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In: Accounting

"Islamic banking and accounting undergraduate" - Explain what is two-tier Mudharaba in detail with examples

"Islamic banking and accounting undergraduate"

- Explain what is two-tier Mudharaba in detail with examples

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Expert Solution

Two-Tier Mudaraba Two-Tier Mudarba is a type of mudaraba where the bank (receiver of funds) represent as an intermediary between depositors and the bank's clients who need financing. In other words, the Islamic bank serves as capital provider in its relationship with clients and investor in its relationship with depositors. The bank on its own may not have the capacity to assume the role of investor for different reasons, such as when it doesn't have enough funds to enter a mudaraba contract with an entrepreneur. Furthermore, the bank may lack the expertise to function as a fund manager (mudarib) with respect to deposited funds. In both cases, this type of mudaraba allows the Islamic bank to go between investors and fund managers in order to direct funds to productive or profitable uses. This type of mudaraba is also known as an intermediary mudaraba. Example of Two-tier mudaraba includes trade financing on markup basis or leasing.


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