Best new product: Abu Dhabi Commercial Bank’s meethaq mudarabah overdraft facility
It took Abu Dhabi Commercial Bank just three weeks to finalize the structure and documentation for its innovative Shariah-compliant overdraft facility for Abu Dhabi Investment House (ADIH). The product structure, which ADCB conceived in conjunction with Islamic finance advisory house Dar Al Istithmar, is based on a Mudarabah relationship between the client and the bank, whereby the client is able to borrow money to meet any shortfall in its current or projected needs. The mudarabah concept is a universally accepted Islamic finance model that requires that the overdraft be used solely for Shariah-compliant business activities.
Under the terms of the agreement ADIH committed itself to pay ADCB a profit rate of not less than three-month Eibor plus 150 basis points over the 12-month tenor of the overdraft. The innovative structure of the facility revolved around a unique point-based system under which the mudarib (client) receives a bonus if the share of the profits of the rab al maal (lender) in the business activities funded by the overdraft exceeds a certain threshold, while at the same time the client promises to pay the lender compensation if profits are lower than forecast.