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Mudarabah/QiradMudarabah/Qirad//MuqaradahMuqaradah

KhairuddinKhairuddin ZakariaZakaria

khairuddinzakaria@gmail.comkhairuddinzakaria@gmail.com

CONCEPT OFCONCEPT OF MUDARABAHMUDARABAH The termThe term mudarabahmudarabah is derived from theis derived from the alal--darbdarb

fifi alal--ardard.. The meaning of the word in this sense has beenThe meaning of the word in this sense has been

used in theused in the QuranQuran. For instance Allah says (al. For instance Allah says (al--MuzammilMuzammil: 20):: 20): “…“….others traveling through the.others traveling through theland seeking of Allahland seeking of Allah’’s bounty.s bounty.””

It is clear that the wordIt is clear that the word darabadaraba is used in thisis used in thisverse to indicate traveling to various parts of theverse to indicate traveling to various parts of theworld, to go from place to place, or to make aworld, to go from place to place, or to make ajourney for a trading purpose, seeking for Allahjourney for a trading purpose, seeking for Allah’’ssbounties.bounties.

MudarabahMudarabah, al, al--qiradqirad, al, al--muqaradahmuqaradah. Have the. Have thesame concept.same concept.

The wordsThe words qiradqirad andand muqaradahmuqaradah are derived fromare derived fromthe wordthe word qaradaqarada which means to cut off.which means to cut off.

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It is so called because in practice the contract ofIt is so called because in practice the contract ofmudarabahmudarabah is formed when the capital provider cutsis formed when the capital provider cutsoff some of his money to beoff some of his money to be utilisedutilised by theby the mudaribmudaribin certain business activities for the purpose ofin certain business activities for the purpose ofgenerating profits to be distributed between them.generating profits to be distributed between them.

the two terms (the two terms (mudarabahmudarabah andand qiradqirad) have been) have beenused toused to emphasiseemphasise two different meanings:two different meanings:

mudarabahmudarabah emphasisesemphasises more on the work of themore on the work of themudaribmudarib the termthe term qiradqirad emphasisesemphasises the fact thatthe fact thatrabrab alal--malmal has given part of his capital and part ofhas given part of his capital and part ofhis profit to thehis profit to the mudaribmudarib..

the difference is onlythe difference is only recognisedrecognised in their literalin their literalmeaning. As far as the juristic meaning ismeaning. As far as the juristic meaning isconcerned, both terms are interchangeable.concerned, both terms are interchangeable.

mudarabahmudarabah is known in the language of the Iraqisis known in the language of the Iraqiswhilewhile qiradqirad is known in the language of the peopleis known in the language of the peopleofof HijazHijaz..

TheThe MalikisMalikis and theand the ShafiShafi’’isis more towards adoptingmore towards adoptingthe wordthe word qiradqirad,, HanafisHanafis andand HanbalisHanbalis prefer theprefer thewordword mudarabahmudarabah..

DefinitionDefinition

TheThe MalikisMalikis define it as an agency for trading indefine it as an agency for trading indelivered cash for a part of profits.delivered cash for a part of profits.

TheThe ShafiShafi’’isis define it as an agreement wherebydefine it as an agreement wherebyan owner hands over the capital to a worker whoan owner hands over the capital to a worker whotrades with it and the profit is to be sharedtrades with it and the profit is to be sharedbetween them.between them.

thethe HanbalisHanbalis define it as a contract in which adefine it as a contract in which aperson gives his capital to another for business inperson gives his capital to another for business inorder to share the profit according to theirorder to share the profit according to theirstipulation.stipulation.

The most comprehensible definition ofThe most comprehensible definition ofmudarabahmudarabah can be found in thecan be found in the HanafiHanafi School ofSchool ofLaw. They defineLaw. They define mudarabahmudarabah as a partnership foras a partnership forparticipation in profit in which capital is providedparticipation in profit in which capital is providedfrom one side, whereasfrom one side, whereas labourlabour or skill (or skill (‘‘amalamal) is) isfrom the other side.from the other side.

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Cont.Cont.

thethe MajallahMajallah (Art. 1404) defines it as:(Art. 1404) defines it as: ““a type ofa type ofpartnership where one party supplies the capitalpartnership where one party supplies the capitaland the other theand the other the labourlabour..

The person who owns the capital is called theThe person who owns the capital is called theowner of the capital (owner of the capital (RabuRabu Al Mal) and the personAl Mal) and the personwho performs the works is called the workmanwho performs the works is called the workman((MudaribMudarib).).””

all these definitions give no emphasis on theall these definitions give no emphasis on theoutcome of the venture. However, this has beenoutcome of the venture. However, this has beengiven some consideration ingiven some consideration in BidayatBidayat alal--MujtahidMujtahid..IbnIbn RusdRusd definesdefines mudarabahmudarabah as:as: ““When a partyWhen a partygives his property to another for the purpose ofgives his property to another for the purpose oftrading, and if the venture generates profit, thetrading, and if the venture generates profit, themudaribmudarib will share his percentage of profit inwill share his percentage of profit inaccordance with their agreement, oneaccordance with their agreement, one--third, orthird, oroneone--fourth or onefourth or one--fifth.fifth.””

Current definition:Current definition: From among contemporary jurists:From among contemporary jurists:

Ali alAli al--KhafifKhafif: defines it as a contract for sharing the: defines it as a contract for sharing theprofit of a business in which one party contributesprofit of a business in which one party contributeswith capital and other with hiswith capital and other with his labourlabour..

Ali KhanAli Khan NiyaziNiyazi: defines: defines mudarabahmudarabah as a form ofas a form ofpartnership where one of the contracting parties,partnership where one of the contracting parties,calledcalled sahib alsahib al--malmal (the financier) provides a(the financier) provides aspecified amount of capital and acts like a sleepingspecified amount of capital and acts like a sleepingor dormant partner, while the other party calledor dormant partner, while the other party calledthethe mudaribmudarib, provides the, provides the mudaribshipmudaribship andandmanagement for carrying on any venture, trade,management for carrying on any venture, trade,industry or service with the objective of earningindustry or service with the objective of earningprofit.profit.

