Mudaraba meaning

Introduction to Musharaka—a profit and loss sharing instrument of Islamic finance At the heart of Islamic finance lies the maxim ‘no profit without risk’, ie no person should realise a gain unless they bear some degree of risk. This concept is most clearly shown through the application of profit and loss sharing instruments. For further detail on this principle, see Practice Note: Key principles of Islamic finance. This Practice Note examines Musharaka, an Islamic finance technique originally founded on profit and loss sharing and broadly analogous to a conventional partnership arrangement. In straightforward terms, a Musharaka is a partnership customarily entered into by two or more parties, not necessarily for a fixed term, and most commonly for the purpose of undertaking a business venture. In a typical Musharaka, each participant makes a capital contribution to the venture and profits and losses are shared between them. A comparable Islamic finance arrangement premised on the same profit and loss sharing rule is Mudaraba, a special form of partnership in which only...

The rise of equity financing: background to Mudaraba Interest-based, conventional funding often hampers economic justice, fairness and equity, as it burdens borrowers with liabilities that, in many cases, cannot be settled. Widespread inequality remains a severe global challenge, and Islamic financial models offer means to ease this. At the heart of Islamic banking and finance lies economic justice realised through risk-sharing. All parties to an investment are expected to participate in both profits and losses. As Ayat 8 of Surah Al Maidah in the Quran declares: O you who have believed, be persistently standing firm for Allah, witness in justice, and do not let the hatred of a people prevent you from being just. Be just; that is nearer to righteousness. And fear Allah; indeed, Allah is acquainted with what you do. Unlike conventional arrangements, which do not require tangible underlying assets, banks and financial institutions may expand credit by generating money from existing money rather than from assets. This stands in contrast to Islamic financing...

This Practice Note outlines the principal distinctions between standard bonds and sukuk, or trust certificates as they are otherwise known, (the Sukuk). It also provides an overview of the principal Sukuk structures and offers commentary on recent trends observed across the Sukuk market. This Practice Note should be read alongside Practice Note: Sukuk documentation and transaction mechanics. What are Sukuk? Sukuk are Shari’ah-compliant certificates, defined by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) as evidencing undivided interests in ownership of tangible assets, usufruct and services, or in the assets of specified projects or particular investment activities. The word ‘Sukuk’ is Arabic and broadly translates as ‘instruments’ or ‘certificates’. Sukuk are frequently described as Islamic bonds and, in general terms, operate as the fixed-income counterpart of a conventional bond or note instrument. Sukuk follow Shari’ah-compliant structures with the broad aim of mirroring a conventional fixed income security. Bonds versus Sukuk Structural features To deliver returns for investors, all Sukuk structures rely upon either...