OPERATIONAL PROCEDURES OF INVESTMENT UNDER MUDARABA MODE

I have discussed about Mudaraba and different types of rules relating to it in my previous article. Now I shall discuss about the operational procedures of Investment under Mudaraba mode.

Mudaraba Investment Committee
For Client selection, study & appraisal of proposals, sanction / recommendation, disbursement, monitoring & supervision, recovery, Shariah compliance etc., Mudaraba Investment Committee shall be formed in all the branches. Mudaraba Investment Committee shall also be formed in all the Zonal Offices and at Investment Wing in Head Office for study, approval / recommendation, monitoring & follow-up etc.
 

Formation of the Committee
The Branch Incumbent, the Second Officer, the In-charge of Investment Department / any other Officer (concerned Project Officer and Field Supervisor, in case of investment under RDS) of the Branch shall be the members of the Branch Committee. The Zonal Committee shall comprise of the Zonal Head and two other senior Executive(s) / Officer(s) next to the Zonal Head. The Head Office Committee shall be formed with the following Executives:
a.  The In-charge of Investment Wing
b.  The In-charge of concerned Division
c.  The In-charge of Asset Management Division and
c.  The In-charge of concerned Department

Business Discretionary Power of the Committee

Branch Committee	At Present Branch Committee shall have no sanctioning power except sanctioning of investment under Rural Development Scheme (RDS). But, sanctioning power for investment other than RDS may be delegated to the Branch Committee in due course which may be reviewed from time to time by the appropriate authority.
Zonal Committee	At Present Zonal Committee shall have no sanctioning power. But, sanctioning power may be delegated to the Zonal Committee in due course which may be reviewed from time to time by the appropriate authority.
Head Office Committee	The Head Office Committee may sanction Mudaraba Investment as according to their circular, which varies for different banks for a single client and which may be reviewed from time to time complying the prevailing norms for exercising investment business discretionary powers. But, the Committee will not sanction any Mudaraba Investment under composite facilities / investment limit. Composite Mudaraba Investment shall be sanctioned by the appropriate authority/Board as per delegation of existing business discretionary power for investment.

The Executives/Officials below the rank of Executive President posted as Branch Incumbent or Zonal Head of In-charge of Division/Wing at Head Office shall have no business discretionary power to sanction Mudaraba Investment under their personal / individual capacity.

Responsibility of the Committee
All the members of the Committee shall jointly and severally responsible for the jobs mentioned above done by them.
 

Induction of Client 

1.  Induction / Selection of good investment client is a prerequisite for averting loss in any investment specially Mudaraba and Musharaka Mode. Due importance will, therefore, have to be given to this aspect and the following points should be considered among others while selecting Mudaraba Clients:
i. Honesty, ii. Integrity, iii. Commitment, iv. Ability, v. Potentiality, vi. Efficiency, vii. Expertise and viii.  Genuineness.
 

2.  Hold preliminary discussion with the prospective Mudaraba Client regarding his capacity, business experience, management quality and investment needs. Brief him on the Shariah rules of Mudaraba Mode of Investment. Appraise, in particular, the usual terms and conditions under which the Bank makes such investment.
3.  The Clients under Mudaraba Investment mode must maintain an Al-Wadeeah Current Account satisfactorily for a reasonable period (Generally six months) to qualify themselves to avail investment. However, micro investment Clients under investment schemes like RDS need not maintain Al-Wadeeah Current Account.
4.  Existing investment Clients having 3 (three) years record of availing investment from the Bank with good performance shall get preference for induction as a Client under Mudaraba mode.
5.  Past performance of the existing Clients and current Investment policy of the Bank, Bangladesh Bank (Central Bank) / Government Policy, Shariah permissibility etc. shall be carefully checked at the induction stage of the Client.
6.  Satisfy about reputation of the Client in the business community.
7.  If the proposal is found suitable, advise the Client to submit formal Application (varies from Bank to Bank) along with other required documents / papers / information. If not found suitable, regret politely.

