Mis-Sold Mudarabah: A Widow, a Loss and a Confidentiality Note
At a branch of an Islamic bank, a sales officer sells a 62-year-old widow a 'Shariah-certified wealth plan', telling her it offers 'at least 12% a year, guaranteed by the bank' and is risk-free because it is Islamic. The product is in fact an unrestricted mudarabah investment account. She invests USD 30,000 of her retirement savings. Six months later the mudarabah reports a loss of 4% arising from a defaulted musharaka in a construction project, and she is told her capital is now USD 28,800. She also notices a monthly 'Shariah supervision fee' of USD 15 deducted from the account, which was never explained. She comes to the branch angry, saying she was cheated, and demands her full USD 30,000 back. A journalist has called the branch. The branch manager wants to refund the difference quietly and ask her to sign a confidentiality note.
1. Identify the conduct, Shariah and regulatory breaches in how the product was sold and administered.
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- Guaranteed return representation. Promising 'at least 12%, guaranteed' on a mudarabah is false. In an unrestricted mudarabah the investor bears business loss; only misconduct or negligence by the bank displaces that rule. The statement also exposes the bank to a mis-selling claim.
- 'Risk-free because Islamic'. This conflates Shariah compliance with capital protection. Shariah compliance removes interest and excessive uncertainty; it does not remove commercial risk.
- Undisclosed fee. A monthly fee debited to the investment account without disclosure is an unauthorised deduction. Depending on the mandate, charging it on top of the mudarabah profit share may also be double charging.
- Suitability. A retirement saver near retirement was placed in a loss-bearing product without a documented suitability assessment.
- Confidentiality note. Conditioning a refund on silence is a cover-up attempt; it interferes with the customer's right to complain and with regulatory reporting.
- Culture and incentives. A sales script promising returns signals a control failure beyond one officer.
2. Separate what the bank must do from what it must not do when addressing the money.
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The key distinction is between business loss and loss caused by the bank's own conduct.
The bank must not treat the 4% shortfall as a capital guarantee. Paying it purely because the investment fell would undermine the mudarabah and misrepresent the product to every other investor.
The bank must make the customer whole for harm caused by its own mis-selling and unauthorised deductions:
- Refund the USD 1,200 of undisclosed fees.
- Consider compensation for the loss to the extent it can be shown she would not have invested on accurate disclosure - typically the difference between her position and what she would have held in the product she was told she was buying.
- Credit the correction to her account with a written explanation of each amount and its basis.
Process requirements: no confidentiality condition; a written complaint acknowledgement; escalation to compliance and to the Shariah function; a conduct-breach report on the sales officer; a review of the sales script and marketing material; retention of call recordings and documents.
3. Draft the branch's communication approach for the customer and the press enquiry.
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With the customer:
- Meet in private, acknowledge the mis-selling plainly, and apologise without excuses.
- Explain in writing how the loss arose: the musharaka default, the profit-sharing mechanics, and the rule that business loss falls on the investor unless the bank is at fault.
- Show the fee correction and any compensation, line by line.
- Offer a switch to a current account or a lower-risk product, with a fresh suitability discussion.
- Give her a named contact and a complaint reference, and explain her right to escalate to the regulator or ombudsman.
With the journalist:
- Route the enquiry to corporate communications; branch staff must not comment.
- Give a short factual statement that the bank is investigating a customer complaint and is committed to fair treatment and Shariah-compliant conduct; never disclose customer details.
- Do not deny, speculate or characterise the customer.
Internally: report the incident, fix the incentive and script problems that produced it, and brief staff before the next product campaign.