1‭. ‬Investment Weightages under Mudarabah‭:‬

a‭. ‬There is a Compelling need for Islamic banks to have a standard methodology for assigning weightages‭, ‬based on requisite parameters‭, ‬instead of leaving it to the discretion of Islamic banks‭.‬

b‭. ‬The criteria for assigning weightages should be regulated by the Central Bank‭.‬

c‭. ‬The weightages should be prepared after a thorough and scientific analysis‭. ‬Sharia Scholars must find the best practices‭, ‬without relying solely on the currently implemented practices for weightages‭.‬

2‭. ‬Mudarabah Expenses

a‭. ‬It is recommended to monitor and control the assignment process for costs‭, ‬expenses and reserves related to the investment pools‭. ‬The Mudarib should bear any expenses and costs‭, ‬except for the direct expenses related to investments financed under investment pools‭.‬

b‭. ‬The Sharia Boards‭, ‬Reference International Shari’a bodies for Islamic Finance and Central Banks should agree on a list of general and circulated elements of the costs and expenses which can be charged to the Mudarabah Pool‭. ‬Regulations should also be in place obliging Islamic banks to seek their respective Shari’a Boards approval upon detecting other costs not included in the approved list‭.‬

c‭. ‬We also need to have a critical understanding of Central Bank measures towards provisions‭, ‬in order not to allow provisions to be used as means of control over Investment Account Holders‭ (‬depositors‭ & ‬Saving Account Holders‭) ‬profits‭, ‬without a valid reason for taking these provisions‭.‬

3‭. ‬Profit Smoothening‭ (‬through Hiba and Reserves‭)‬

a‭. ‬Islamic banks should regulate the process of profit distribution to the Investment Account Holders‭, ‬and this includes‭, ‬with no limitation‭, ‬specifying the portion of the Mudarib‭, ‬investment weights‭, ‬reserves‭, ‬gifts from shareholders‭ (‬if any‭). ‬This would‭ ‬be done in order to ensure that extending support‭ (‬either from the reserves or through gift from the shareholders‭) ‬is specified‭ ‬based on objective and logical standards to avoid diluting the Shari’a essence of Mudarabah or Wakala‭.‬

4‭. ‬Investment Wakala Deposit‭:‬

a‭. ‬Expected profit under Investment Wakala Deposit must not be promoted as guaranteed profit‭.‬

b‭. ‬Liquidation must be used to identify the actual profit and incentive achieved for the bank‭, ‬and payment of the anticipated profit should not take place without the aforesaid liquidation‭.‬

c‭. ‬Profit can be backed up by shareholders if the anticipated profit was not attained‭.‬

d‭. ‬In case back up from shareholders is carried out‭, ‬then such must be observed in the financial statements and the Board of Directors report of the Islamic Financial Institution upon submission to the General Assembly‭.‬

e‭. ‬Avoid inter-lending the internal pools of the bank against interest‭, ‬through what is known as Funds Transfer Pricing‭ (‬FTP‭), ‬whereas this system can be applied to one pool‭, ‬and must not be applied to multiple party pools‭.‬

5‭. ‬Malaysian Model‭ (‬for Investment Accounts‭)‬

This model is basically based on the return on assets‭ (‬ROA‭) ‬approach‭, ‬which prescribes the methodology of calculating the income‭ ‬generated from the balance sheet assets and other incomes‭. ‬This model is implemented on the deposits solicited on the basis of‭ ‬Mudarabah or Musharakah and the share of profit or profit and loss between the Investment Account Holders and the Islamic bank shall be based on the agreed profit sharing ratio‭ (‬PSR‭) ‬only and use of weightages is not allowed for the determination of profit‭ ‬and its distribution between the tiers‭. ‬In addition‭, ‬as per this model‭, ‬Islamic banks cannot implement profit smoothening practices such as IRR and PER‭, ‬hiba and other commercial risk mitigation techniques in determining the final distributable profit‭. ‬The Islamic banks are required to disclose all the procedure and information with regard to the profit distribution with the accountholders and provide them with clear illustrations on the application of the PSR‭. ‬As per the model‭, ‬it is allowed to offer various PSR for the Mudarabah deposits‭. ‬This includes similar PSR for all deposits‭, ‬e.g‭. ‬all deposits are offered at 70:30‭ ‬PSR‭; ‬different PSR for respective tenure of deposits‭, ‬e.g‭. ‬a 3-month investment is offered at 70:30‭ ‬PSR while a 6-month investment is offered at 80:20‭ ‬PSR‭, ‬or multi PSR may be agreed for each deposit‭, ‬e.g‭. ‬a 3-month investment may be offered at 70:30‭ ‬PSR and 80:20‭ ‬PSR simultaneously‭.‬

Malaysian model seems to be closer to the classical Mudarabah and can be practiced by other Islamic banks in the long term‭. ‬Although‭, ‬in the absence of proper regulation‭, ‬it is difficult for the Islamic banks to implement this method‭, ‬but the respective Shari’a Boards‭, ‬Reference International Shari’a bodies for Islamic Finance and Central Banks may encourage Islamic banks to follow the same and pave the way for them to get benefit of this experience‭.‬

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