Application 

Application for Mudaraba Investment shall be obtained on as per specimen form of the banks from all clients other than clients of the various Investment Schemes. Applications for Mudaraba investment from clients of the schemes will be obtained on the forms as circulated with the relevant Schemes duly revised. A combined form for Application, Guarantee, Sanction Advice and Agreement in respect of RDS investment shall be obtained on as per specimen format. Banker have to obtain and affix attested photograph(s) of the Mudarib on the top right hand corner of the application duly verifying the same with the photograph submitted at the time of account opening. A projection of the proposed business shall also be obtained alongwith the Application as per banks prescribed format. At the outset, Shariah permissibility of the proposal and projection of the proposed business shall be examined. If the business does not meet the requirement of Shariah and / or the projection does not apparently seems viable, the proposal shall be rejected outright. The Application is to be scrutinized to see that all columns therein are properly filled in, correct in all respect, all required documents/papers are attached with and duly signed in by the Mudarib at the appropriate place. The signature of the Mudarib on the Application shall be verified by an authorized official of the Branch. Particulars of the Application shall be recorded duly allotting a serial Number on it.

Processing and Appraisal 

Bankers have to visit to the business establishment / project site of the Client and tally the particulars, information and figures in the application form with the original documents/papers/records and be sanguine about its genuineness and correctness. They have to obtain additional information, particulars, facts and figures, if required. Banker also have to talk to business and important personalities of the locality in order to ascertain the honesty, integrity, commitment, business dealings etc of the Client. Then obtain declaration of the Client about its/his/their liability (both funded and non-funded) with other Banks/Financial Institutions/Leasing Companies etc including any other branches of Islami Bank Bangladesh Ltd. Banker also obtain Report from Credit Information Bureau (CIB) of Bangladesh Bank through Head Office Investment Wing as per circular and guidelines in this regard. Confidential Reports are to be obtained from all local Banks and Financial Institutions for all general clients. Such report is not needed in respect of micro investment clients. Then banker have to inspect Land, Building(s), Other Assets and Properties proposed to be mortgaged or hypothecated. Ascertain genuineness and correctness of those in cross-references to Documents, Title Deeds and other relevant Papers.

Proper valuation of mortgaged property (market & forced sale value) is to be done. Valuation of such properties of the Corporate Branches shall be made jointly by the Investment/Section Incharge and any other Officer not below the rank of Principal Officer duly countersigned by the Branch Incumbent/Second Officer/any other Executive of the Branch. Branch Incumbent/Second Officer and Investment Incharge of the Branches other than Corporate Branches shall made valuation of such properties jointly. While accepting mortgage properties and valuation shall be done, the following guidelines shall be observed:
a.    Residential / Commercial building situated in the City Corporation / Metropolitan City / Municipality shall be preferred.
b.    Properties owned by the Investment Client himself shall be preferred and third party collaterals should be discouraged.
c.    Easily saleable properties shall be preferred. Inspecting Officials shall satisfy themselves about whether the properties can be sold, in case of need or not.
d.    Market value shall be determined on the basis of taking interview with the local people who are likely to sale and purchase such types of properties or their employees and / neighbours.
e.    Forced sale value shall be ascertained prudently by the inspecting officials considering all the probable situations which may arise while selling of properties in case of need. If the property is easily saleable i.e. many buyers may come freely to participate and there will be no hazard for bidding and transfer of possession, the forced sale may higher than those of hazardous. Forced sale value of the properties situated besides highway/ in the heart of the city or town / commercial places etc may higher than those of narrow street/ backward places/ rural area etc.
f.    Value of land and value of the construction to be made separately taking the depreciated value of the construction as per standard norms.
g.    Concerned Registry Office, Record Room, Tahshil Office etc. shall be checked to ascertain genuineness and correctness of the particulars of the property given by the clients and necessary records / reports i.e. non encumbrance certificate with search fee paid receipt, report of the lawyers/officials/representatives of the Bank etc. shall be obtained and preserved.
h.    Valuation shall be done by the external surveyor.

Then forward Documents, Title Deeds and other relevant Papers to the approved Lawyer of the Bank for examination and furnishing his opinion. (Lawyer's opinion should be clean and without ambiguity). Opinion shall not be made only on the basis of submitted documents but physical verification of such documents with the concerned Office / Department shall be made and this shall invariably be mentioned in detail in the opinion.  While preparing the Appraisal Report for general clients, it is to be ensured that all information, particulars, figures and statistics shall be incorporated therein correctly with special attention to the following: 

a)    Composition of assets of the Client, viz., cash, goods, investments, building, landed property, stock in trade, work-in-process, marketable securities, etc.
b)    Extent and nature of liabilities of the Client, i.e., whether the volume is within the manageable capacity of the Client. Opinion in this regard and justification thereof must be clearly mentioned.
c)    The value of liquid assets, viz. cash and book debts of the Client.
d)    Respectability, commitment, trustworthiness and business reputation of the Client in the market.
e)    Experience of the Client in the business. 

