Saturday, March 20, 2010

The Two Tier Mudharabah


With the passage of time, the business practices become more complex and widespread over the world. Even, some buyers and sellers are not ‘physically attended in the same majlis’. They are just connecting to each other thru various sophisticated technologies like email, video conferencing, ‘social networking portal’ and others. In the present day, the concept of ‘e-trading’ becomes more popular among the Muslims. In Malaysia for example, there are some companies more encouraging their ‘potential clients’ to execute buying and selling of their products or services via e-trading. The various government agencies also encourage people to settle all the related bills via online services portal. Under this kind of situation, the role of financial intermediation such as banks is becoming much important in facilitating such kind of the modern business nature.

If we turn to many years back, most of the business ventures were conducting in a way that ‘sellers and buyers’ physically present and ‘face-to-face’ to each other to conclude the deals. Whereby, the market segment during the time is not quite widespread as at today.

With regards to this importance, Islamic financial intermediation has to play the similar roles as the conventional practice but as an alternative for those who want to be away from the riba’ based system. A part of that, Islam introduced a concept of two-tier mudharabah to be practiced in the Islamic financial intermediation in order to mobilize funds from the surplus users to the deficit users with the purpose of business and profit sharing. Pertaining to this, it gives freedom to the Islamic financial intermediation to expand partnership to create a pool with a large number of capital providers as passive partners.

The above diagram, summarizes the concept of the two-tier mudharabah in Islamic financial intermediation.

In the very early stage, Islamic financial intermediation more emphasized to the concept of interest free banking i.e. Islamic bank as an alternative to ‘the conventional banking’ which had already been realized since more than 400 years ago whereby interest based lending and borrowing was the primary ground of its operations which is totally prohibited by Islam.
In the early 1960s the efforts had been started by the academicians and Islamic movements to study about the reality of interest free banking practices. Finally after ‘head and tale’, the first shariah based principle banking was established under the flagship of Mit Ghamr Savings Bank in Egypt, 1963. From the point of time, Islamic banking had become more and more widespread over the world and not only limited the Muslim countries but also to the non-muslim countries like China, United States, Korean and some others.

Now, we back our discussion to the two-tier mudharabah model practiced by the Islamic financial intermediation as an alternative to ‘lending and borrowing based on riba’ or interchangeably refers to the interest rate.

Basically, it is a ‘musharakah company’ which establishes and running the operation of a bank or financial intermediation to mobilize funds from the surplus users on profit sharing basis then extends these funds to the deficit users on the same basis.

The ‘musharakah company’ which acts a parent company of the bank was set up based on the initial capital contributed by the shareholders. The shareholders might be individual investors, corporate investors and government investment arms. In the case of first Islamic bank in Malaysia, that is Bank Islam Malaysia Berhad (BIMB) which started its operation in 1983, its major shareholder is Lembaga Urusan Tabung Haji (LUTH) that is one of the statutory bodies of Malaysia government to manage pilgrimage to perform ‘hajj’ in Mecca.

As shareholders of the musharakah venture, they could be directly involved in the management of the financial intermediation or thru their representatives in the board of directors or just being a ‘passive partner’. If all the shareholders agreed to involve in the management, each and everyone should be treated as an agent of another. All the business matters which are carried out must be in consensus or authorization by other shareholders.

In case of profit, there must be a pre-agreed ratio before the musharakah took place. If not, no validity could be effective between the contracting parties. For a passive partners, the pre-agree ratio should not be exceeded to their capital contribution ratio.

In term of losses, it is based on the capital contribution ratio by the shareholders. If let say a shareholder contributed 30% of the initial capital, he (she) should not be liable to the losses which is more than 30% of his (her) capital contribution.

A part to the termination without the closing down of the business operations of the financial intermediation, if anyone from the shareholders decided to end his (her) musharakah contract, there must be a mutual agreement to presume business as normal. This is because under musharakah, one shareholder does not imply his (her) termination between the other shareholders. Then, the leaving shareholder may take back his capital proportion or sell to the other shareholders with mutual agreement and fair valuation agreed by all shareholders.
Since the flexible structure of different tiers has become the basis of modern Islamic financial intermediation, therefore we shall look at two level of mudharabah:

(1) The first tier mudharabah
(2) The second tier mudharabah

No comments:

Post a Comment