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MudarabahMudarabah MudarabahMudarabah is simply:is simply: the act of one party giving away his property asthe act of one party giving away his property as

capital to a person for him to work with that capital.capital to a person for him to work with that capital. If the venture makes a profit, it will be sharedIf the venture makes a profit, it will be shared

between them according to a certain ratio that theybetween them according to a certain ratio that theyhave agreed upfront.have agreed upfront.

In case of losses, it will be entirely borne by theIn case of losses, it will be entirely borne by the rabrabalal--malmal and the worker receives nothing for his efforts.and the worker receives nothing for his efforts.

The only differences is:The only differences is: While some have justWhile some have just emphasisedemphasised the act ofthe act of

contributing capital andcontributing capital and labourlabour from the parties,from the parties, some go beyond that by explaining the end result ofsome go beyond that by explaining the end result of

the venture in, earning profits or making losses.the venture in, earning profits or making losses. Some even go further by stating the form of capital inSome even go further by stating the form of capital in

which thewhich the rabrab alal--malmal can contribute and so on.can contribute and so on.

LEGITIMACY OFLEGITIMACY OF MUDARABAHMUDARABAH

there is no explicit injunction from the text ofthere is no explicit injunction from the text ofthethe QuranQuran in permittingin permitting mudarabahmudarabah, some, someverses from theverses from the QuranQuran have beenhave been recognisedrecognisedby jurists to indicate the legality ofby jurists to indicate the legality ofmudarabahmudarabah..

For instance, Allah says:For instance, Allah says: ““Others areOthers aretravelling through the land seeking Allahtravelling through the land seeking Allah’’ssbounty.bounty.””

Although this verse does not directly addressAlthough this verse does not directly addressthe legality ofthe legality of mudarabahmudarabah, they are, they areinterpreted to mean those who travel for theinterpreted to mean those who travel for thepurpose of trading and seeking permissiblepurpose of trading and seeking permissibleincome, including those who work withincome, including those who work withanotheranother’’s capital in exchange for part of thes capital in exchange for part of theprofits.profits.

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Cont.Cont. Proof fromProof from SunnahSunnah The act of the Prophet (The act of the Prophet (pbuhpbuh), before or after his), before or after his prophetshipprophetship..

It has been reported that the Prophet (It has been reported that the Prophet (pbuhpbuh) himself worked) himself workedas aas a mudaribmudarib..

There is a saying from the Prophet (There is a saying from the Prophet (pbuhpbuh) relating to this. It) relating to this. Itwas reported that the Prophet (was reported that the Prophet (pbuhpbuh) said:) said: ““There is blessingThere is blessingin three transactions: credit sales,in three transactions: credit sales, muqaradahmuqaradah and mixingand mixingwheat and barley for home consumption, not for tradingwheat and barley for home consumption, not for trading””..

AnotherAnother HadithHadith on this matter is a tacit approval (on this matter is a tacit approval (taqrirtaqrir) from) fromthe Prophet (the Prophet (pbuhpbuh). It is reported on the authority of). It is reported on the authority of IbnIbn‘‘AbbasAbbas, that his father, al, that his father, al--‘‘AbbasAbbas used to stipulate a conditionused to stipulate a conditionwhenever he gave his money in awhenever he gave his money in a mudarabahmudarabah that thethat the mudaribmudaribwill not take his money across the sea, into any valley, or buywill not take his money across the sea, into any valley, or buyany animal with a soft belly, and if theany animal with a soft belly, and if the mudaribmudarib were to do anywere to do anyof those actions, then he must guarantee the capital. Theof those actions, then he must guarantee the capital. TheProphet (Prophet (pbuhpbuh) heard of this practice and permitted it.) heard of this practice and permitted it.

the practices of the Companion onthe practices of the Companion on mudarabahmudarabah wee also cited inwee also cited insupportingsupporting mudarabahmudarabah..

IbnIbn alal--MunzirMunzir in his book onin his book on ijmaijma, there is generally consensus, there is generally consensusamong the jurists with respect to the validity ofamong the jurists with respect to the validity of mudarabahmudarabah..

MudarabahMudarabah and Hireand Hire

In a contract of hire, a party is obliged to performIn a contract of hire, a party is obliged to performwork for another and a given sum is to be paid towork for another and a given sum is to be paid tohim.him.

MudarabahMudarabah is a partnership in the sense that oneis a partnership in the sense that oneprovides capital whereas the other provides workprovides capital whereas the other provides workand as such they are partners.and as such they are partners.

in a contract of hire, the other is just a worker toin a contract of hire, the other is just a worker tothe capital owner.the capital owner.

in a contract of hire, the worker will get a lumpin a contract of hire, the worker will get a lumpsum payment, if he did his job according to theirsum payment, if he did his job according to theiragreement.agreement.

InIn mudarabahmudarabah, his share of profit depends on the, his share of profit depends on thesuccess of the business.success of the business.

If it generates profit, then he will share the profit inIf it generates profit, then he will share the profit inaccordance with the agreement.accordance with the agreement.

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MudarabahMudarabah and Loanand Loan

mudarabahmudarabah and loan (and loan (qardqard) share the same) share the samefeatures in terms of capital contribution.features in terms of capital contribution.

InIn mudarabahmudarabah, the capital provider gives his, the capital provider gives hiscapital as a partner, thus entitling him to acapital as a partner, thus entitling him to ashare of the profit.share of the profit.

If the venture incurs losses, he will have toIf the venture incurs losses, he will have torisk his capital.risk his capital.

in a loan contract, since the capital ownerin a loan contract, since the capital ownergives his capital to the borrower as agives his capital to the borrower as acourtesy from him, he is not entitled tocourtesy from him, he is not entitled toclaim any profit, if there is any, it falls intoclaim any profit, if there is any, it falls intoribariba..