Micro investment proposals under different schemes are to be appraised as per guidelines of the concerned Schemes. The Mudaraba Investment Clients must maintain formal Books of Accounts. The proposal may be classified into the following sectors/schemes:
i.    Industrial
ii.   Commercial
iii.   Different Schemes
iv.   As appropriate.

Industrial
    Investment to be made for establishment of Industrial Projects, Mills, Factories, Agri-farms, purchase of Machineries & Equipments be classified as Mudaraba- Industrial and be appraised and processed as per guidelines mentioned above and also guidelines issued / to be issued from Head Office from time to time, in this regard.

Commercial
    Financing of local trade, import, export, any other commercial and trading enterprise shall be classified as Mudaraba-Commercial and be processed as per guidelines mentioned above and also guidelines issued / to be issued from Head Office from time to time, in this regard.

Different Schemes
    Investment under different schemes shall be known by a particular name of the schemes, such as, Mudaraba - Transport Investment Scheme etc. Investment under such schemes shall be governed by the rules and regulations to be framed for each and every scheme and circulated / to be circulated from Head Office.

Credit restriction schedule of Central Bank and current investment policy of the Bank are to be checked. Proposal which does not conform to these policies should be declined.

Formation of Mudaraba and Fixation of Profit sharing ratio 

     Mudaraba is a relationship established by the parties through a mutual contract. Therefore, an Agreement must be concluded between the Bank and the investment client for the purpose of investment under Mudaraba mode. The capital of Mudaraba should be provided in the form of cash. However, it may be presented in the form of tangible assets, in which case the value of the assets is the contribution to the Mudaraba capital.  The valuation of the assets shall have to be determined at the time of formation of Mudaraba by the experts or as agreed upon by the contracting parties and the assets to be used in the business. In Mudaraba Investment Profit sharing ratio may be varied from business to business, sector to sector depending on profitability of the business and risk involved. Keeping in view all the factors, profit sharing ratio shall be fixed in such a way that Bank’s share of profit does not fall below the anticipated rate of return fixed by the Head Office from time to time.

Security:
Collateral security  and / or Personal Guarantee and / or any Other security to cover any loss which the bank may sustain due to breach of trust i.e. willful negligence, misconduct, mismanagement, violation of the terms of contract and obstruction etc on the part of the Mudarib shall be obtained duly insured, if necessary from the Mudarib. Head Office will, from time to time, advise norms for obtaining collateral securities to the branches in this respect. However, no collateral security excepting personal guarantee, if necessary, is to be obtained form micro investment clients.
 

Period of Mudaraba Investment:
The period of Mudaraba investment shall be determined on the basis of trade norms and nature of business of the client. Ordinarily, the period of investment should be for 12 months. However, period of less / more than 12 months may be fixed-up depending on the nature of the business and the need of the client.

Continuity
After expiry of the validity of the contract or after liquidation, it may be renewed for further period depending on the past performance of the Client and with the mutual consent of the Bank and the Client having settled all the operational result of the previous contract. The Bank’s investment, after full and final settlement of operational result of the previous contract as mentioned above, in the Mudaraba will, instead of taking back, be considered reinvested in the Mudaraba for the renewed period. A fresh agreement for this purpose to be executed inserting the necessary fresh terms and conditions.

Sanction 

Upon completion of the appraisal & study, if the proposal is found viable and the expected rate of profit is found satisfactory (not below the anticipated minimum rate fixed by Head Office) and if it is within the delegated business discretionary power of the Branch Mudaraba Investment Committee, the Committee will sanction it putting signature of all of them, otherwise it will be regretted. The Sanction Advice (F-   as per specimen at page 52) in duplicate / Regret Letter shall be issued by the Branch incumbent having got it sanctioned / regretted by the Committee. The above Sanction Advice shall be issued to all Clients other than Clients of the various investment Schemes. Sanction Advice for Mudaraba investment to the Clients of the schemes will be issued on the prescribed forms as circulated with the relevant Schemes duly revised. A combined form for Application, Guarantee, Sanction Advice and Agreement in respect of RDS Investment shall be obtained on F-220 A  (as per specimen at page 35). If the proposal exceeds the business discretionary power of the Branch Committee, it will be forwarded to the Zonal Office with specific views and recommendations of the Committee.
 

