposition to liquidity risk is related to the degree of money creation. In Islamic finance, credit creation and control for interest free banki

 There are two types liquidity risk which are funding liquidity risk and market liquidity risk. The first risk arises if the Islamic bank cannot meet  expected and unexpected current and future cash-flow and collateral needs without affecting the daily banking operations or the bank’s financial conditions. This funding liquidity risk  related to unexpected withdrawalsof funds by depositors . The market liquidity risk appears if the bank is not able to easily eliminate a position at the market price due to market deficiencies such as market disruption or the inadequate market depth. In others words, these two categorized liquidity risk are  lack of access to funding and lack of liquidity in the market. In PLS financing, the liquidity risk arise if there is a late or nonpayment of profit payment during the contract or at the end of contract. In PLS liabilities, the liquidity risk emerges if the bank is not able to satisfy the liquidity behavior of its depositors for both routine liquidit

There are challenges faced by the profit-and-loss sharing (PLS) financing in Islamic banking institutions in Malaysia.  there were four major obstacles to PLS financing such as high risk of investment Musharakah and mudharabah financings could be classified as high risk investments. These concepts of financing are difficult to be implemented due to their high probability of failure; as a result of various factors such as the entrepreneurs’ lack of skills and experience in doing business.       2. difficulty in selecting appropriate partners The selection process poses a big challenge to Islamic banks in providing financing that are based on musharakah and mudharabah. The Islamic bank needs to find the right partner as to ensure the shared business is generating profit because Islamic financial institutions are not charitable organizations that grant free capital, instead they need to be profitable so that they can remain competitive.The selection is difficult because

In joint ventures on shirkah and mudārabah, the knowledge of profit / loss sharing ratio is imperative at the inception of the contract.   Although there appears to be some difference on whether it is necessary to stipulate these aspects in the agreement, a perusal of accepted works of the schools would reveal that where this is not required, it is due to the fact that certain schools do not recognize the possibility of any variation occurring pertaining to these. Thus, the Shāfi‛i school holds that profit (as well as loss) in shirkah would necessarily be owned by the partners in proportion to their respective capitals, irrespective of whether this fact is stipulated in the agreement or not.  If any condition is agreed to the contrary, the contract becomes invalid. The position of the Māliki school in this respect is similar, who also state that labor, too, would be contributed by the parties in proportion to their capital investment, even when these aspects are not stipulat

There are two central issue: which are the regulatory problems in jurisdictions and problem in supervision .  The problem in jurisdiction arises as bank deposits are required by legal definition to be ‘capital certain’ but the presence of such ‘puttable instruments’ in the capital structure of Islamic banks leads to complications in assessing their capital adequacy.  The main regulatory problem arising from the use of PSIAs is that they do not meet the legal definition of deposits. Neither the customers’capital nor any return on it is guaranteed by the bank. Hence, PSIAs are not ‘capital certain’and are, essentially, investment products. Islamic banks, therefore, do not meet the criteria to be classified as depository institutions as required by banking regulations in the majority of countries     2.  The problem of supervision occurs due to the fact that profit-sharing investment account            holder are a type of equity investor without the governance rights o

    Distribution of the Profit in Mudarabah It is necessary for the validity of Mudharabah that the parties agree, right at the beginning, on a definite proportion of the actual profit to which each of them is entitled. No particular proportion has been prescribed by the Shari’ah; rather, it has been left to their mutual consent. They can share profit in equal proportions for the rabb-ul-mal and the mudarib. However, they cannot allocate lump sum amount of profit for any party, nor can they determine the share of any party at a specific rate tied up with the capital. For example, if the capital is RM10000, they cannot agree on a condition that RM10000 out of the profit shall be the share of the mudarib, nor can they say that 20% of the capital shall be given to rabb-ul-mal. However, thet can agree that 40% of the actual profit shall go to the mudarib and 60%to the rabb-ul-mal or vice versa.   It is also allowed that different proportions are agreed in different situations. Fo

As we know, Islamic Economic System prohibit the payment of interest in the borrower- lender relationship and replace with profit/loss sharing financial instruments. Generally, there has been an implicit assumption by Islamic writers that the prohibition of interest is special to Islamic literature. In truth, its advocacy has been a feature of both religious teachings and nonreligious literature over several decades. This article will classified the major arguments against interest in Western literature in terms of the relationship between interest, charitable deeds and social divisions, the preferred use of money, the effects upon work effort and the time dimension. In truth, there is little in contemporary economic literature which is fundamentally opposed to interest payments. Historically, interest has been opposed in the social divisions since it creates hardship to borrowers. For instance, the Old Testament recommends loans to the poor free of interest and loans need to be cance