ELEMENTS OFELEMENTS OF MUDARABAHMUDARABAH

TheThe HanafiHanafi’’ss record only forms offer andrecord only forms offer andacceptance as the element ofacceptance as the element of mudarabahmudarabah..In this sense, theIn this sense, the MajallahMajallah stipulates (art.stipulates (art.1405):1405): ““The basis of aThe basis of a mudarabahmudarabah is offeris offerand acceptanceand acceptance””..

The majority of jurists list three elementsThe majority of jurists list three elementsfor the contract offor the contract of mudarabahmudarabah: parties to: parties tothe contract (the contract (rabrab alal--malmal andand mudaribmudarib),),subject matter (capital, work and profit)subject matter (capital, work and profit)

and statement (offer and acceptance).and statement (offer and acceptance).

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CONDITIONS OFCONDITIONS OF MUDARABAHMUDARABAH

1. legal capacity of the parties:1. legal capacity of the parties: thethe rabrab alal--malmalmust be competent to appoint an agent and themust be competent to appoint an agent and themudaribmudarib is competent to accept agency.is competent to accept agency.

2. The capital must cash:2. The capital must cash: which can serve as thewhich can serve as thecapital ofcapital of mudarabahmudarabah. Therefore certain properties. Therefore certain propertiesare not suitable to function as capital, such: aare not suitable to function as capital, such: amerchandise.merchandise.

merchandise and immovable property cannot servemerchandise and immovable property cannot serveas the capital ofas the capital of mudarabahmudarabah..

They argued that capital in the form of commodityThey argued that capital in the form of commoditymight lead to uncertainty (might lead to uncertainty (gharargharar).).

IbnIbn AbiAbi LaylaLayla and aland al--AwzaAwza’’ii allowed the use of nonallowed the use of non--monetary properties as capital. To value thesemonetary properties as capital. To value theseproperties, the prevailing market price will be usedproperties, the prevailing market price will be usedas the mechanism of valuation.as the mechanism of valuation.

Cont.Cont.

according to this opinion, the property itself will be used as taccording to this opinion, the property itself will be used as thehecapital for the venture.capital for the venture.

An example applicable to modern practices is when a personAn example applicable to modern practices is when a personhas 15 cars and he wants to sell these cars. He concludes ahas 15 cars and he wants to sell these cars. He concludes acontract ofcontract of mudarabahmudarabah with person B and says to him:with person B and says to him: ““If youIf yousell these cars, you will take 50 per cent of the profitsell these cars, you will take 50 per cent of the profit””. In this. In thiscase, the capital of the venture is the cars which are not incase, the capital of the venture is the cars which are not inmonetary form. In this situation, the cars will be valued andmonetary form. In this situation, the cars will be valued andthe value is considered the capital contribution to the venture.the value is considered the capital contribution to the venture.

This situation is different from the situation in which a personThis situation is different from the situation in which a personsays to someone:says to someone: ““Take these cars and sell them. WhateverTake these cars and sell them. Whateverprice that you get from the proceeds of the sale becomes myprice that you get from the proceeds of the sale becomes mycontribution to thecontribution to the mudarabahmudarabah contract.contract.”” In this case, theIn this case, thecapital is not the cars, but the cash from the proceeds.capital is not the cars, but the cash from the proceeds.

AbuAbu HanifahHanifah,, MalikMalik and Ahmadand Ahmad IbnIbn HanbalHanbal allowed the latterallowed the latterpractice but not the former one.practice but not the former one.

AlAl--ShafiShafi’’ii, declines to accept both types of capital contribution,, declines to accept both types of capital contribution,arguing that the capital is thus specified as the propertyarguing that the capital is thus specified as the property’’ssprice, which is unknown during the conclusion of the contract,price, which is unknown during the conclusion of the contract,and aand a mudarabahmudarabah contract cannot be established with ancontract cannot be established with anunknown capital.unknown capital.

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Cont.Cont. the Accounting and Auditing Organization forthe Accounting and Auditing Organization for

Islamic Financial Institution (AAOIFI)Islamic Financial Institution (AAOIFI)standard on this matter follows the opinionstandard on this matter follows the opinionofof IbnIbn AbiAbi LaylaLayla and aland al--‘‘AwzaAwza’’ii..

AAOIFIAAOIFI standard, seems to adopt thestandard, seems to adopt theopinion of the two jurists who allow theopinion of the two jurists who allow theasset itself to be used as capital of theasset itself to be used as capital of theventure, in which the valuation of the expertventure, in which the valuation of the expertor the agreement of the parties willor the agreement of the parties willdetermine the amount of money contributeddetermine the amount of money contributedin the venture.in the venture.

Cont.Cont. 3. The capital must also be present during3. The capital must also be present during

the conclusion of the contract.the conclusion of the contract. Therefore, it is not permitted to use debtTherefore, it is not permitted to use debt

owed by theowed by the mudaribmudarib or another party toor another party tothethe rabrab alal--malmal as capital inas capital in mudarabahmudarabah,,because it is not considered as an existingbecause it is not considered as an existingasset at the conclusion of the contract.asset at the conclusion of the contract.

However, if theHowever, if the rabrab alal--malmal instructs theinstructs themudaribmudarib to collect his debts from a thirdto collect his debts from a thirdparty and use them as capital in theirparty and use them as capital in theirmudarabahmudarabah, the contract is valid, provided, the contract is valid, providedthe debt is due (the debt is due (dayndayn halhal) and in fact ready) and in fact readyfor collection.for collection.