Upon receipt of the proposal form the Branches, the Zonal Committee shall sanction it putting the signature of all of them if they are satisfied themselves in all respects after due study and if it is within their business discretionary power.  If they are not satisfied, it shall be regretted instantly. The sanction/regret letter shall be issued by the Zonal Head having got it sanctioned/regretted by the Committee. If the proposal exceeds the business discretionary power of the Zonal Committee, it will be forwarded to Head Office with specific views and recommendations of the Zonal Committee. 

Upon receipt of the proposal form the Zonal Offices, the Head Office Committee shall sanction it putting the signature of all of them if they are satisfied themselves in all respects after due study and if it is within their business discretionary power.  If they are not satisfied, it shall be regretted instantly. The sanction/regret letter shall be issued by the In-charge of the concerned Division having got it sanctioned/ regretted by the Committee. If the proposal exceeds the business discretionary power of the Head Office Committee, it will be placed to the appropriate authority (E.P. / M.C. / E.C. / Board) as per procedure with specific views and recommendations of the Committee for consideration/approval.
 

On getting the Duplicate of the Sanction Advice duly accepted by the Client, it shall be recorded in details and a Number shall be allotted to each Client which shall be treated as his Mudaraba Investment Account Number so long the limit remains valid and the Client continue to do business with the Bank. Separate file for preserving documents and papers for each Client shall be maintained at the Branch, Zonal Office and Head Office. Branch Committee or the Zonal Committee will not sanction any Mudaraba Investment to Trust Organisation or Co-operative Society. Such proposal may be forwarded to Head Office with their specific views and recommendations.

Documentation: 

Though the Charge Documents such as D.P. Note, D.P. Note Delivery Letter, etc. which the Bank usually obtains from investment Clients, have no relevance in Mudaraba investment deals yet, in absence of any relevant law in force in the country, the Branches will have to obtain the following documents for every Mudaraba contract or for every case of renewal thereof:
i.    Mudaraba Agreement Other than Schemes.
ii.    Mudaraba Agreement for RDS Clients.
iii.    Letter of Disbursement
iv.    Single Party D.P. Note
v.    Joint and Several D.P. Note signed by all the Directors in case of Company
vi.    D.P. Note Delivery Letter
vii.    Letter of Continuity
viii.    Insurance Policy
ix.    Letter of Installments if Bank’s share of capital is refundable on installment basis.
x.    Balance Confirmation Letter to be obtained after interim settlement.
 

If the Investment is secured by Personal Guarantee to cover any loss which the bank may sustain due to the willful negligence & mismanagement, violation of the terms of contract and obstruction by the Mudarib, the following documents shall be obtained:
i.    Letter of Guarantee.
ii.    Letter of Guarantee (for RDS)
iii.    Double Party D.P. Note to be made by the Client in favour of the Guarantor and endorsed by the latter in favour of the Bank.
iv.    D.P. Note Delivery Letter duly signed by the maker and the endorser (the Client and the Guarantor).
 

