Understanding Islamic Finance - Doha Academy of Tertiary Studies

190 Understanding Islamic Finance• Specific investment accounts can be managed as per savers’ instructions on a Mudarabah orWakalah basis. Banks can float equity funds on the principle of Mudarabah against a share intheactualprofits.However,theremayalsobeanagencyrelationship,whereinthebankwouldbe managing depositors’ funds against pre-agreed fees and passing on the profit/loss to thedepositors.• Banks may establish closed/open-ended mutual funds.• Inter-bank financing will also become part of the equity of the bank, using appropriateweightage and DPB to calculate profit.Box 8.1:Deposit Management in Islamic Banks on Mudarabah BasisMost of the Islamic banks are following a profit-sharing mechanism called theMudarabah + Musharakah model or simply the Mudarabah model. Step by step, theprocess flow of the Mudarabah model is as follows:The bank will create an investment pool having categories based on differenttenors of deposits. We assume that the bank launches the following deposit tenors:three months, six months and one year. Each depositor of the bank will depositits funds in a specific category of the investment pool that will be assigned a specificweightage. Weightage can only be amended at the beginning of the accountingperiod. Assume that the following investment is made by the depositors inpool A.Category Amount in $ WeightageThree months 3000 0.60Six months 4000 0.70One year 3000 1.00All members of the pool will have a Musharakah relationship with each other, i.e.they are partners in the pool with the above mentioned weightages. The bank mayalso invest in the pool as a depositor.Now the pool, in its collective capacity, enters into a Mudarabah contract. Underthe agreement, pool A would act as Rabbul-māl and the bank would be Mudarib. Thebank would undertake business with funds from the pool and the profit earned wouldbe shared between the parties in an agreed ratio. Assume that the profit sharing ratiois 50:50.The bank deploys $10 000 of the pool for a period of one month and earns a profitof $1000 at the end of the month. This profit would be shared as follows: bank (500)and the pool (500). The Mudarabah contract would be completed at this stage.Profit-sharing Among the Pool Members$500 earned by the pool would be distributed as per the weightage assigned at thebeginning of the month. The relationship within the pool would be governed by therules of Musharakah.