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Cont.Cont. 4. The existing capital must be delivered to the4. The existing capital must be delivered to the mudaribmudarib whowho

will supply thewill supply the labourlabour.. 5. The5. The rabrab alal--malmal should not have any control over the capitalshould not have any control over the capital

but may have supervision over the management of the venture.but may have supervision over the management of the venture. 5. This capital must be known and certain. Therefore, it must5. This capital must be known and certain. Therefore, it must

be definite in terms of its quality and quantity, in a manner thbe definite in terms of its quality and quantity, in a manner thatateliminates any possibility of uncertainty or ambiguity.eliminates any possibility of uncertainty or ambiguity.

6. The mechanism for distribution of the profit must be made6. The mechanism for distribution of the profit must be madeclear and known to both parties in a manner that eliminatesclear and known to both parties in a manner that eliminatesuncertainty and any possibility of dispute.uncertainty and any possibility of dispute.

7. The shares of the profit for each party must be determined7. The shares of the profit for each party must be determinedas a percentage and not as a specific or fixed figure. it must bas a percentage and not as a specific or fixed figure. it must beeone half or oneone half or one--third, but not a fixed amount such as RM2,third, but not a fixed amount such as RM2,000.00.000.00.

if theif the mudaribmudarib has worked (Base on fixed figure) and generatedhas worked (Base on fixed figure) and generatedprofit from that venture, the contract will be treated as aprofit from that venture, the contract will be treated as aregular hire (regular hire (ijaraijara). Hence, the). Hence, the mudaribmudarib is considered as a hiredis considered as a hiredperson to do the work of the venture and he will be entitled forperson to do the work of the venture and he will be entitled foran equitable remuneration (an equitable remuneration (ajrajr mithlmithl) for his work but not a) for his work but not ashare of the profit.share of the profit.

Cont.Cont. 8. The determination of the profit ratio must be made in8. The determination of the profit ratio must be made in

advance or at the time of the contract.advance or at the time of the contract. Issues & CasesIssues & Cases if it appears that the contracting parties have not fixed anyif it appears that the contracting parties have not fixed any

ratio of profit at the time of the contract, the profit will beratio of profit at the time of the contract, the profit will beshared between them equally.shared between them equally.

the parties may change the ratio at any time with mutualthe parties may change the ratio at any time with mutualagreement.agreement.

if all the profit is stipulated for theif all the profit is stipulated for the mudaribmudarib only, thenonly, thenaccording toaccording to HanafiHanafi andand HanbaliHanbali jurists, the contract is nojurists, the contract is nolonger consideredlonger considered mudarabahmudarabah. it becomes a contract of loan. In. it becomes a contract of loan. Inthis case thethis case the mudaribmudarib would be required to bear all losses andwould be required to bear all losses andbe responsible to return the entire principal.be responsible to return the entire principal.

TheThe ShafiShafi’’isis disagrees and upholds that in that situation, thedisagrees and upholds that in that situation, thecontract ofcontract of mudarabahmudarabah becomes invalid becausebecomes invalid because mudarabahmudarabahrequires proportional division of profit, which is lacking in threquires proportional division of profit, which is lacking in thisiscase. It cannot be transformed to a loan contract automaticallycase. It cannot be transformed to a loan contract automaticallybecause the contract was not concluded as such.because the contract was not concluded as such.

If all the profit is stipulated for the investor, then the contrIf all the profit is stipulated for the investor, then the contractactis no longer a contract ofis no longer a contract of mudarabahmudarabah. Rather it will become a. Rather it will become acontract of hire, and as such thecontract of hire, and as such the mudaribmudarib will be entitled for awill be entitled for aremuneration (remuneration (ajrajr mithlmithl) for his work.) for his work.

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Cont.Cont. 9. The profit to be divided between the parties is the net profi9. The profit to be divided between the parties is the net profitt

after all expenses and losses have been written off and theafter all expenses and losses have been written off and thecapital has been fully restored.capital has been fully restored.

Issues & CasesIssues & Cases Any distribution of profits before the termination of theAny distribution of profits before the termination of the

mudarabahmudarabah agreement will be considered as an advance and asagreement will be considered as an advance and assuch is not allowed.such is not allowed.

in the case of continuingin the case of continuing mudarabahmudarabah, it may be permissible to, it may be permissible tospecify a mutually agreed accounting period for the distributionspecify a mutually agreed accounting period for the distributionof profits, treating each period independently.of profits, treating each period independently.

it is suggested that for continuingit is suggested that for continuing mudarabahmudarabah, it may be, it may beadvisable to build reserves from profits to offset the possibleadvisable to build reserves from profits to offset the possibleupcoming losses.upcoming losses.

In Malaysian practice, this reserve is known as ProfitIn Malaysian practice, this reserve is known as ProfitEqualisationEqualisation Reserve (PER).Reserve (PER).

ProfitProfit EqualisationEqualisation Reserve (PER) refers to the amountReserve (PER) refers to the amountappropriated out of the total gross income to maintain anappropriated out of the total gross income to maintain anacceptable level of return for the depositors (investmentacceptable level of return for the depositors (investmentaccount holders). It is a provision shared by both parties theaccount holders). It is a provision shared by both parties thedepositors and the bank, and hence, is deducted from the totaldepositors and the bank, and hence, is deducted from the totalgross income.gross income.

Cont.Cont. 10. the10. the labourlabour of the contract must be provided byof the contract must be provided by

thethe mudaribmudarib.. Therefore, any condition that restrictsTherefore, any condition that restrictshim from doing his normal work is not allowed.him from doing his normal work is not allowed.

This is applicable inThis is applicable in mudarabahmudarabah mutlaqahmutlaqah(unrestricted(unrestricted mudarabahmudarabah).).If theIf the mudarabahmudarabah is restrictedis restricted mudarabahmudarabah, then, then

thethe mudaribmudarib is bound to follow the restrictionsis bound to follow the restrictionsimposed upon him.imposed upon him.

thethe rabrab alal--malmal cannot make a condition thatcannot make a condition thatstipulates his involvement in thestipulates his involvement in the mudarabahmudarabahcontract.contract.

