| Within the Islamic financial system the real alternative to charging and receiving interest is financing on a profit and loss partnership basis (PLS).The basic principle of profit and loss sharing is that, instead of lending money at a fixed rate of return, the banker forms a partnership with the borrower sharing in a venture’s profits and losses. If the returns are good the profits are shared equitably and similarly with losses. So the return to the investors depends on the productivity of the investment. Nothing is pre-fixed. So a Mudaraba is a form of partnership where one party provides the funds while the other provides the expertise and management. Any profits are shared between the two parties according to a pre agreed ratios, while any loss is borne only by the provider of the capital.This case describes the workings of the Mudaraba contract as applied to the liability side of the balance sheet of an Islamic bank.
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