What is Mudarabah?
It 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 (Rabb-ul-mal), whilst the management and work is the exclusive responsibility of the other partner (Mudarib).
How many types of Mudarabah are there?
There are two main types of Mudarabah:
(1) Restricted Mudarabah, where the investor specifies a particular business for the manager, who may then invest in that particular business only.
(2) Unrestricted Mudarabah, where the investor allows the manager to invest in any type of business.
How will the profits be distributed?
- Before forming Mudarabah, the parties should agree about a definite proportion of profit, to which each one of them would be entitled.
- The investor and the manager can share the profit equally or they can allocate different proportions.
- They cannot allocate a fixed, lump amount, nor can they allocate a fixed percentage of the capital.
- Different proportions of the profit can be agreed to under different situations, e.g., it can be agreed that the manager can get 35% of the profit, if he works in his hometown. If he works in another town, he can get 50% of the profit.
- The manager cannot draw any periodical salary or fee for the work done by him for Mudarabah. However, Imam Ahmad has allowed that the manager draws his daily expenses of food from the Mudarabah account. Hanafi jurists, on the other hand, have allowed that the manager draws his expenses, if he is on a business trip outside his own city.
What happens when Mudarabah incurs both a profit and a loss?
In such situation, the profit shall be used to offset the loss. Then, the remainder, if any, shall be distributed between the partners, according to the agreed-upon ratio.
What roles does the Mudarib play?
- A trustee responsible to look after the investment.
- An agent for the investor, as he purchases from the funds provided by the investor.
- A partner, who shares in any profit.
- Liable to provide for any loss to Mudarabah, due to his actions.
- An employee, who receives salary, when Mudarabah becomes void.
When does Mudarabah terminate?
- When the period specified in the contract expires.
- When either of the two parties informs the other party about the termination of the contract by serving a notice.
What happens when Mudarabah is terminated?
- All the liabilities are paid off and receivables collected.
- Assets are liquidated to determine the value of Mudarabah.
- The investor receives back the amount he / she invested.
- The balance amount is to be distributed as profit, according to the agreed ratio. If no balance is left, the manager does not get anything.
How do we apply the Mudarabah model for financing purposes?
Mudarabah can be applied to project financing business models, opening letters of credit without margins. The Mudarabah model can also be combined with the Musharakah model for financing large enterprises, import and export businesses (pre-shipment financing), etc.
- Usmani, Muhammad Taqi. “An Introduction to Islamic Finance.” Idarat ul-Marif, Karachi, Pakistan.
- Usmani, Dr. Muhammad Imran Ashraf. “Meezan Bank’s Guide to Islamic Banking.” Darul-Ishaat, Karachi, Pakistan.