It is generally believed that 'Mudarabah' and 'Musharakah' are real Islamic modes of financing because these are equity-based (profit and loss sharing) products. But the Islamic banks, all over the world, use these products at the minimum level. On the other hand, the use of debt-based products is overwhelming. The issue has been discussed below to find the motive behind the use of debt-based products in Islamic banking.
There are both 'equity' and 'debt'-based financing products in use in Islamic banks. The equity-based products comprise Mudarabah and Musharakah. On the other hand, debt-based products comprise Bai-murabaha, Bai-muajjal, Bai-salam, Istisna, Ijarah and Istijrar etc. The Mudarabahh and Musharakah are profit sharing and loss bearing products. Loss means capital loss, not profit loss. In the case of loss, all the Muslim jurists are unanimous on the point that each partner shall suffer the loss exactly according to the ratio of his investment. Therefore, if a partner has invested 40 per cent of the capital, he must suffer 40 per cent of the loss, not more, not less, and any condition to the contrary shall render the contract invalid. There is a complete consensus of the jurists on this principle. When a financier contributes money on the basis of these two products, it is bound to be converted into the assets having intrinsic value. Profit and loss are generated through the sale of these real assets.
The nature of the Mudarabah and Musharakah, therefore, indicates that there is no guarantee of capital in use of these two products. This particular nature of the Muadrabah and Musharakah is a threat to banking. A bank cannot finance in equal chance for making profit or losing capital because it is, after all, a financial intermediary and is engaged in banking business with depositors' money. Moreover the deposit is payable on demand so it is protected by a banking safety-net, and besides, banks are under obligation to safeguard depositors' money.
The depositors' money is protected in Islamic banks but there cannot be protection of 'bank money' in the case of Mudarabahh and Musharakah products. Suppose, to protect the bank money in an alternative way, the partner of Musharakah (customer) may be held liable, through contarct, for the loss with a view to protecting the bank money as well as sharing the profit only. It may be called 'Profit Musharakah'. Such attempt makes the Profit Musharakah parallel to the debt-based products because these are more advantageous for both the customer and the banker. Debt for the customers is pre-fixed by the stipulated schedule of repayment. So, it is easy to re-pay by the customer and realise by the banker without further calculation.
Dr. Mahmood Ahmed is Executive Vice President, IBBL. mahmood.ahmed@islamibankbd.com