TOPIC: THE APPLICATIONS OF AL-MUDARABAH AT BANK ISLAM

MALAYSIA BERHAD (BIMB)

2.0 Legal Evidence of Al-Mudarabah

i. Ijma’

Ijma’ is an Arabic phrase that relates to the Muslim community's assent or

approval in an issue of Islamic law. After the Qur'an and the Sunnah, Sunni Muslims
see Ijma' as one of the secondary sources of Sharia law. In reality, different schools of
Islamic law disagree on which group should represent the Muslim community in
achieving a consensus. Some believe it should be limited to the Sahabat (first
generation of Muslims); others presume it must be limited to the Salaf (first three
generations of Muslims); or the consensus of Islamic lawyers, fuqaha, and scholars of
the Islamic world, such as the consensus of scholars or the consensus of the entire
Islamic world, including scholars and the wider public. Ikhtilaf is the polar opposite
of ijma like the lack of ijma’ in questions of Islamic law.

Islamic banking, possibly the most significant sector in Islamic finance, refers
to the banking system's principles, which are founded on Islamic regulations in terms
of operations and activities. That is, an Islamic bank is responsible for all operations,
and all transactions must adhere to Shariah rules. The main distinction between
Islamic and conventional banks is that Islamic banks conduct all transactions without
including the element of riba, which is absolutely prohibited in Islam. The bank's
purpose is to address the requirements of Muslims in banking while also providing
options to others. These banks are managed according to Islamic law and are based on
Quran and Hadith decisions. For the interest of society, justice and equality (Haron &
Wan Azmi, 2009). Ijma' (agreement or ijma' among Muslim jurists) and Qiyas are two
further aspects governed by Shariah (analogical reasoning to explain something
specific cases). By drawing a parallel between the current case and the prior one,
Islamic jurists extend the earlier judgement to the new one. He went through the
Qur'an and Hadith in greater detail so that everyone may understand it (Nakagawa,
2009).
 ii. Qias

Qiyas literally refers to measuring something is really length, weight, or

quality. It may also refer to a comparison between two entities that share some
characteristics. Whereas Qiyas is described as an extension of Shariah value from the
original case to new cases, because new cases have the same effective reason as the
original case. The text in the Quran, Sunnah, or Ijma supports the original situation. If
there is a common effective cause between the original and new instances, the rule of
law is applied to new cases, and Qiyas occurs. The original or initial case might have
a variety of meanings all related to the same issue. It can be a rule of law in and of
itself, such as Quranic and Sunnah writings. It may also be defined as a set of legal
regulations. The Quran and Sunnah are the major sources of Qiyas. Furthermore, the
majority of the fuqaha agree that Ijma is also a source Qiyas, from which they may
obtain the law in the original case that Ijma has settled.

In reality, a tiny percentage of fuqaha differ regarding the source of Qiyas

being Ijma. The reasoning for this is that the rules given by Ijma need not explain why
the laws are in place, making it impossible to find a "effective deity or cause," and
Qiyas cannot be utilized without an effective cause. This, however, is not the case.
The source may not always indicate the effective causes. It is the Mujtahid's
responsibility to derive from any source not listed in the Quran, Sunnah, or Ijma.
Furthermore, there are differing viewpoints on whether Qiyas can be the asl for
another Qiyas. The schools of Al Hanafi and Al Shafi’ disputed on the usage of Qiyas
in original situations where earlier Qiyas had established their authority. Unlike the
Maliki and Hanbali Schools, who accepted using Qiyas based on norms set by prior
Qiyas.
3.0 Scholars Views on Al-Mudarabah

There are two types of mudarabah (profit sharing) contracts limitless (al-

mudarabah al-mutalaqah) and limited (al-mudarabah al-mutalaqah) (al-mudarabah al-
muqayyadah). The agreement does not specify the time period, location of the
company, or the precise sort of trade or service to be conducted in infinite
circumstances. Meanwhile, entrepreneurs (mudarib) are restricted to particular
fundraising restrictions under limited mudarabah (profit sharing) (rabbulmal). If the
entrepreneur (mudarib) does not adhere to the financial constraints imposed by the
supplier (rabbulmal), he will be held entirely liable for any losses incurred. Recent
scholars also believe that mudarabah should be guaranteed by a third party (al-kafala).
Profit sharing, capital since it may decrease risk and assure a return on investment.
Investors (rabbul-maal) can be protected against misbehavior or fraud, but not from
market risk. Giving promises to entrepreneurs (mudarib) in mudarabah capital (for
profit) is forbidden, according to Dalla Albaraka. However, if the assurance is
provided by the government, it is legal (Rosly, 2005). Third-party assurances are now
available from the government or commercial organizations. The Shariah Advisory
Committee of Bank Negara Malaysia concluded in June 2002 that third-party
guarantees for Islamic deposits were acceptable.

This guarantee plan is based on the principle of mutual guarantee (al-kafala)

amongst participating Islamic financial institutions. The programmer is Shariah-
compliant since its goal is to defend the public interest (maslahah), particularly
depositors and bankers’ industry. Islamic banking institutions, on the other hand, must
guarantee that monies from the Islamic deposit insurance system are invested in
Shariah-compliant products. In response, the Malaysian government established
Perbadanan Insurance Deposit Malaysia (PIDM), a government entity that acts as a
third party to provide Shariah-compliant insurance benefits on deposits. Additionally,
with the establishment of the Islamic Direct Access Guarantee Scheme in 2005, Bank
Negara Malaysia (BNM) recognized Credit Guarantee Corporation Berhad (CGC) as
third-party guarantors for commercial operations (DAGS-i). In this arrangement, the
guarantor will charge a fee for guarantee services supplied only to Islamic banking
firms' clients for Islamic financing instruments (BNM, 2008).

