Mudarab

ah

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Contents

Introduction Mudarabah;
Profit / Loss Distribution;
Kinds of Mudarabah
Termination of Mudarabah
Mudarabah Vs Musharakah
Scope of Mudarabah for Banking System
Risks
Practical examples

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Mudarabah - Introduction

Mudaraba is a kind of partnership where partner

involve in business;
Mudarabah is partnership between persons in which one
partner gives money to another for investing in
profitable avenues.
The investor (fund provider/supplier) is called Rabb-ul-
Maal while the person who utilizes this fund (the fund
manager) is called Mudarib;
Mudarib is exclusively responsible for management of
the business.
Rabbul Maal (fund supplier) does not have any right to
interfere in business affairs.

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Mudarabah - Introduction

Mudarabah Capital:
In principle, the capital of Mudaraba should be
provided in the form of cash.
However, it may be presented in the form of kind i.e.
tangible assets which will be valued as per mutual
consent;
The value (in cash) of the assets will be the
Mudaraba capital;
The Capital of Mudaraba should be clearly known to
the contracting parties and defined in terms of
quality and quantity in a clear manner;
Debt (receivable) can not be the capital of
Mudarabah.

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Mudarabah - Introduction

Mechanism of Profit and Loss distribution:

The contracting parties should stipulate in the
contract the profit shares (in defined terms) for each
one;
The profit sharing ratio should be:
Specific; and
of the profit expected to be earned by the venture;
Therefore following method is not allowed:
Unknown ratio;
A ratio attributed to future settlement;
A ration linked with the capital (in terms of x% of the capital);
A lump sum settlement as profit;

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Mudarabah - Introduction

Mechanism of Profit and Loss distribution:

Losses in Mudaraba shall only be born by Rabb-ul-
Mal and not by the Mudarib;
Mudarib will also suffer loss in shape of not receiving
anything as profit;
The Mudarib shall only be responsible for losses if
the loss happened due to his negligence and willful
misconduct.

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Mudarabah - Types

There are two types of Mudarabah:

Restricted Mudarabah (Mudarabah Muqayyadah):
It is a kind of Mudarabah in which the capital provider restricts
the Mudarib to perform business with certain restrictions. These
restrictions may be for place (geographical restriction),
particular type of investment (sector wise restriction) or any
other restriction provided these restrictions do not unduly
constrain the Mudarib from business operations.
Unrestricted Mudarabah (Mudarabah Mutlaqah):
It is a kind of Mudarabah in which the capital provider (Rabbul
Maal) does not put any restriction the Mudarib.

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Mudarabah - Rules

Supply of funds:
The basic feature of Mudaraba is that the the capital is
provided by Rabbul Maal and the Mudarib is responsible
for the management only;
However, it is allowed for Mudarib to add capital into
the business of Mudaraba if agreed with Mudarabi;
In such cases Musharaka and Mudaraba are combined.
For example, Zuhaib gave to Rahman Hayder
Rs.100,000/- for Mudaraba. R. Hayder added Rs.
50,000/- from his own with the consent of Zuhaib;
This type of partnership will be treated as a
combination of Musharaka and Mudaraba;
Here the Mudarib may allocate for himself a certain
percentage of profit on account of his investment as
Sharik, and at the same time he may allocate another
percentage for his management and work as a Mudarib.

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Mudarabah - Rules

Termination of Mudarabah:
The contract of Mudaraba can be terminated at any
time by either of the two parties after giving a notice
to the other party.
If all assets are in form of cash and some profit has
been earned on the principle amount, it shall be
distributed between the parties according to the
agreed ratio.
If the assets of the Mudaraba are in other form the
Mudarib shall be given an opportunity liquidate them
and the actual profit may be determined.

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Mudarabah Vs Musharakah

Mudarabah: Musharakah:
The contribution The contribution
comes from Rabbul comes from all
Maal (the investor). partners in form of
The Rabbul Maal cash, commodities,
(investor) is not services or liability in
permitted to manage the case of reputation
the business. partnership.
The work, as a general
The Mudarib will only
manage the business. rule, is to be done
jointly by the parties.
The Mudarib can also
A partner or some
invest in the capital of
partners may be
Mudarabah.
sleeping.

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Mudarabah - Application

Scope of Mudarabah for Banking System:

Mudaraba as a mode of finance used by Islamic
Banks for the following purpose:
Relationship with depositors;
The depositors provide moneys to bank as Rabb-ul-Mal to be
invested by bank as Mudarib on the basis of profit and loss
sharing on pre agreed specific ratio;
Islamic bank can also use this mode through
providing capital in a business and sharing in the
profit with pre-agreed ratio;
Large Enterprise financing;
Project Finance;
Business ventures;
Private equity;

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Mudarabah - Application

Depositors and Islamic bank relationship:

Mudaraba is used by Islamic Banks for taking deposit
from depositors;
The depositors provide moneys to bank as Rabb-ul-
Mal to be invested by bank as Mudarib on the basis
of profit and loss sharing on pre agreed specific
ratio;

DEPOSITS

MUDARABAH PROFIT &

DEPOSITORS LOSS SHARING
ISLAMIC BANK

PROFIT

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Mudarabah Application (Deposit [Liability]
management)
POOL MANAGEMENT
Pools according to (1) size of deposit, (2) Tenure

S
i A B C D E F
z
e

o G H I J K L
f

D
e M N O P Q R
p
o
s
i S T U V W X
t

Time (tenure)

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Issues in Mudarabah

Problems and Risks for Islamic Banks:

Mudarabah is among the preferable modes of
financing which is also heavily recommended by
scholars and Ulema, but certain difficulties are there
in application of this mode. Some are given below:
Mudaraba is considered to be very high risk financing activity.
Collateral can be asked but could not be used in case of real
loss.
Banks existing competencies in project evaluation and related
techniques are limited.
Dual book keeping trends in market.
No legal mechanism for treatment with Mudarabah.

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