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3.2.3. Mudarabah (Profit Sharing) Model
The mudarabah model is based on a mode of financing in Islamic finance that is based on a
partnership contract between a capital provider, who is usually the sleeping partner and the
entrepreneur, who invests the funds in a Shari'ah compliant business. In a typical mudarabah
contract, one party provides the capital, known as rab al-mal, or capital provider, while the other
party, known as the mudarib or entrepreneur offers his or her expertise in business
management and investment.
The profit-sharing ratio will be agreed upfront between the parties, while in case of financial
loss, it will be borne solely by the capital provider except in cases of explicit negligence on the
part of the entrepreneur. In the absence of such explicit negligence, the entrepreneur is deemed
to have incurred loss in time and effort when the entire business venture incurs financial loss
(Frenz & Soualhi, 2010). To transpose this contractual relationship to Takaful operations,
participants play the role of rab al-mal while the TOs are known as mudarib. below
illustrates the pure mudarabah model, which is explained as follows:
1. Mudarabah contract will be signed between the TO and participants, which will
determine the pre-agreed profit-sharing ratio;
2. Then, a contribution will be made by participants to the Takaful fund through the
tabarru' contract;
3. The TO invests the fund in Shari'ah-compliant investments;
4. Each party shares the investment profit according to the pre-agreed ratio. The share of
the participant will be transferred into the Takaful fund; and
5. The Takaful fund will deduct the claims, reserves and Re-Takaful, and the surplus
belongs either 100% to the participants (Pure Mudarabah Model) or is shared with the
TO (Modified Mudarabah Model).
This Pure Mudarabah model operates on a commercial basis whereby TO is compensated for his
management expertise with pre-determined shares of profit from the investment of funds. In
General Takaful plan, “idle” financial resources from the risk fund are invested to generate profit.
In the Family Takaful plan, the Takaful fund consists of two pools: Participants’ Account (PA)
and Participants’ Special Account (PSA). The first one is used for savings purpose, while the
latter serves as a risk fund for managing claims and underwriting costs.