Mudharabah Essay

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Mudharabah Background Mudharabah contract is a profit sharing contract between the entrepreneur and the capital provider. Mudharabah contract is applied in deposit taking arrangement such as current account, savings account and investment account. The contract is also applied in inter-bank investment and Islamic bonds. In takaful industry, mudharabah contract is used as one of the operational model as well as being applied for investing the takaful funds. Issues 1. Floating Islamic Negotiable Instrument of Deposit (INID) Bank Negara Malaysia has introduced floating INID with the following mechanisms: i. A customer deposits money into a bank; ii. The bank accepts customer’s deposit and issues INID to the customer as an evidence of receiving deposit; iii. INID is tradable in the secondary market; iv. On maturity, the customer or holder of INID returns it to the bank and receives the principal value of INID and the declared dividend; and v. The declared dividend is from the profit derived from the investment of the deposit. The term “floating” refers to the characteristic of the product that changes in value based on the dividend declared by the bank from time to time. The question is whether the investment mechanism mentioned above is in line with mudharabah principle. Resolution The Council in its 3rd meeting held on 28th October 1997 / 26th Jamadil Akhir 1418 resolved that Floating Islamic Negotiable Instrument of Deposit (INID) using mudharabah concept is permissible and tradable in the secondary market. 2. Mudharabah Current Account There was a proposal from Islamic banking institution to introduce mudharabah current account product. This account is different from the wadiah current account in which the payment of dividend to customers is at the sole discretion of the bank. In this mudharabah current account, customers have right to

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