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Murabaha is the most popular and most common mode of Islamic financing. It is also known as Mark up or Cost plus financing. The word Murabaha is derived from the Arabic word Ribh that means profit. Originally, Murabaha was a contract of sale in which a commodity is sold on profit. The seller is obliged to tell the buyer his cost and the profit he is making. The contract has since been modified for application in the financial sector.
The Murabaha is, overwhelmingly, the most popular, tried and tested form of Islamic financing and forms the backbone of Islamic trade finance.
is an Islamic contract in which one party supplies the money and the other provides management expertise to undertake a specific trade. The party supplying the capital is called owner of the capital. The other party is referred to as an agent who actually runs the business. In Sharia law, different duties and Responsibilities have been assigned to each of these two.
As a matter of principle, the owner of the capital does not have a right to interfere in the management of the business enterprise which is the sole responsibility of the agent. However, the capital provider has every right to specify conditions that would ensure better management of his money. That is why Mudarabah is sometimes referred to as the sleeping partnership. An important characteristic of
Mudarabah is the arrangement of profit sharing. The profits in a Mudarabah agreement may be shared in any proportion agreed between the parties beforehand. However, the loss is to be completely borne by
the owner of the capital. In the case of loss, the capital owner bears the monetary loss and agent loses the reward of his efforts.
Mudarabah can be individual or joint. Islamic banks practice Mudarabah in both forms. In case of individual Mudarabah, an Islamic bank provides finance to a commercial venture run by a person or a company on the basis of profit sharing. The joint Mudarabah may be between the investors and the bank on a continuing basis. The investors keep their fund in a special fund and share the profits without even the liquidation of those financing operations that have reached the stage of final settlement. Many Islamic investment funds operate on the basis of joint Mudarabah.
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