If the Investment is made collaterally secured, to cover any loss which the bank may sustain due to the willful negligence & mismanagement, violation of the terms of contract and obstruction by the Mudarib, by Mortgage of Property, obtain the following documents:
i) In case of Equitable Mortgage, Memorandum of Deposit of Title Deeds signed by the owner of the property.
ii)  In case of Legal Mortgage, Registered Mortgage Deed should be obtained.
iii) A registered Power of Attorney authorizing the bank to sell the property in case of need.
iv) Personal Guarantee of the owner(s) of the Property.
v) Original Title Deed(s) with Bia-deed(s), CS, SA, RS & Mutation Parcha, DCR of the property, Mutation record, Up-to-date Rent Receipts etc. The genuineness and correctness of all these documents shall be got verified jointly by the investment / section incharge and an official of the branch not below the rank of principal officer or by the Branch Incumbent himself.
vi) Up-to-date Rent Receipts.
vii) Non-encumbrance Certificate along with Search Fee Paid Receipt. Search should be made by the Bank’s panel lawyer directly or by a suitable searcher under his supervision.
viii) Mouza Map and Site Plan of the proposed mortgage property.
ix)  Approved Plan for building from the appropriate authority.
x) Clearance Certificate from the local authority/development authority regarding free from planning scheme.
xi) Permission/clearance/no objection of the concerned allotting authority i.e. RAJUK, CDA, KDA, PWD, City Corporation, Municipality, Developer, Association etc., if needed, for creation of mortgage of the property(ies).
xii) Lawyer's Certificate about verification of the Title Deeds. The Lawyer should certify in clear terms that the Property covered by the Title Deeds is free from all encumbrances and the same can be accepted as collateral security against the particular Investment. The Certificate should start with a good root of title describing the devolution of title and it should trace from the first beneficial owner down to the client / mortgagor(s). It should be self-contained without any ambiguity and clean in all respects and must state that the identity of the property has been established.
xiii) An Affidavit sworn in before a 1st Class Magistrate / Notary Public (The shall prefer 1st Class Magistrate) by the owner of the property to the effect that the property offered for mortgage as security is free from all encumbrances and the owner(s) is/are lawful owner(s) in possession and he/ she/they will not Encumber /Transfer / Sale and / or Charge the Property in any manner whatsoever to others during the continuance of Bank's Investment without prior written clearance of the Bank.
xiv)    Any other documents required by the Bank as per circular issued / to be issued from time to time by Head Office.
 

In case Investment is Collaterally/ Additionally secured, to cover any loss which the bank may sustain due to the willful negligence & mismanagement, violation of the terms of contract and obstruction by the Muarib, by Pledge of Shares of reputed Public Limited Company on Bank's approved list and quoted in the Stock Exchange, the following additional Documents are to be obtained:

i) Agreement for Pledge of Shares along with original Share Certificates (No share in the name of minor shall be accepted as security).

ii) Share Transfer Deed in Duplicate - one copy signed, dated and another copy signed undated.
iii) Share Delivery Letter addressed to the Bank.
iv) Letter to the concerned Company to register Lien in Bank's favour.
   This notice shall be sent by Registered Acknowledgement Due Post (Registered A/D Post) and confirmation of recording the Lien shall be obtained from the concerned Company.
v)  Letter of Authority in Bank's favour duly signed by the shareholder to collect Dividend and Bonus on his behalf of the Share pledged to the Bank.
 

In case of Investment to Partnership Firms, obtain the following Documents:
i) Letter of Partnership signed by all Partners.
ii) Copy of Partnership Deed duly attested by the Incumbent-in-charge of the Branch.
In case of Investment to Private or Public Limited Company, obtain the following additional Documents:
i)  Certified copy (duly certified by the Registrar of Joint Stock Companies & Firms) of the Memorandum and Articles of Association to ensure that the Company has necessary power to borrow/take Investment from any Bank.
ii)  Resolution of the Board of Directors of the Company to do business and authorizing the office bearers to execute necessary documents.
iii) Personal Guarantee of all the Directors of the Company.
iv) If the Investment is allowed on Hypothecation basis, in addition to other Charge Documents, 1st charge under relevant section of the Company's Act-1994 shall be created in Bank's favour in respect of Company’s Assets prescribed as security. This charge shall be created with the Registrar of Joint Stock Companies and firms within 21 days from the date of execution of the relative Charge Documents.
v) Certificate issued by the Registrar of Joint Stock Companies & Firms under     section 114 of the Companies Act, 1994 in respect of creation of Charges;
vi) Copies of Memorandum and Articles of Association with latest amendments, if any, duly certified by the Registrar of Joint Stock Companies & Firms and attested by the Managing Director on every page with Official Seal of the Company duly verified by the Branch Incumbent/Authorized Official.
vii) A certified copy of Certificate of Incorporation.
viii)    A copy of Certificate of Commencement of Business in case of Public Limited Company.

In case of Investment to a Trust Organisation obtain the following Documents in addition to other Charge Documents:
i) Copy of Trust Deed duly attested by a 1st class gazetted officer and verified by the Incumbent-in-charge of the Branch with the original copy. The Trust Deed must have power to do business with Banks.
ii) Resolution of the Board of Trustees to do business with Islami Bank Bangladesh Ltd.
iii) Charge Documents shall be signed either by persons authorized by all members of the Trust Committee, if Trustees are authorized to delegate their powers by the Trust Deed or all of the Trustees;
iv) Personal Guarantee of all the Office Bearers of the Trust in their personal capacity.
 

