Chapter 14 Flashcards
What is a musharaka?
Musharaka is a partnership contract where each party contributes towards an investment project, with profits and losses shared in proportion to their contributions.
What is the role of banks in a musharakah?
Generally it is the banks that provides most of the funding for the Musharaka contract.
The bank will then have the right to monitor or supervise the project to determine whether their funds are being utilized properly.
What is a fixed musharaka contract?
Fixed Musharaka contract, the contributed shares of the bank and the client participating in the project remain constant over the life of the partnership.
What is a diminishing musharaka contract?
Diminishing Musharaka contract, the bank gives the client the right to withdraw its share gradually over time. Both the client and the bank may choose to sell their share of the Musharaka to a third party.
What is the rights and responsibilities of the partner in a musharaka contract?
One of the partners takes the responsibility for the management of the project, and this partner then receives a percentage of net profits as compensation for this effort. In most cases the bank client will tend to be the managing partner in Musharaka contracts with the bank.
What is a mudaraba contract?
A Mudaraba contract, also known as Qirad, is a special type of partnership where one party contributes funds for the venture while the other party provides the managerial effort in implementing and operating the project.
Who is the first party in a mudaraba?
The first party is the owner of capital -‘‘Rab Almal”- bearing the financial risk, and agreeing to accept any losses on the project.
Who is the second party in a mudaraba contract?
The second party is the working partner- ‘‘Mudarib”-, sharing in the profit of the venture based on a predetermined ratio, but not responsible for potential losses unless it is a result of misuse, deliberate negligence or violations of the terms of the contract.
What are the roles and responsibilities of the bank in the mudaraba contracts?
The bank is generally the provider of the capital in a Mudaraba contract, acting as the Rab Almal.
The bank is not allowed to demand a fixed sum of money as a return on the project, with profits only able to be allocated according to a predetermined percentage, not absolute amounts.
In a mudaraba contract, can the Rab Almal ask for any guarantees?
Since Mudaraba capital is considered to be provided on “trust” to the working partner, the owner of capital is not permitted to ask for guarantees in the form of collateral from the Mudarib.
If the bank providing the capital demanded collateral from the working partner, the Mudaraba would be void.
What are the rights and responsibilities of the client in mudaraba contracts?W
The client cannot demand a fixed sum of money as a return on the project.
Profits have to be shared according to a predetermined and declared percentage and not as absolute amounts.
The Mudaraba will also be void if the working partner is asked to share in the financial losses of the venture.
However, the working partner can be held responsible for financial losses resulting from deliberate negligence or disregard to the terms of the contract.
What is a special mudaraba?
A special Mudaraba is where only two parties participate in the venture, with one contributing capital (usually the bank) and the other contributing managerial effort (the client of the bank).
In some cases capital is provided by one party but the contract is jointly managed by both parties.
What is a multiple mudaraba?
A multiple Muraraba contract involves a number of capital owners and working partners with one party assuming the role of coordinator or facilitator.
What is a murabaha agreement?
A Murabaha agreement is an agreement between a seller and a buyer, where the seller will acquire the commodity and deliver it to the buyer for an agreed upon, marked up price.
The seller thus acts as the provider of funds. Payment is normally made on an installment basis or as a lump sum amount at a later date.
For the Murabaha contract to be shariah complaint it must satisfy the following conditions:
- The seller is required to disclose the original price at which the commodity was acquired
- The seller is required to disclose any expenses that may have been incurred, in addition to the original price
- The profit margin must be clearly specified and be known to both parties to the contract
Who are the usual buyers and sellers under murabaha agreements?
The seller in the Murabaha contract is a bank,
while the buyer is a bank client who is in need of funds to purchase the underlying goods.
It is legitimate for the bank to require the client to make an initial down-payment or to provide some guarantee. The bank, however, is not expected to take advantage of the client’s situation by demanding unreasonably high mark-ups.
What is the risk to the seller in murabaha agreements?
The right of the buyer to reject the commodity prior to delivery can make the contract particularly risky for the bank.
The bank bears the risk of loss prior to delivery to the client and the risk of the transaction increases the longer the bank has to hold the commodity until delivery.
To lessen this risk, in most cases the bank is in possession of the goods for a very short period of time, allowing the bank to play its traditional role as a provider of funds at a cost determined by market interest rates.
Who initiates the process of the murabaha agreement?
The process is initiated by a client who places a purchase order for the required commodity with the bank at a mutually agreeable price, including a profit margin for the bank.
The bank is required to purchase and assume physical possession of the commodity before reselling it to the client at the agreed upon price.
