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"Mudarabah" is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment 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".

Mudarabah can be broadly classified into two types:

    i.Al-Mudarabah al-muqayyadah (restricted mudarabah): Here the rabb-ulmaal may specify a particular business for the mudarib, in which case he shall invest the money in that particular business only.

    ii. Al-Mudarabah almutlaqah (unrestricted mudarabah): Here the Rabb-ulmaal 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.

Rules and regulations for Mudarabah:

    i. 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 mudâribs shall run the business as if they were partners inter se.

    ii. 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. No particular proportion has been prescribed by the Shari'ah; rather, it has been left to their mutual consent. They can share the profit in equal proportions, and they can also allocate different proportions for the rubb-ul-mal and the mudarib. However, they 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. For example, if the capital is Rs. 100000/- they cannot agree on a condition that Rs. 10000/- out of the profit shall be the share of the mudarib, nor can they say that 20% of the capital shall be given to rabbul- 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.

    iii. It is also allowed that different proportions are agreed in different situations. For example the rabbul-mal can say to mudarib, "If you trade in wheat, you will get 50% of the profit and if you trade in flour, you will have 33% of the profit". Similarly, 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. Apart from the agreed proportion of the profit, as determined in the above manner, the mudarib cannot claim any periodical salary or a fee or remuneration for the work done by him for the mudarabah. All the schools of Islamic Fiqh are unanimous on this point. However, Imam Ahmad has allowed for the mudarib to draw his daily expenses of food only, from the mudarabah account. But the Hanafi jurists say that the mudarib can only claim his daily expenses, from the Mudarabah account, if he is on a business trip outside the town. He is not entitled to get an allowance from the Mudarabah account if he is in his own town.

    iv. 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. In the present world circumstances most of the businesses take some time to bring fruit. If the mudarabah contract is ended unilaterally, the other party may suffer huge loss. Suppose the contract is ended by the Rabb ul Maal then the Mudarib might get nothing despite all his effort. Therefore to avoid such situation both the parties entering into Mudarabah should mention in the contract the minimum time the mudarabah would last, and the contract cannot be terminated before such time.

    v. 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.

Risk associated with Mudarabah:-

  • Mudarabah is a high risk mode of finance. It is so risky because the bank ought to give capital to the client relying completely on his integrity, ability and good management. The bank is not only risking the expected return but also the capital itself.
  • However many Islamic banks were able to develop a new Shari'ah based forms of Mudarabah with significantly reduced degree of risk. For example:
  • Mudarabah is used only with public limited companies, where a reasonable degree of transparency is possible i.e audited accounts, and quarterly reported performance; which is not possible in privately owned companies.

    Securities and guarantees are introduced in the contract, but not against profit or payment of capital. But against loss due to negligence and mismanagement.

    Checking the feasibility of the project before approving it for the Mudarabah type of financing.

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