JURISTIC ANALYSIS OF THE PROFIT DISTRIBUTION METHOD OF MALAYSIAN ISLAMIC BANKS

The relationship between depositors and Islamic banks is governed by a mudarabah contract. In principle, the former are regarded as rabb ul-mal (capital providers) while the latter are considered as mudarib (entrepreneurs). Profit generated from the business will be shared between both parties according to a pre-determined ratio. The present article reviews some Shari’ah issues which arise from the profit distribution method implemented in Malaysian Islamic banking institutions. It examines to what extent the current practices fulfil the principles and the ethical framework of the mudarabah contract as propounded by the classical jurists. The article analyses the justifications of the local Shari’ah scholars in modifying the doctrine to adapt to the modern banking business. This includes their decisions in authorising the Weighted Method (WM), the Profit Equalisation Reserve (PER), the indicative profit rate and the interim profit payment.