Reading-2 for applications --- Chapter-5 from Islamic Financial Services by M. Obaidullah

Reading-2 for applications --- Chapter-5 from Islamic Financial Services by M. Obaidullah

Info icon This preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
57 Chapter 5 FINANCING PRODUCTS (EQUITY-BASED) In this section we discuss various equity-based financing products, such as, mudaraba and musharaka . In banking parlance, these are referred to as trustee project finance and joint venture project finance respectively. The former involves a combination of entrepreneurship and capital while the latter involves a partnership in entrepreneurship and capital. We also discuss products based on a novel concept of declining musharaka leading to complete ownership of asset or project by the customer-entrepreneur. These equity-based products are unique to Islamic banking and in some sense, account for its superiority over conventional banking on grounds of ethics and efficiency. Arguably, because of their uniqueness, they are also less popular. The equity-based financing is what makes the business of Islamic banking more challenging. Trustee Partnership ( Mudaraba ) Facility Trustee partnership based on mudaraba is a mode of financing through which the bank provides capital finance for a specific venture indicated by the customer. The bank, called rabb-al-mal is the owner of the capital and the customer-entrepreneur, called mudarib , is responsible for the management of the business and provides professional, managerial and technical expertise for initiating and operating the business enterprise or project. Profit is shared according to a pre-agreed ratio. Losses if any, are entirely absorbed by the Source: Obaidullah, Mohammed, Islamic Financial Services, Jeddah: Scientific Publishing Centre, King Abdulaziz University, 2005.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Islamic Financial Services 58 capital provider – the bank. Mudaraba may be of two types – restricted or unrestricted. In a restricted mudaraba ( mudaraba al- muqayyada ) the bank or the financier may specify a particular business in which investments may be undertaken. Mudaraba may also be an unrestricted one ( mudaraba al-mutlaqa ); in which case the mudarib may invest the capital provided in any business he deems fit. A simple mudaraba financing structure is presented in Exhibit 5.1. Client Bank Dotted line indicates flow of funds Activity 1: Bank and Client discuss business plan; Bank provides funds to client towards capital investment; 2. Client sets up the business and manages its operations; 3. Business generates positive or negative profits; 4. Profits if positive, are shared between Client and Bank as per a pre- agreed ratio; 5. Profits if negative, are absorbed by Bank; effectively bringing down the value of the asset created with its investments Exhibit 5.1 Mudaraba Financing Structure $ Investment / Asset Profit 3 2 5 1 4 Positive Negative
Image of page 2
Financing Products (Equity-Based) 59 Joint Venture ( Musharaka ) Facility A joint venture based on musharaka involves a partnership in which both the bank and its customer-client contribute to entrepreneurship and capital.
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern