The Concept of Mudarabah

Abdur Rashid Mirza

University of Lahore School of Accountancy and Finance Lecture no.04
Financial Engineering and Islamic Finance (Product and Services)

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.

Types of Mudarabah
1.

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

1.

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).
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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)

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.

Different Capacities of the Mudarib

1.

Ameen (Trustee): The money given by Rabbul-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.

2.

3.

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.

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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 Percentage of Actual Profit

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-ulMaal 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.

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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, Profit 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.

Collective Mudarabah creates two different relationships:

Relationship between investors, 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?

Expenses of Mudarabah
Direct

expenses are borne by the Mudarabah pool.

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