Mudarabah distribution of profits

Moulana Shoayb Joosub

                                     Mudarabah distribution of profits

 

Resolution No 8/9 regarding the distribution of profits on page 234 of Shariah Standards (aaofi)

 

If the Bank (Mudarib) has commingled its own funds with the depositors (Mudarabah) funds, the bank becomes a partner in respect of his funds and a Mudarib in respect of the funds of the capital provider. The profit earned on the two commingled funds will be divided proportionately to the amounts of the two funs, in which case the bank takes the profit attributable to his own funds, while the remaining profit is to be distributed between the mudarib and the capital provider according to the provisions of the Mudarabah contract.

 

The formula for the distribution of profits on deposit accounts:

 

When The financial institution invests its own capital or funds besides the capital procured by the bank with the depositors funds in the unrestricted investment pool. The distribution of shares between the bank and the depositors shall be as follows:

 

The financial institution investment :                    R100 000

Depositors investment :                                                  R 100 000

The profit sharing ratio is 50/50

 

Supposing the profit or loss of the enterprise is R 20 000

 

                         Calculation of profit

 

Depositor:                                 R 100 000 deposit + R5 000 profit

Total :                                       R105 000

 

The financial institution:               R 100 000 investment + R15 000 profit

Total:                                        R 115 000

 

The amount of the profit will be spread over the total capital invested and then half the profit earned shall be distributed between the bank and the depositors in terms of the profit sharing ratio.  The Bank will get R 15,000 and R 5,000 will be the deposior’s share. Out of the amount of profit R 20,000 The financial institution gets half R 10,000 on his own capital and R 5,000 out of the depositor’s profit under mudarabah as reward for the successful operation of the business, so the total profit of The financial institution would be R 15,000 out of a gross profit of R 20,000 and the depositor’s profit thereon will be R 5,000 only.

 

Loss

 

Since the loss is charged according to the capital contribution of the bank and the depositor, therefore any loss shall be distributed as follows:-

 

Bank                 :                       R 1,00,000 capital          -           R 10,000 loss

Total shares      :                                                                       R 90,000

 

Entrepreneur      :                       R 1,00,000 capital          -           R 10,000 loss

Total share        :                                                                       R 90,000

 

The loss, it may be noted, is borne by both parties according to the amount of their investment. In this case the amounts of their capital investments are equal, both bear the loss in equal proportion.

 

In conclusion, The financial institution shall receive 100% of the profits where it contributed capital and management but where funds were provided by the depositors and management by the bank the profit shall be distributed according to the agreed profit sharing ratio.

 

Prepared By:

 

Moulana Shoayb Joosub

Shariah Department

The financial institution