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MUDHARABAH

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CONTENT

• DEFINITION• EVIDENCE• PILLARS OF MUDHARABAH• CATEGORIES OF MUDHARABAH• CONDITION OF MUDHARABAH• DIFFERENCES BETWEEN MUDHARABAH &

MUSHARAKAH

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DEFINITION

• Literally: – Derived from the phrase “dharaba fi al-ard” which means to

make a journey and it is called this because the agent (entrepreneur) gets profit by virtue of his hard work and efforts in performing long journeys.

• Technically: – A contract or a partnership where one provides the capital and

the other the entrepreneurship with the profit being shared among them with a predetermined condition

– Partnership in profit whereby one party (rabb al-mal) provides capital and the other party (mudharib) provides labor.

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NATURE OF MUDHARABAH• The term Mudharabah was widely known in the classical

literature as Qiradh and muqharadhah.• Both terms derived from the word qarada which means to cut

off (al-qat’). This is simply because the capital provider (rabb al-mal) need to cuts off some of his money to be utilized by the mudharib in business activities.

• Imam Nawawi says: A joint-stock company is called Qiradh or Mudharabah

• It exists between two persons, one of whom supplies fund to the other to trade with, on condition that the former has a share in the profit.

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CHARACTERISTIC OF MUDHARABAH

1. The profit will be shared between the two parties according to the terms of their agreement

2. The losses will be borne by the capital provider alone who is the financier.

3. The entrepreneur only suffers the frustration of a fruitless effort.

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EVIDENCE• Al-Quran:

– Although this verses do not directly address the legality of mudharabah, they have been interpreted to include those who travel for the purpose of trading and seeking permissible income.

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EVIDENCE

• Hadith:– Reported By Hakim Bin Hizam that he had stipulated to

a man that if he gave him certain asset to be utilized for Muqaradah (Mudharabah, Qiradh) , he must not use it to purchase livestock, or carries it (travel) through the sea, or drop by at the oasis, if the man committed any of the above, he is considered to be the guarantor of my property

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PILLARS OF MUDHARABAH1. Sahibul Mal

– Owner of capital, fund provider 2. Mudharib

– Entrepreneur 3. Ra’sul Mal

– Capital 4. Al-Amal or Mashru’

– Business Venture or projects 5. Ribh

– Predetermined share of profit 6. Sighah

– Ijab (Offer)– Qabul (Acceptance)

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FLOWS OF MUDHARABAH

Ra’sul-Mal (Capital) Mashru’

(Project)

Mudharib (Entrepreneur)

Sahibul Mal (Owner of Capital)

Ribh (Predetermined

profit rate)

profit

profit

Ijab & Qabul

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ROLES OF ENTREPRENEUR (MUDHARIB)

• The money given by Rab al-mal (investor) and the assets required therewith are held by him as a trust.

Ameen (Trustee)

• In purchasing goods for trade, he is an agent of Rab al-mal.

Wakeel (Agent)

• In case the enterprise earns a profit, he is a partner of Rab al-mal who shares the profit in agreed ratio.

Sharik (Partner)

• If the enterprise suffers a loss due to his negligence or misconduct, he is liable to compensate the loss.

Dhamin (Liable)

• If the Mudarabah becomes Void due to any reason, the Mudarib is entitled to get a fee for his services.

Ajeer(Employee)

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CATEGORIES OF MUDHARABAH

Mudharabah

Mudharabah Mutlaqah

Unlimited Mudharabah

Profit sharing contract unrestricted

by a stipulation

Mudharabah Muqayyadah

Limited Mudharabah

Profit sharing contract restricted by

stipulation

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MUDHARABAH MUTLAQAH• The entrepreneur (mudharib) may buy and/or sell all types of

merchandise as he sees fit, hire helpers as needed, rent equipment and travel with the equipment etc.

