The Concept of Mudarabah

1
The Concept of Mudarabah

• Dr. Muhammad Zubair Usmani
• Sharia Advisor
• Muslim Commercial Bank Ltd.
• Jamia Darul Uloom Karachi
• At AlHuda CIBE Workshop at NIBAF, State Bank of
  Pakistan Islamabad.

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Definition

• This is a kind of partnership where one partner
  gives money to another for investing in a
  commercial enterprise.
• The investment comes from the first partner who
  is called Rabb-ul-Maal (Investor) while the
  management and work is an exclusive
  responsibility of the other, who is called
  Mudarib (Working Partner) and the profits
  generated are shared in a predetermined ratio.

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Types of Mudarabah

• Al Mudarabah Al Muqayyadah
• (Restricted Mudarabah)
• Al Mudarabah Al Mutlaqah
• (Unrestricted Mudarabah)

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Al Mudarabah Al Muqayyadah (Restricted
Mudarabah)

•  
•  Rabb-ul-Maal may specify a particular business
  or a particular place for the mudarib, in which
  case he shall invest the money in that particular
  business or place. This is called Al Mudarabah
  Al Muqayyadah (restricted Mudarabah).

5
Al Mudarabah Al Mutlaqah (Unrestricted
Mudarabah)

• Rabb-ul-maal gives full freedom to Mudarib to
  undertake whatever business he deems fit, this is
  called Al Mudarabah Al Mutlaqah (unrestricted
  Mudarabah)
• However, he is not authorized to
•   a) keep another Mudarib or a partner
• b) mix his own investment in that particular
  Mudarabah without the consent of Rabb-ul Maal.

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Authority of Rabb-ul-Maal

• Rabb-ul-Maal has authority to
•  a)  Oversee the Mudaribs activities and
• b) Work with Mudarib if the Mudarib consents.

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Different Capacities of the Mudarib

• Ameen (Trustee) The money given by
  Rabb-ul-maal (investor) and the assets required
  therewith are held by him as a trust.
• Wakeel (Agent) In purchasing goods for trade,
  he is an agent of Rabb-ul-maal.
• Shareek (Partner) In case the enterprise earns a
  profit, he is a partner of Rabb-ul-maal who
  shares the profit in agreed ratio.

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Different Capacities of the Mudarib

• 4. Zamin (Liable) If the enterprise suffers a
  loss due to his negligence or misconduct, he is
  liabel to compensate the loss.
• 5. Ajeer (Employee) If the Mudarabah becomes
  Void due to any reason, the Mudarib is entitled
  to get a fee for his services.

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Capital of Mudarabah

• The capital in Mudarabah may be either cash or in
  kind. If the capital is in kind, its valuation is
  necessary, without which Mudarabah becomes void.

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Distribution of Profit Loss

• It is necessary for the validity of Mudarabah
  that the parties agree, right at the beginning,
  on a definite proportion of the actual profit to
  which each one of them is entitled.
• They can share the profit at any ratio they
  agree upon.
• However in case the parties have entered into
  Mudarabah without mentioning the exact
  proportions of the profit, it will be presumed
  that they will share the profit in equal ratios.
• Some incentives my be given to the Mudarib.

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Distribution of Profit Loss

• Apart from the agreed proportion of the profit,
  the Mudarib cannot claim any periodical salary or
  a fee or remuneration for the work done by him
  for the Mudarabah.
• The Mudarib Rabb-ul-Maal cannot allocate a lump
  sum amount of profit for any party nor can they
  determine the share of any party at a specific
  rate tied up with the capital.

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Distribution of Profit Loss

• EXAMPLE
• If the capital is Rs.100,000/-, they cannot
  agree on a condition that Rs.10,000 out of the
  profit shall be the share of the Mudarib nor can
  they say that 20 of the capital shall be given
  to Rab-ul-Maal. However they can agree that 40
  of the actual profit shall go to the Mudarib and
  60 to the Rab-ul-Maal or vice versa.

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Distribution of Profit Loss

• 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, then the remainder,
  if any, shall be distributed between the parties
  according to the agreed ratio.

14
Termination of Mudarabah

• Mudarabah can be terminated any time by either of
  the two parties by giving notice.
• If Mudarabah was for a particular term, it will
  terminate at the end of the term.
• Termination of Mudarabah means that the Mudarib
  cannot purchase new goods for the Mudarabah.
  However, he may sell the existing goods that were
  purchased before termination.

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Distribution at Termination

• If all 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.
• If the assets of Mudarabah are not in cash form,
  they will be sold and liquidated so that the
  actual profit may be determined.

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Distribution at Termination

• If there is a profit, it will be distributed
  between Mudarib and Rab-ul-Maal.
• If no profit is left, Mudarib will not get
  anything.

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Collective Mudarabah

• Collective Mudarabah means a joint
• Pool created by many investors and handled over
  to a single Mudarib who is normally a juristic
  person.
• Collective Mudarabah creates two different
  relationships
• Relationship between investors inter se, which is
  Shirkah or Partnership.
• Relationship of all the investors with mudarib,
  which is mudarabah.

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When Mudarib is a Juristic Person

• Who is the Mudarib?
• Shareholders?
• Management or Directors?
• Juristic Person
• Expenses of Mudarabah
• Direct expenses are borne by the Mudarabah pool.
• Indirect expenses are borne by the mudarib.

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Running Mudarabah

• Investors come in and go out at different dates
• Profits are calculated on daily product basis.
• Redemption before maturity
• If the assets of mudarabah are in illiquid form,
  an investor may redeem his share by selling it to
  the pool..
• If the assets are in liquid form, a provisional
  amount may be given to him subject to final
  settlement