If the contract contains a condition that theIf the contract contains a condition that the rabrab alal--malmal is to take part in the management, the contractis to take part in the management, the contractwill be invalid.will be invalid.

thethe HanbaliHanbali School, allows him to take part in theSchool, allows him to take part in themanagement of the partnership.management of the partnership.

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TYPES OFTYPES OF MUDARABAHMUDARABAH 1. Unrestricted1. Unrestricted mudarabahmudarabah ((mudarabahmudarabah mutlaqahmutlaqah):):

is a type ofis a type of mudarabahmudarabah in which the capital is handedin which the capital is handedover to theover to the mudaribmudarib without determination of the type ofwithout determination of the type ofwork that is to be done, the location, the time, method ofwork that is to be done, the location, the time, method ofpayment from the client (cash or credit), the quality ofpayment from the client (cash or credit), the quality ofwork and the person with whom the may or have towork and the person with whom the may or have totrade, etc.trade, etc.

it is up to the discretion of theit is up to the discretion of the mudaribmudarib to run theto run thebusiness according to his expertise and experience.business according to his expertise and experience.

His authority is absolute and he can use the capital in theHis authority is absolute and he can use the capital in themanner he deems fit.manner he deems fit.

he is permitted to undertake all transactions, which arehe is permitted to undertake all transactions, which arenormally allowed in commercial usage.normally allowed in commercial usage.

TheThe mudaribmudarib cannot commit thecannot commit the rabrab alal--malmal beyond thebeyond thecapital provided in the venture.capital provided in the venture.

he is not permitted to borrow money on behalf of thehe is not permitted to borrow money on behalf of themudarabahmudarabah venture unless he is specifically permitted toventure unless he is specifically permitted todo so.do so.

2.2. mudarabahmudarabah restrictedrestricted ((mudarabahmudarabah muqayyadahmuqayyadah):):

The AAIOFI standard defines restrictedThe AAIOFI standard defines restricted mudarabahmudarabah as:as:““a contract in which the capital provider restricts thea contract in which the capital provider restricts theactions of theactions of the mudaribmudarib to a particular location or to ato a particular location or to aparticular type of investment as the capital providerparticular type of investment as the capital providerconsiders appropriate, but not in a manner that wouldconsiders appropriate, but not in a manner that wouldunduly constrain theunduly constrain the mudaribmudarib in his operations.in his operations.””

the restrictions imposed by the capital provider upon thethe restrictions imposed by the capital provider upon themudaribmudarib are not a matter of agreement among theare not a matter of agreement among thejurists.jurists.

The restriction to purchase goods from a particular placeThe restriction to purchase goods from a particular placeonly is valid according to theonly is valid according to the HanafisHanafis andand HanbalisHanbalis butbutinvalid according to theinvalid according to the MalikisMalikis andand ShafiShafi’’isis..

TheThe HanafisHanafis argue that this restriction might be validargue that this restriction might be valideconomically as some goods might be more expensive,economically as some goods might be more expensive,generally, in one place compared to the other.generally, in one place compared to the other.

TheThe MalikisMalikis andand ShafiShafi’’isis, argue that this kind of, argue that this kind ofrestriction may cause difficulties to therestriction may cause difficulties to the mudaribmudarib as heas hemay only find the thing which is necessary to themay only find the thing which is necessary to thebusiness only in the place in which he is prohibited frombusiness only in the place in which he is prohibited fromdealing with.dealing with.

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Cont.Cont. TheThe HanafisHanafis andand HanbalisHanbalis allow theallow the rabrab alal--malmal to stipulate that theto stipulate that the

mudaribmudarib has to deal with specific individuals only.has to deal with specific individuals only. They justify this through the possibility of reducing business rThey justify this through the possibility of reducing business risks byisks by

restricting the set of individuals with whom therestricting the set of individuals with whom the mudaribmudarib deals.deals. TheThe MalikisMalikis andand ShafiShafi’’isis refuse torefuse to recogniserecognise this restriction as theythis restriction as they

view this as unnecessary.view this as unnecessary. TheThe HanafisHanafis andand HanbalisHanbalis permit thepermit the rabrab alal--malmal to specify a periodto specify a period

after which the contract becomes void.after which the contract becomes void. TheThe MalikisMalikis andand ShafiShafi’’isis, on the other hand, consider this kind of, on the other hand, consider this kind of

restriction to invalidate the contract ofrestriction to invalidate the contract of mudarabahmudarabah.. The parties have all the right to withdraw from the contract atThe parties have all the right to withdraw from the contract at allall

times.times. It only means that after the elapse of the time, theIt only means that after the elapse of the time, the mudaribmudarib is notis not

entitled to continue performing the act ofentitled to continue performing the act of mudaribmudarib to the ventureto the ventureanymore.anymore.

This rule has been modified in modern times. Most contemporaryThis rule has been modified in modern times. Most contemporaryjurists allow fixation of time in which early withdrawal is notjurists allow fixation of time in which early withdrawal is not allowedallowedat all.at all.

The AAOIFI standard also accepts this practice.The AAOIFI standard also accepts this practice. Restrictions that theRestrictions that the mudarabahmudarabah venture will deal in certain types ofventure will deal in certain types of

merchandise or in certain investments only is acceptable bymerchandise or in certain investments only is acceptable bycontemporary jurists.contemporary jurists.

RIGHTS AND RESPONSIBILITIES OF THERIGHTS AND RESPONSIBILITIES OF THEMUDARIBMUDARIB

thethe mudaribmudarib is responsible to employis responsible to employhis best efforts to accomplish thehis best efforts to accomplish theobjectives of the contract.objectives of the contract.

He is responsible for assuring theHe is responsible for assuring thecapital provider that his money will becapital provider that his money will beused in the finest manner to achieveused in the finest manner to achievethe goals of the venture.the goals of the venture.