In case of Investment to Co-operative Society, obtain the following documents also:
i) Clearance from the Registrar of Co-operative Societies for doing business with Islami Bank Bangladesh Ltd.
ii) Letter to be issued to the concerned Registrar of Co-operative Societies under Registered A/D Mail informing about Bank's allowing of Investment/ Facility to the concerned Society as per clearance accorded by him.
iii)  Personal Guarantee of the Office Bearer of the Society in their personal capacity.
iv)  A copy of Bye-laws of the Society duly certified by the Registrar of the Co-operative Societies.
 

Rates of Stamp Duty on various types of documents will be supplied by Head Office, concerned Department (Law Department), from time to time. Signature of the Client on Documents should be verified by the Incumbent-in-Charge/Authorized Official of the Branch by a wooden lead pencil. Before preserving the Documents in the Safe Custody, the Investment Committee of the Branch should ensure that all the formalities of documentation have been properly done and completed strictly as per terms of the Sanction Advice. After Completion of Documentation, enter the Documents in Documents Execution Register, and put into an Envelope duly inscribing the name of the Client deal-wise and preserve in the Strong Room in Fire proof Safe/Almirah under Joint Custody of the Incumbent-in-Charge of the Branch and the Officer-in-Charge of the Investment Department. Movement of Documents, if any, should be duly recorded in the "Documents Ex-Custody Register" duly signed by the Custodians.

Insurance: 

The client shall obtain Insurance Policy equal to the amount of investment of the Bank in the Mudaraba investment plus ten percent covering the risk of FIRE, RSD and FLOOD & CYCLONE, where necessary with Bank’s Mortgage clause. The amount of insurance premium shall be an expense of Mudaraba business.
Insurance Policy preferably shall be obtained from any Islamic Insurance Company or in absence of Islamic Insurance Company from Sadharan Bima Corporation or from an Insurance Company on Bank’s approved list. The Insurance Policy together with premium paid receipt shall be obtained from the client, checked properly and recorded in Insurance Policy Register (B-39) and be kept in safe custody.  If the client doesn’t willingly obtain Insurance Policy, the Branch shall obtain the same and pay the premium to the debit of Mudaraba Investment Account and charge the same as an expense of the business at the time of settlement. If any accident occurs, the client will be advised to lodge claim through the Branch to the concerned Company duly complying with all formalities within the stipulated time/period.

Disbursement & Operations 

The Branch shall disburse the entire amount of investment to the debit of Mudaraba Investment Account to be opened in the name of the Client. In order to ensure end-use of investment and check diversion of fund, strict monitoring & supervision shall be made.

Monitoring & Supervision:In case of Micro Investment like RDS, weekly meeting and weekly collection schedule shall be observed. In other cases, weekly / fortnightly / monthly inspection of stock, business establishment and checking of Books of Accounts as the Branch Incumbent feels necessary shall be done. The Branch will, however, invariably obtain Monthly Stock Report from the client and arrange inspection by an official of the Branch.
 

Settlement /Adjustment of Mudaraba Investment Account: 

As on the terminal date of Mudaraba contract or on the date fixed as per contract, the Mudarib will prepare Profit & Loss Account and will submit the same to the bank. Micro investment clients will submit Profit & Loss Account within 5 days from the terminal date of contract or on the date fixed as per contract while the other clients will submit such Accounts within 10 days. After receipt of the Profit & Loss Account, the branch shall verify its genuineness and got themselves satisfied. If the bank’s share profit as per agreement are within the expected rate of return of bank’s norms, it shall be accepted by the branch and the Mudarib will be advised to deposit it immediately into Mudaraba Investment Account but not later than 15 days from the date of closing the Accounts. If the bank’s share of Profit is substantially lower than the expected rate of return of bank’s norms, the branch shall forward the same with recommendations to Investment Wing for decision. No profit can be recognised or claimed unless the capital of the Mudaraba is maintained intact. If interim profit & loss accounts are prepared before expiry of the validity of the contract or before liquidation and if Mudaraba operation incurs losses, such losses shall be kept in suspense account in the books of Mudaraba business for setting it off by the profits of future operations of the Mudaraba. The distribution of profit depends on the final result of the operations at the time of expiry of the validity of the Mudaraba contract or at the time of liquidation. If losses are greater than profits at the time of expiry or liquidation, the balance (net loss) must be deducted from the Bank’s capital. In this case, as the Mudarib is a trustee he is not liable for the amount of this loss, unless there is negligence or misconduct or breach of contract on his part. If the total Mudaraba expenses are equal to the total Mudaraba revenues, the Bank will receive his capital back without either profit or loss, and the Mudarib is also not entitled to share any profit. But, if there is profit i.e. excess of revenues over expenses and is realized, it must be distributed between the parties as per the agreement.

