Facility Business

Mudaraba is an ancient form of financing practised by the Arabs since long before the advent of Islam. It suited the Meccan Arabs because of their location at the cross roads of the ancient trade caravans. They themselves were merchants carrying goods north to Syria in the summer and south to the Yemen in winter. They took goods from their homeport to sell at their destination, and with the proceeds bought other goods and brought them back to sell at home and/or to re-export to another destination. When a trading caravan is organised it was the practice of the Meccans either to join it with their own goods and money or to send such through agents who did the business on their behalf. When a caravan returned home and the goods were all sold, the mission was complete and it was time to prepare the ‘balance sheet’ and calculate the profit/loss.

Traders who took their own money and goods assessed the success of the mission by the profit/loss they made and enjoyed the fruits of their labour or mourned their loss on their own. Those who combined their fortunes with that of one or more of their colleagues and undertook the project together had to go one step further and divide the fortune or loss among the partners, according to a pre-agreed pattern. The rules of this pattern had long been established by custom and had been known by the name musharaka. The agents who carried others’ goods and/or money had to give accounts to their principals and claim their share of the profit/loss according to a pre-arranged pattern. This too had rules assigned by custom and was known by the name mudaraba.

Mudaraba is therefore essentially an agreement between a financier and an entrepreneur — the principals. However, taking account of the modern social structure and context, the pioneers of Islamic banking brought in an intermediary between the principals and created a two-tier mudaraba. This modified form of mudaraba was introduced into conventional commercial banking in the form of profit-and-loss-sharing (PLS) investment accounts and financing arrangements. The earned profit (which is an uncertain and unpredictable return on capital) was to replace the interest (a pre-determined fixed return) in the conventional setting. This, however, was not acceptable to the conventional banking authorities. Therefore, except in a few countries where rules were relaxed or special banking laws were enacted, it was not possible to establish and operate Islamic banks in most countries of the world. In such countries Islamic financial institutions, which did not come under deposit bank regulations, were introduced. In both cases, while the deposit/investment side worked on mudaraba basis, mudaraba was only one of several modes used for financing. Though a preferred one in theory, in practice it became one of the least used. The most used forms are modes of trade, and this has led to questions of morality and ethics. In addition, Islamic banks are unable to provide all the financing services expected of a commercial bank

Murabaha is a method of Islamic financing, where an intermediary buys a property with free and clear title to it. The intermediary and prospective buyer then agree upon a sale price (including an agreed upon profit for the intermediary) that can be made through a series of installments, or as a lump sum payment. Investopedia explains Murabaha.

Murabaha is not an interest-bearing loan, which is considered riba (or excess). Murabaha is an acceptable form of credit sale under Sharia (Islamic religious law). Similar in structure to a rent to own arrangement, the intermediary retains ownership of the property until the loan is paid in full.

It is important to note that to prevent riba, the intermediary cannot be compensated in addition to the agreed upon terms of the contract. For this reason, if the buyer is late on their payments, the intermediary cannot charge any late penalties

Hope this helps
Halcon