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Cont.Cont. 1.To buy and sell all types of merchandise:1.To buy and sell all types of merchandise: In buying, the jurists agree that he can buyIn buying, the jurists agree that he can buy

whatever merchandise provided that the price thatwhatever merchandise provided that the price thathe paid for it is less or equal to the market value ofhe paid for it is less or equal to the market value ofthe merchandise.the merchandise.

In selling, AbuIn selling, Abu HanifahHanifah opines that theopines that the mudaribmudarib maymaysell on cash or credit even with prices that aresell on cash or credit even with prices that areexcessively lower that the market value.excessively lower that the market value.

However, Abu Yusuf, Muhammad alHowever, Abu Yusuf, Muhammad al--ShaybaniShaybani, the, theShafiShafi’’isis and theand the MalikisMalikis view that he is not allowedview that he is not allowedto sell at credit or to sell it excessively lower thanto sell at credit or to sell it excessively lower thanthe normal price.the normal price.

He can only sell it at a reasonable price accepted byHe can only sell it at a reasonable price accepted bythe practice of the merchants.the practice of the merchants.

TheThe HanbalisHanbalis allow theallow the mudaribmudarib to trade cash orto trade cash orcredit, but within reasonable market prices.credit, but within reasonable market prices.

Cont.Cont. 2. To keep the property as deposit or2. To keep the property as deposit or

pledge:pledge: TheThe HanafisHanafis permit thepermit the mudaribmudarib to maketo make

deposits to any person, arguing that indeposits to any person, arguing that incertain circumstances, it is necessary forcertain circumstances, it is necessary fortrade to do so.trade to do so.

TheThe MalikisMalikis, on the other hands, disagree to, on the other hands, disagree tothis. They argue that this maythis. They argue that this may jeopardisejeopardise thethecontract. Therefore, if he makes such acontract. Therefore, if he makes such adeposit, he would have to guarantee thedeposit, he would have to guarantee thecapital.capital.

However, jurists have permitted the act ofHowever, jurists have permitted the act ofpledging part of the capital for the businesspledging part of the capital for the businessthat thethat the mudaribmudarib has engaged in or to takehas engaged in or to takepledge in lieu of debts owed to the venture.pledge in lieu of debts owed to the venture.

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Cont.Cont.

3. To rent or buy animals, vehicle,3. To rent or buy animals, vehicle,equipments:equipments: as a means ofas a means oftransportation for him or the commodities.transportation for him or the commodities.

5. To travel with the capital.5. To travel with the capital.

TheThe MalikisMalikis, most of the, most of the HanafisHanafis and some ofand some ofthethe HanbalisHanbalis allow theallow the mudaribmudarib to travelto travelwith the capital to seek profit.with the capital to seek profit.

thethe ShafiShafi’’isis and most of theand most of the HanbalisHanbalis rulerulethat specific permission is needed beforethat specific permission is needed beforethethe mudaribmudarib can travel with the capital.can travel with the capital.

ISSUES IN IMPLEMENTATIONISSUES IN IMPLEMENTATION

1. the contract of1. the contract of mudarabahmudarabah will take effectwill take effectimmediately after the contract has beenimmediately after the contract has beenconcluded.concluded.

According to theAccording to the ShafiShafi’’isis andand MalikisMalikis, the, theeffect ofeffect of mudarabahmudarabah cannot be suspended orcannot be suspended ordelayed because the nature of the contractdelayed because the nature of the contractitself requires that the contract must takeitself requires that the contract must takeeffect immediately.effect immediately.

However, theHowever, the HanafisHanafis andand HanbalisHanbalis are of theare of theopinion that theopinion that the mudarabahmudarabah can becan besuspended so long as it is agreeable to thesuspended so long as it is agreeable to theparties.parties.

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Cont.Cont. 2.2. mudarabahmudarabah contract is a noncontract is a non--binding contract (binding contract (’’aqdaqd ghayrghayr

lazimlazim).). As such, it may be terminated by any of the parties.As such, it may be terminated by any of the parties. AbuAbu HanifahHanifah, al, al--ShafiShafi’’ii and Ahmadand Ahmad ibnibn HanbalHanbal rule that thisrule that this

nonnon--binding situation continues even after the commencementbinding situation continues even after the commencementof the contract.of the contract.

TheThe HanafisHanafis rule further that the allowance to dissolve therule further that the allowance to dissolve themudarabahmudarabah contract is only applicable if the capital is incontract is only applicable if the capital is inmonetary form.monetary form.

This restriction is opposed by theThis restriction is opposed by the ShafiShafi’’isis and theand the HanbalisHanbalis.. According to the stronger opinion of theAccording to the stronger opinion of the ShafiShafi’’isis andand HanbalisHanbalis,,

the dissolution of contract is also allowed, even if the capitalthe dissolution of contract is also allowed, even if the capital isisin nonin non--monetary form, provided that the two parties agree tomonetary form, provided that the two parties agree tosell it or divide it among themselves.sell it or divide it among themselves.

They also rule that if theThey also rule that if the mudaribmudarib requests selling the capital,requests selling the capital,thethe rabrab alal--malmal is forced to sell so that theis forced to sell so that the mudaribmudarib may collectmay collecthis rightful share of profits.his rightful share of profits.

ImamImam MalikMalik ruled that once the work begins, the contractruled that once the work begins, the contractbecomes binding on both parties.becomes binding on both parties.

ImamImam MalikMalik argues that dissolving the contract in this situationargues that dissolving the contract in this situationmay harm the other party and may lead to losses.may harm the other party and may lead to losses.

Cont.Cont. The AAOIFI standard on this matter follows the opinion of theThe AAOIFI standard on this matter follows the opinion of the

MalikisMalikis.. It maintains that one of the situations in which the contractIt maintains that one of the situations in which the contract

becomes binding upon parties inbecomes binding upon parties in mudarabahmudarabah is:is:““When theWhen the mudaribmudarib has already commenced the business, inhas already commenced the business, inwhich case thewhich case the mudarabahmudarabah contract becomes binding up to thecontract becomes binding up to thedate of actual or constructive liquidationdate of actual or constructive liquidation””..