Compensation
Mudaraba Agreement may include a clause to the effect that if any party violates any rules of Mudaraba or any terms & conditions of Mudaraba Agreement, the business or other party will have the right to impose compensation on him as determined by the Review Committee of the Bank.
 

Book-Keeping of Mudaraba Transactions1. A head of Account titled “Mudaraba” Investment Account will be maintained in the General Ledger for recording all transactions under this head.
2. Detail particulars of client are to be recorded properly.
3. An Investment Account Number shall be allotted to the client. No Account Opening Form is required for opening Mudaraba Investment Account.
4. General Voucher Debit will be used for debiting Mudaraba investment Account. Investment Account Pay-in-Slip will normally be used for crediting Mudaraba Investment Account. However, General Voucher Credit may be used for crediting general nature of transactions in the Mudaraba Investment Account.
5. Amount of Profit realized from the investment client shall be credited to Investment Income Account on the same day it is deposited by the client.

Accounting of Mudaraba Transactions 

1. While disbursement to be made:
Dr.    Mudaraba Investment Account
Cr.    Cash or Current Account of the Mudarib
    (Being the amount disbursed under Mudaraba mode as per sanction advice No…………….. dated ……………).
2. For adjustment of Mudaraba Investment Account, the following Accounting entries will be passed:
Dr.    Cash or Current Account of the Mudarib
Cr.    Mudaraba Investment Account
    (Being adjustment of Mudaraba Investment Account No…………….)

3.  For realization of Bank’s share of profit, the following Accounting entries will be passed:
Dr.    Cash or Current Account of the Mudarib
Cr.    Mudaraba Investment Account
    (Being Bank’s share of Profit realized from the Client)
 Dr.     Mudaraba Investment Account
 Cr.    Investment Income Account
        (Being Bank’s share of profit transferred to Income Account)

4.  For sharing Loss by the Bank the following accounting entries will be passed:
Dr.    Investment Income Account
Cr.    Mudaraba Investment Account
    (Being share of loss accounted for)
5.  For charging compensation, the following entries will be passed:
Dr.    Mudaraba Investment Account
Cr.    Sundry Deposit Account: Compensation Realisable
(Being the amount of compensation charge for the overdue period)
6.  On realization of charged compensation, the following Accounting entries will be passed:
Dr.     Sundry Deposit Account: Compensation Realisable
Cr.    Sundry Deposit Account: Compensation Realised
    (The amount of Compensation realized will be transferred to Head Office as per Head Office instructions)
7.  For the Compensation amount accrued and charged for the overdue period of the year and the Investment A/C subsequently classified.
    Dr.     Sundry Deposit Account: Compensation Realisable
    Cr.    Compensation Suspense Account.
    (Being the amount of Compensation transferred to Compensation Suspense A/C.)

8.  At the time of filing Suit the following entries shall be passed for payment of the legal expenses.
    Dr.    i)  Suspense A/C:  Court Fee
              ii)  Expenditure A/C: Legal Expenses
    Cr.    Payment Order / Account of the Lawyer.
    (Being the amount paid to the Lawyer for Court fees and Lawyer’s Charges and other related expenses for filing suit).
9. While Recovery/ Deposit is made from / by the Client after filing suit, the following entries shall be passed.
    Dr.    Cash/ Current A/C of the Client
    Cr.    Mudaraba Investment A/C
    (Being the amount paid/ deposited by the Investment Client after filing suit).
 

The same should be proportionately taken into principle and profit (if any) A/c. The amount to be credited to Investment A/C duly marked “Without pre-judice to any court case” and the court be informed about such payments.
     
Other Expenses, if incurred after filing Suit:   
1.  Other expenses in respect of maintenance, storage and insurance etc., if any, incurred by the Bank after     filing suit against the Client, the following entries shall be passed:
   Dr.    i) Suspense A/C        :  Insurance Premium
                                            : Other Exp. (e.g.  Advertisement Cost, Auction Exp. etc.)
            ii)  Expenditure A/C:  Legal Expenses.
   Cr.    Cash/ Payment Order A/C Favouring the Beneficiary.
    (Being the amount of expenses incurred for insuring/ maintaining storing the Stock /Other Securities of the Client).   
 