• The business is run according to entrepreneur (mudharib) expertise and experience based on his discretion

• The capital provider (rabb al-mal) authorizes the entrepreneur (mudharib) to act completely at the latter’s discretion in all business matter.

• Mudharib’s liberty to transact the capital:– All matters which are commonly practiced in business - the authorization to

transact with the capital is unlimited– All matters which are not commonly practiced in business - free to transact with

the capital provided with permission from rabb al-mal. Eg: giving the capital as donations or loans

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MUDHARABAH MUQAYYADAH

• The capital provider (rabb al-mal) makes certain limitations to the activities to be conducted by the entrepreneur (mudharib) with regards to the capital given

• The business is subject to capital provider’s (rabb al-mal) instruction in term of type, location, time etc.

• Mudharib’s liberty to transact the capital:– The mudarib is subjected to certain limitations in the form of

territorial limits, or time limitation and limitation in terms of kind of goods or person with whom trade may be conducted

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CONDITION OF MUDHARABAH

• Conditions of Work/ Subject Matter1. The work or business venture under Mudharabah must

be conducted solely by the entrepreneur (mudharib). It is not legal if the capital provider (rabbulmal) was also required to conduct the daily operation.

2. The project must be legal and permissible(halal) 3. All the expenses will be taken from the capital provided

that is not more than the justified expenses required in the venture

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CONDITION OF MUDHARABAH

• Conditions of Capital1. Must be in the form of money and not commodities

since commodities fluctuate in price and cause uncertainty and ignorance

2. The capital must be clearly specified, determined and known at the time of the contract

3. Must be available cash-present during the conclusion of contract

4. Must be delivered to the possession of the mudharib entirely

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CONDITION OF MUDHARABAH

• Conditions Of Profit1. The distribution of profit must be determined

proportionally between the capital provider and the entrepreneur

2. The pre-determined profit must be in ratio form or percentage and not in fixed amount

3. Allowed to be different ratios at different situations

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ISSUES IN PROFIT• There cannot be a distribution of profits until the losses have been written

off and the equity of rab al-mal has been fully restored• Any distribution of profits before the conclusion of the contract will be

considered as an advance• All losses incurred in the ordinary course of business must be charged

against profits before they can be charged against the equity of rab al-mal• If it has been agreed that the entire profit will be taken by the rab al-mal –

the mudarib will be entitled to the customary remuneration (‘ujr al-mithly)• If it has been agreed that the entire profit will be taken by the mudarib –

the rab al-mal is a creditor and mudarib is a debtor• The mudarib cannot claim any periodical salary /fee or remuneration for

the work done by him for the mudharabah

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TERMINATION OF MUDHARABAH CONTRACT

• Unilateral termination• On the date of maturity if the two parties had

earlier agreed to set the time limit• When the fund of mudharabah has been

exhausted or have suffered losses• The death of the mudharib or liquidation of

institution that acts as mudharib• Insanity of any parties to the mudharabah contract

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DIFFERENCE BETWEEN MUDHARABAH AND MUSHARAKAH MUDHARABAH MUSHARAKAH

The capital is financed by one party, which is the capital provider or the owner of the business

The capital is financed by all the shareholders according to the proportion agreed upon by all parties

The capital must be in the form of cash money

Any type of property that could normally be assessed and have certain commercial value could be considered as an acceptable source of capital. Example; intellectual capital

The entrepreneur will be the only one that will conduct the actual business. The capital provider is not allowed to jointly work with the entrepreneur.

All the shareholders have the right to work and contribute their skills, knowledge, experience e and expertise in the company

The monetary loss will be solely borne by the capital provider while the entrepreneur will only suffer from a fruitless effort without having to bear all the capital losses

The monetary loss will be jointly borne by all the shareholders according to the ratio and proportion of their respective share in the partnership

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MODERN APPLICATION

• Project financing• Import/export financing• Working capital financing• Saving/Current/Investment account • Interbank lending/borrowing• Sukuk

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END OF CHAPTER