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Topic 5 mudharabah

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DEFINITIONLiterally: 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 conditionPartnership in profit whereby one party (rabb al-mal) provides capital and the other party (mudharib) provides labor.3

NATURE OF MUDHARABAHThe 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 MudharabahIt 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.


CHARACTERISTIC OF MUDHARABAHThe profit will be shared between the two parties according to the terms of their agreement The losses will be borne by the capital provider alone who is the financier. The entrepreneur only suffers the frustration of a fruitless effort.



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.


EVIDENCEHadith: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 7

PILLARS OF MUDHARABAHSahibul Mal Owner of capital, fund provider MudharibEntrepreneur Rasul MalCapital Al-Amal or MashruBusiness Venture or projects RibhPredetermined share of profit SighahIjab (Offer)Qabul (Acceptance)8

FLOWS OF MUDHARABAH9Rasul-Mal (Capital)Mashru (Project)Mudharib (Entrepreneur)Sahibul Mal (Owner of Capital)Ribh (Predetermined profit rate)

profitprofitIjab & Qabul



MUDHARABAH MUTLAQAHThe 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 discretionThe capital provider (rabb al-mal) authorizes the entrepreneur (mudharib) to act completely at the latters discretion in all business matter.Mudharibs liberty to transact the capital:All matters which are commonly practiced in business - the authorization to transact with the capital is unlimitedAll 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


MUDHARABAH MUQAYYADAHThe 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 providers (rabb al-mal) instruction in term of type, location, time etc. Mudharibs 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


CONDITION OF MUDHARABAHConditions of Work/ Subject MatterThe 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. The project must be legal and permissible(halal) All the expenses will be taken from the capital provided that is not more than the justified expenses required in the venture14

CONDITION OF MUDHARABAHConditions of CapitalMust be in the form of money and not commodities since commodities fluctuate in price and cause uncertainty and ignorance The capital must be clearly specified, determined and known at the time of the contract Must be available cash-present during the conclusion of contractMust be delivered to the possession of the mudharib entirely


CONDITION OF MUDHARABAHConditions Of ProfitThe distribution of profit must be determined proportionally between the capital provider and the entrepreneur The pre-determined profit must be in ratio form or percentage and not in fixed amountAllowed to be different ratios at different situations


ISSUES IN PROFITThere cannot be a distribution of profits until the losses have been written off and the equity of rab al-mal has been fully restoredAny distribution of profits before the conclusion of the contract will be considered as an advanceAll losses incurred in the ordinary course of business must be charged against profits before they can be charged against the equity of rab al-malIf 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 debtorThe mudarib cannot claim any periodical salary /fee or remuneration for the work done by him for the mudharabah17

TERMINATION OF MUDHARABAH CONTRACTUnilateral terminationOn the date of maturity if the two parties had earlier agreed to set the time limitWhen the fund of mudharabah has been exhausted or have suffered lossesThe death of the mudharib or liquidation of institution that acts as mudharibInsanity of any parties to the mudharabah contract18

DIFFERENCE BETWEEN MUDHARABAH AND MUSHARAKAH MUDHARABAHMUSHARAKAHThe capital is financed by one party, which is the capital provider or the owner of the businessThe capital is financed by all the shareholders according to the proportion agreed upon by all partiesThe capital must be in the form of cash moneyAny 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 companyThe 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 lossesThe monetary loss will be jointly borne by all the shareholders according to the ratio and proportion of their respective share in the partnership


MODERN APPLICATIONProject financingImport/export financingWorking capital financingSaving/Current/Investment account Interbank lending/borrowingSukuk20