2. After obtaining decree from the court for the Other expenses incurred above, the Suspense entries shall be reversed as follows:
    Dr.    Mudaraba Investment A/C
    Cr.    Suspense A/C     : Insurance Premium
                                       : Other  Expenditure
    Cr.    Other Income     :  Legal Exp.  Allowed by the Court.

    (Being the amount of Insurance expenses/ Other expenses/ Legal Expenses etc. allowed by the court and recovered from the client).
 

3. Entries to be passed after realization of Compensation:
    While any Compensation amount is recovered/ realized from the Investment Client out of Compensation charged / imposed during the year, the following entries shall be passed.
    Dr.    Sundry  Deposit Account:  Compensation Realisable
    Cr.     Sundry  Deposit Account:  Compensation Realised
    (Note: -  If the amount of Compensation already transferred to FAD, Head Office earlier, separate entry for the amount of Compensation realized should not be passed).
4. Entries to be passed while writing off the principal or Other Charges.
    No Charges or Principal, whatever small the amount may be, shall be written off by the Branch/ Zonal Office save and except, with authority to this effect in writing from the Head Office. Whenever, any such authority is received to write off any Charges or principal amount, the following entries shall be passed.
    Dr.    IBG  A/C : Head Office, FAD.
    Cr.    Mudaraba Investment A/C
5. At the year end i.e. on 30th December each year Compensation realized/ realizable amount to be transferred to CAD, Head Office and the following entries to be passed: -
    Dr.    Sundry Deposit  Account:  Compensation  Realisable or
        Sundry Deposit Account :  Compensation Realised
    Cr.    I.B. General A/c, FAD, Head Office:
    ( Being the Account of Compensation Charged on Overdue Unclassified A/Cs. during the year and kept in Sundry Deposit- Compensation Realised / Realisable now transferred to Head Office).
6.  The following entries to be passed while writing off/ waived Profit/ Rent amount if any.
            (1)    Dr.  Profit  (if any) Suspense A/c
(Being the amount of Profit written off/ waived, in case any amount of Profit kept in Profit Suspense A/c of the Branch).
           (2)    Dr.      I.B. General A/C : FAD
For the remaining amount i.e. total     waived/ written off of Profit minus (-) amount of Profit Suspense with the Branch.
(Being the remaining amount of Profit    written off/ waived as per Head Office, letter. No.............)
        Cr.    Mudaraba Investment A/C
(Being the amount of Profit/ waived / written off as per Head Office approval).

7.  The following entries to be passed while the Compensation is waived if any.
    Dr.      (1)     Compensation Suspense A/c
(If any amount of Compensation of that A/c kept in Compensation Suspense A/c with the Branch).
                     (2)    Sundry Deposit- Compensation Realisable A/c
(If any amount of Compensation of that account kept in Sundry Deposit : Compensation Realisable A/c with the Branch)     
                     (3)    I.B. General A/c FAD, Head Office
(For the remaining amount of Compensation waived i.e. total waived Compensation minus (-) Balance of Compensation Suspense A/c and Balance of Sundry Deposit: Compensation Realisable A/c with the Branch, if any).
   Cr.    Mudaraba Investment A/c
(Being the amount of Compensation waived as per Head Office approval).
 

Miscellaneous & Evaluation: 

Monthly Statement of outstanding Mudaraba Investment Statement shall be prepared and submitted to Zonal Office and Head Office as per bank's Proforma.  Monthly statement of Mudaraba Investment matured and closed shall be submitted to Zonal Office / Head Office as per bank's Proforma. Head Office Audit & Inspection Team while auditing and inspecting the Branches will invariably scrutinize each and every Mudaraba Investment Account closed during the year to ascertain actual position of recovery of Bank’s share of profit on investment. They will promptly report the cases of violation of principles, if any, and the instances where the Mudaraba Investment Accounts have been settled below the anticipated rate of profit. Shariah Council of the Bank will, while inspecting the Branches, also scrutinized the Mudaraba Investment Account either closed or running deals in order to get themselves satisfied about compliance of Shariah Principles in the operations of Investment Accounts under Mudaraba mode.