3. The jurists also differ in their opinion in fixing certain3. The jurists also differ in their opinion in fixing certainduration to theduration to the mudarabahmudarabah contract.contract.

WhileWhile MalikMalik andand ShafiShafi’’ii disallow any fixation of duration indisallow any fixation of duration inmudarabahmudarabah contracts, this practice is allowed according to Abucontracts, this practice is allowed according to AbuHanifahHanifah and Ahmad.and Ahmad.

the AAOIFI standard also allows the fixation of the period forthe AAOIFI standard also allows the fixation of the period forthethe mudarabahmudarabah..

The basis for allowing a time limit for the operation of aThe basis for allowing a time limit for the operation of amudarabahmudarabah contract is that thecontract is that the mudarabahmudarabah contract is, incontract is, inessence, an agency contract, which is subject to a designatedessence, an agency contract, which is subject to a designatedduration.duration.

The AcademyThe Academy FiqhFiqh of Jeddah in one of its resolutions alsoof Jeddah in one of its resolutions alsosupports this opinion.supports this opinion.

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Cont.Cont. 4. The majority of jurists hold that the4. The majority of jurists hold that the mudaribmudarib isis

not entitled to mix the capital of thenot entitled to mix the capital of the mudarabahmudarabahwith another capital, except whenwith another capital, except when authorisationauthorisation ofofthethe rabrab alal--malmal has been obtained.has been obtained.

TheThe HanafisHanafis allow theallow the mudaribmudarib to mix the capitalto mix the capitalwith anotherwith another’’s, even without prior permission froms, even without prior permission fromthe capital provider if it is the custom of the market.the capital provider if it is the custom of the market.

TheThe MalikisMalikis, even allow such mixing, and regulate, even allow such mixing, and regulatethat in certain circumstances the mixing is eitherthat in certain circumstances the mixing is eithercompulsory (compulsory (wajibwajib) or recommendable () or recommendable (nadbnadb).).

Contrary to all these, theContrary to all these, the ShafiShafi’’isis, with the exception, with the exceptionof alof al--MawardiMawardi, disallow the mixing of capital even, disallow the mixing of capital evenwith the permission of thewith the permission of the rabrab alal--malmal..

The practice of modern Islamic banks is to allow theThe practice of modern Islamic banks is to allow themixing of funds. To avail themselves of thismixing of funds. To avail themselves of thisprivilege, prior permission from the depositors inprivilege, prior permission from the depositors ininvestment accounts is obtained.investment accounts is obtained.

Cont.Cont. 5. the jurists have agreed that the5. the jurists have agreed that the mudaribmudarib is ais a

trustee in respect of the capital that comes to histrustee in respect of the capital that comes to hishand.hand.

Therefore, he cannot bear any losses unless uponTherefore, he cannot bear any losses unless uponfault or negligence.fault or negligence.

Likewise, he will be responsible to bear the losses ifLikewise, he will be responsible to bear the losses ifhe works contrary to the terms and conditions of thehe works contrary to the terms and conditions of themudarabahmudarabah..

thethe MalikisMalikis andand ShafiShafi’’isis and an opinion from Ahmad,and an opinion from Ahmad,thethe mudaribmudarib is not responsible to guarantee theis not responsible to guarantee thelosses as regard the capital and any condition to dolosses as regard the capital and any condition to doso will invalidate the contract.so will invalidate the contract.

TheThe HanafisHanafis and theand the HanbalisHanbalis are of the opinion thatare of the opinion thatthe contract is valid, but the condition is deemed tothe contract is valid, but the condition is deemed tobe void.be void.

it is permissible for a third party, other than theit is permissible for a third party, other than themudaribmudarib, to undertake voluntarily that he will, to undertake voluntarily that he willcompensate thecompensate the mudarabahmudarabah losses, provided thatlosses, provided thatthis guarantee is not linked in any manner to thethis guarantee is not linked in any manner to themudarabahmudarabah contract.contract.

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Cont.Cont. 6.6. alal mudaribmudarib yudaribyudarib almost every jurist from all schools of law disallows thealmost every jurist from all schools of law disallows the

mudaribmudarib to invest in anotherto invest in another mudarabahmudarabah and become theand become therabrab alal--malmal to that secondto that second mudarabahmudarabah without priorwithout priorapproval from the firstapproval from the first rabrab alal--malmal..

If theIf the rabrab alal--malmal allows him to enter into the secondallows him to enter into the secondmudarabahmudarabah using the capital, the jurists agree that theusing the capital, the jurists agree that thesecondsecond mudarabahmudarabah is valid.is valid.

TheThe HanafisHanafis opine that if theopine that if the mudaribmudarib enters into aenters into acontract ofcontract of mudarabahmudarabah with another partner using thewith another partner using themudarabahmudarabah capital with the permission from thecapital with the permission from the rabrab alal--malmal of the first tierof the first tier mudarabahmudarabah, the contract is valid and, the contract is valid andhe is considered thehe is considered the mudaribmudarib to the first tierto the first tier mudarabahmudarabahandand rabrab alal--malmal to the second tierto the second tier mudarabahmudarabah..

This opinion is considered the most suitable one inThis opinion is considered the most suitable one inmodern commercial activities.modern commercial activities.

Modern jurists advocate the opinion of theModern jurists advocate the opinion of the HanafisHanafis on thison thismatter.matter.

APPLICATION OFAPPLICATION OF MUDARABAHMUDARABAH 1. Simple Partnership1. Simple Partnership. A party provides capital. A party provides capital

to ato a mudaribmudarib to work with the capital and theyto work with the capital and theyparticipate in profits. Any losses will be borne byparticipate in profits. Any losses will be borne bythe capital provider and thethe capital provider and the mudaribmudarib loses hisloses histimes and effort.times and effort.

