Mudarabah

Mudarabah is a very common mode of finance used by islamic institutions. Mudarabah is mostly used in deposit base products like as saving accounts, term deposits etc. This article is covers the following aspects of Mudarabah.

Definition

Types of Mudarabah

Business of the Mudarabah

Joint Mudarabah

Distribution of the profit

Termination of Mudarabah

Definition

Mudarabah is a special kind of partnership permitted by Shariah where one partner gives money to another for investments it in a commercial enterprise (mortgage, insurance, credit, financing and other business). The investments comes from the first partner who is called "rabb-ul mal", while the management and work is an exclusive responsibility of the other, who is called "mudarib".

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Types of Mudarabah

There are two types of Mudarabah

Al-Mudarabah Al-Muqayyadah (restricted mudarabah)

The rabb-ul-mal may specify a particular business for the mudarib i.e. (mortgage, insurance, credit, financing, banking, investment funds, bonds investment and any other business), in which case he shall invest the money in that particular business only. This is called al-Mudarabah al-muqayyadah (restricted mudarabah).

Al-Mudarabah Al-Mutlaqah (unrestricted mudarabah)

But if he has left it open for the mudarib to undertake whatever business he wishes, the mudarib shall be authorized to invest the money in any business he deems fit. This type of mudarabah is called 'al-mudarabah al-mutlaqah" (unrestricted mudarabah)

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Business of the Mudarabah

Mudarabah is partnership business and any type of business can be formed under Mudarabah. There is no restriction by rules to do a specific business under Mudarabah agreement. It is mutual agreement of rabb-ul-mal (The Investor) and mudarib (The Manager) to select the type of business i.e. (mortgage, insurance, credit, financing, banking, investment funds, bonds investment and any other business).

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Joint Mudarabah

A rabbul-mal can contract mudarabah with more than one person through a single transaction. It means that he can offer his money to A and B both, so that each one of them can act for him as mudarib and the capital of the mudarabah shall be utilized by both of them jointly, and the share of the mudarib shall be distributed between them according to the agreed proportion. In this case both the mudaribs shall run the business as if they were partner’s interest. The mudarib or mudaribs, as the case may be, are authorized to do anything which is normally done in the course of business. However, if they want to do an extraordinary work, which is beyond the normal routine of the traders, they cannot do so without express permission from the rabb-ul-mal.

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Distribution of the profit

It is necessary for vaidity of mudarabah that parties should define profit sharing ratio at the beginning of business. There is no particular proportion has been prescribed by the Shariah. It has been left on mutual consent of paraties. They can share the profit in equal proportions, and they can also allocate different proportions for the rabb-ul-mal and the mudarib. However, a lump sum amount of profit cannot be allocated to any party and they cannot fix a specific rate of profit tied up with capital. For example, if the capital is USD 1,000,000/- they cannot agree on a condition that USD 100,000/- out of the profit shall be the share of the mudarib, nor can they say that 20% of the capital shall be given to rabb-ul-mal. However, they can agree on that 40% of the actual profit shall go to the mudarib and 60% to the rabb-ul-mal or vice versa.

However they can fix different ratios of profit for different situations i.e. the rabbul-mal can say to mudarib, "If you trade in cloth, you will get 30% of the profit and if you trade in made-ups, you will have 50% of the profit. In same way he can say "If you do the business in your town, you will be entitled to 30% of the profit, and if you do it in another town, your share will be 50% of the profit. Mudarib cannot claim any salay, remuneration or fee for work done other than his share of profit. All the schools of Islamic Fiqh are unanimous on this point. However, Imam Ahmad has allowed for the mudarib drawing his daily expenses of food only from the mudarabah account.

The Hanafi jurists restrict this right of the mudarib only to a situation when he is on a business trip outside his own city. In this case he can claim his personal expenses, accommodation, food, etc., but he is not entitled to get anything as daily allowances when he is in his own city. If the business has incurred loss in some transactions and has gained profit in some others, the profit shall be used to offset the loss at the first instance, and then the remainder, if any, shall be distributed between the parties according to the agreed ratio.

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Termination of Mudarabah

The contract of mudarabah can be terminated at any time by either of the two parties. The only condition is to give a notice to the other party. If all the assets of the mudarabah are in cash form at the time of termination, and some profit has been earned on the principal amount, it shall be distributed between the parties according to the agreed ratio. However, if the assets of the mudarabah are not in the cash form, the mudarib shall be given an opportunity to sell and liquidate them, so that the actual profit may be determined.

There is a difference of opinion among the Muslim jurists about the question whether the contract of mudarabah can be affected for a specified period after which it terminates automatically. The Hanafi and Hanbali schools are of the view that the mudarabah can be restricted to a particular term, like one year, six months, etc, after which it will come to an end without a notice. On the contrary, Shafi‘i and Maliki schools are of the opinion that the mudarabah cannot be restricted to a particular time.

However, this difference of opinion relates only to the maximum time-limit of the mudarabah. Can a minimum time-limit also be fixed by the parties before which mudarabah cannot be terminated? No express answer to this question is found in the books of Islamic Fiqh, but it appears from the general principles enumerated therein that no such limit can be fixed, and each party is at liberty to terminate the contract whenever he wishes.

This unlimited power of the parties to terminate the mudarabah at their pleasure may create some difficulties in the context of the present circumstances, because most of the commercial enterprises today need time to bring fruits. They also demand constant and complex efforts. Therefore, it may be disastrous to the project, if the rabb-ul-mal terminates the mudarabah right in the beginning of the enterprise. Specially, it may bring a severe set-back to the mudarib who will earn nothing despite all his efforts. Therefore, if the parties agree, when entering into the mudarabah, that no party shall terminate it during a specified period, except in specified circumstances, it does not seem to violate any principle of Shariah.

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