How an Islamic bank distributes a periodic profit to Mudarabah depositors

In-Depth Analysis

For a quick recap, the funds in the Mudarabah common pool are mainly comprised of customer deposits received via saving accounts and term deposit accounts in addition to the shareholders' funds which include the aggregate amount lying in current accounts. Both the customers' and shareholders' funds should be deposited in the common pool on a non-discriminatory basis since they form a tacit Musharakah in the common pool. The Shariah definition of profit is what exceeds the original capital. As such, when one-to-one Mudarabah takes place, the Rab Al Maal (capital provider) and the Mudarib (capital receiver) agree over the tenor and profit distribution ratio between them. Upon completion of the Mudarabah tenor, it is the obligation on the Mudarib to not only return the original capital but also the share of the Rab Al Maal's profit corroborated by the statement of the Mudarabah account. The Mudarib is able to retrieve the original Mudarabah capital along with the actual profit in cash by selling the Mudarabah assets in the market. How does an Islamic bank distribute the common pool Mudarabah profit to depositors and itself on a periodic basis? Does it sell the entire Mudarabah assets in the market against cash on the profit distribution date and, pursuant to the distribution of the profit, re-invest the original capital of the common pool all over again in the new assets? Such liquidation and reinvestment could be cumbersome and fairly risky since the Islamic bank may not find the right price for the common pool Mudarabah assets or it does not quite succeed in locating the new assets with the desired returns. The Shariah guidance is to deal with such situations through constructive liquidation.