2. General Investment Account (GIA) and2. General Investment Account (GIA) andSpecific Investment Account (SIA).Specific Investment Account (SIA).

GIA is of an absoluteGIA is of an absolute mudarabahmudarabah and the ratio ofand the ratio ofprofit sharing is more or less uniform/standardprofit sharing is more or less uniform/standardand advertised as a ready package between theand advertised as a ready package between thebank and the customer.bank and the customer.

in SIA, thein SIA, the mudarabahmudarabah arrangement is of aarrangement is of arestrictedrestricted mudarabahmudarabah. The ratio of profit sharing. The ratio of profit sharingcan be negotiated between the client and thecan be negotiated between the client and thebank, and normally a relatively big amount ofbank, and normally a relatively big amount ofinvestment is needed in this type of investment.investment is needed in this type of investment.

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Cont.Cont. 3. Project financing.3. Project financing. Islamic bank provides financing to theIslamic bank provides financing to the

projects and theprojects and the mudaribmudarib acts as the manager of the project.acts as the manager of the project. The bank does not interfere in the dayThe bank does not interfere in the day--toto--day functioning ofday functioning of

the project. The profit is to be shared between the partiesthe project. The profit is to be shared between the partiesaccording to an agreed ratio determined.according to an agreed ratio determined.

4. Letter of Credit based on4. Letter of Credit based on mudarabahmudarabah.. The most wellThe most well--known structures used in the issuance of LC are based onknown structures used in the issuance of LC are based onmusharahmusharah,, murabahahmurabahah oror wakalahwakalah..

LC can be issued using theLC can be issued using the mudarabahmudarabah contract.contract. the client informs the bank of his Letter of Credit requirementsthe client informs the bank of his Letter of Credit requirements

and negotiates terms and conditions of theand negotiates terms and conditions of the mudarabahmudarabahfinancing for this LC.financing for this LC.

The client then places a deposit with the bank under theThe client then places a deposit with the bank under thewadiahwadiah principles and the full amount of the cost of the goodsprinciples and the full amount of the cost of the goodsto be purchased/ imported as perto be purchased/ imported as per mudarabahmudarabah agreement.agreement.

The client will appoint the bank as theThe client will appoint the bank as the mudaribmudarib.. The bank, acting as theThe bank, acting as the mudaribmudarib, establishes the Letter of, establishes the Letter of

Credit and pays the proceeds to the negotiating bankCredit and pays the proceeds to the negotiating bank utilisingutilisingthe clientthe client’’s deposit.s deposit.

After disposing the goods, the bank will share with the clientAfter disposing the goods, the bank will share with the clientthe profit from the venture according to the terms andthe profit from the venture according to the terms andagreement of the venture.agreement of the venture.

Cont.Cont.

5. Relationship between5. Relationship between takafultakaful operator andoperator andtakafultakaful participants.participants. ModernModern takafultakaful contracts can alsocontracts can alsobe devised using thebe devised using the mudarabahmudarabah model.model.

In Malaysia, Takaful Malaysia and TakafulIn Malaysia, Takaful Malaysia and Takaful NasionalNasional useusethis model for their operation.this model for their operation.

In brief, the contract ofIn brief, the contract of takafultakaful will start with thewill start with theparticipation made by theparticipation made by the takafultakaful subscribers to certainsubscribers to certaintakafultakaful products.products.

The pool of funds from the participantsThe pool of funds from the participants’’ contribution willcontribution willbe credited into two separate accounts, participantsbe credited into two separate accounts, participants’’accounts (PA) and participantsaccounts (PA) and participants ‘‘special accountsspecial accounts’’ (PSA).(PSA).

The former account will be managed based on theThe former account will be managed based on thecontract of thecontract of the mudarabahmudarabah..

Based on this principle, the participants asBased on this principle, the participants as rabrab alal--malmal(capital providers) appoint the(capital providers) appoint the takafultakaful operator asoperator asmudaribmudarib to work with the money in investments whichto work with the money in investments whichareare ShariahShariah compliant.compliant.

participants will share with the operator the profit of theparticipants will share with the operator the profit of thebusiness.business.

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Cont.Cont. Due to the fact that the participants have not been involved inDue to the fact that the participants have not been involved in

managing the fund (accepting the contribution andmanaging the fund (accepting the contribution and channellingchannellingfinancial aid to the members), they appoint thefinancial aid to the members), they appoint the takafultakafuloperator (based on contract ofoperator (based on contract of wakalahwakalah) to become their) to become theiragency in managing the fund.agency in managing the fund.

For the agency work that theFor the agency work that the takafultakaful operator has performed,operator has performed,he is entitled to take a kind of fee (he is entitled to take a kind of fee (ujrujr). This means that the). This means that thetakafultakaful operator is entitled to two mechanisms of payment.operator is entitled to two mechanisms of payment.

One by means of sharing profit (or loss) by virtue of theOne by means of sharing profit (or loss) by virtue of thecontract of thecontract of the mudarabahmudarabah..

the other is in the form of fees for the management of fundsthe other is in the form of fees for the management of fundsthat he made.that he made.

thethe takafultakaful operator has the right to waive his entitlement foroperator has the right to waive his entitlement forthe fees of the agency contract, and this is what has actuallythe fees of the agency contract, and this is what has actuallybeen done in practice. However, somebeen done in practice. However, some takafultakaful institutions doinstitutions doemploy the concept ofemploy the concept of wakalahwakalah in their relationship with thein their relationship with theparticipants such as Takafulparticipants such as Takaful TaTa’’awuniawuni which operates in Saudiwhich operates in SaudiArabiaArabia

6. Unit trust.6. Unit trust. The investors provide the capital and the unitThe investors provide the capital and the unittrusts company provides management and any profits andtrusts company provides management and any profits andlosses are to be shared together, according to the agreed profitlosses are to be shared together, according to the agreed profitsharing ratio.sharing ratio.

Thank youThank you

WasalamWasalam