In generally, Islamic financial institutions prefer to employ debt financing

tools such as murabahah (short-term debt) or bai 'bithaman ajil (long-term debt) rather
than equity funding tools in their economic activities. The dilemma of poor selection
and moral risk is the reason why equity financing, specifically mudarabah (profit
partnership) is a less popular alternative as a source of financing in Islamic financial
institutions. In reality, mudarabah (profit sharing) investment are particularly
hazardous since entrepreneurs (mudarib) sometimes have access to relevant data
about the proposed project and its earnings than Islamic banks have. As a result, the
contractual parties have incomplete information (Siddiqui, 2008). In the meantime,
Ismail and Tohirin (2008) and Khalil et al., (2002) discovered that mudarabah
undertakings can be ineffective when Islamic banks fail to enforce an effective vetting
process in the selection of suitable entrepreneurs to start the company prior to entering
into a contract, as well as failing to monitor the entrepreneur's actions that after
contract is concluded. This is frequently linked to the entrepreneur's ability to conceal
knowledge about his past and talents before to being hired, as well as his subsequent
covert activities.

Information asymmetries in mudarabah contracts is also due to false parties,

according to Sarker (2000). the conduct of entrepreneurs who do not correctly
disclose their outcomes. Meanwhile, Iqbal and Lewis (2009) discovered that
businesses with lower-than-average earnings preferred equity contracts over loan
contracts to limit failure losses. Managers with above-average wages, on the other
hand, want to employ debt financing to maximize their profits if they are successful.
This is consistent with Allen and Gale's (1992) findings that high-quality companies
employ debt financing as an indication of their better quality. When authorities
impose limits on the use of collateral for these assets, the situation gets much worse.
A mudarabah contractual investment is likewise exceedingly dangerous because there
is no guarantee of return. Before the investment is implemented, the entrepreneur
(mudarib) faces the genuine danger of poor selection. Meanwhile, moral risk comes
when the mudarib is not motivated to forward the project's goals for reasons other
than his own. It also refers to the possibility that the businessman may withhold
information about his talents and history before from the contract's execution, and
then work independently once the contract is completed (Ismail and Tohirin, 2008).
Furthermore, according to Dar and Presley (2000), similar issues might arise when
business owners report or cut claimed earnings false representation.
5.0 Applications of Al-Mudarabah at BIMB

General Investment Account (GIA)

A "General Investment Account" (GIA) can be used to name these

investments, or a "General Investment Account" can be used to name them (GIA).
GIA is a regular profit-sharing ratio mudarabah contract completion package, whereas
GIAs is a limited profit-sharing ratio mudarabah contract. At the moment of intake of
money, GIAs funds should be managed independently. Groups of GIAs are integrated
and maintained. GIAs is commonly used for somewhat significant overall
investments. Malaysia launched the first Islamic bank in 1983. Under the Islamic
Banking Scheme, a commercial bank, merchant bank, and finance company began
delivering Islamic Banking goods and services in 1993. (IBS Bank). In Malaysia,
Islamic banks provide two types of profit-sharing investment accounts (PISAs):
general investment accounts (GIA-i, limitless Mudarabah accounts) and specialized
investment accounts (SIAs) (SIA-i, Mudarabah limited). For GIA-i, the term for
which money is collected for a GIA deposit might be less than one month and up to
60 months, or any other duration allowed by BNM. Every Islamic bank determines
the minimum amount; however, it must be at least RM 500. Bank Islam collects cash
from investors with a minimum investment of RM 200,000 for SIA-i. Whether or not
to let investors to make withdrawals in advance of maturity is up to the Islamic bank's
judgment (Ismail, 2010).

Bank Islam offers a one-of-a-kind Mudharabah Savings Account. This facility

is based on the mudharabah contract, which is a profit-sharing idea. Individual
accounts, trust accounts, and joint accounts are the three types of accounts approved
by BIMB. They also provide a Mudharabah-based Investment Account-i contract for
Generals. In Malaysia, Islamic banks nearly never sell products based on the notion of
musyarakah. In the 1980s and 1990s, there was a wide range of Islamic financing
options; however, musharakah, in which banks create partnerships with entrepreneurs,
is rarely employed since it is deemed too hazardous.

7.0 Conclusion

In a conclusion, mudarabah is a strictly shariah-governed transaction. Classic

mudarabah contract applications have been expanded to encompass numerous
enterprises in current times. However, mudarabah financing approaches have yet to
reach their full potential. The successful implementation of PLS contracts in general,
and mudarabah in particular, has been hampered by a range of challenges and
restrictions. Furthermore, mudarabah is more difficult to practice than musharakah
and other Islamic laws since the mudarabah bank has no role in the administration
will be fully in the hands of the mudarib. As a result, mudarib's capacity to operate a
firm requires a lot of faith. The mudarabah has been altered today. In a mudarabah
contract, the bank provides all funds to coworkers and has sole responsibility for all
financial losses. The bank will choose its colleagues and advance the capital held in
"investment accounts" by bank clients. The monies will be invested in a lucrative
business enterprise by the agency.

Islamic banks will be authorized under the Mudarabah agreement to

discourage businesses from taking actions that might result in losses owing to a lack
of preparedness. As a result, in general, the most suited mechanism for mudarabah
agreements between Islamic banks and enterprises will have total flexibility. While
providing investments, Bank Islam will also guarantee that no fixed rates are returned.
Instead, the depositor will become a stakeholder in the bank, entitled to a part of the
business's profits (Sadr).
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