profit and loss sharing in islamic framework

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 wo...

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 ...

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 f...

 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 f...