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MUDHARABAH. Definition. Mudharabah is a partnership where only one partner contributes money to another for investing it in a commercial enterprise.
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Definition • Mudharabah is a partnership where only one partner contributes money to another for investing it in a commercial enterprise. • The investment comes from the first partner or rabbul-mal (capital provider) and the other party who will take the responsibility of managing the investment is called ‘mudarib’ or entrepreneur. • Mudharabah is not loan to the entrepreneur. It is capital forwarded in a partnership venture.
The Hanafi and the Hanbali schools call this partnership as Mudharabah, while the Shafi’e and the Maliki schools call it Qirad or Muqaradah. • Although the capital provider could not interfere in the management of the business, he could however set conditions that must be observed by the mudarib.
Types of Mudharabah • Al-Mudharabah Al-Muqayyadah (Restricted Mudharabah): • The rabb al-mal had spell out specific conditions (for example specifying certain type of business to enter or not to enter, specifying which market to play in or avoid and etc.) that the mudarib must comply with. If the mudarib fails to do so, he would violate the partnership agreement and would have to be liable for any losses that incurs. • Al-Mudharabah Al-Mutlaqah (Unrestricted Mudharabah): • The rabb al-maal does not specify any condition. Thus, the mudarib has the liberty to conduct the business according to his judgment.
Rules in Mudharabah 1. Distribution of Profit and Loss • -The partners must determine a profit sharing ratio (PSR) at the inception of the contract and distribute actual profit based on this ratio. If there is loss, the capital provider will absorb the loss. The entrepreneur will loose all the effort and time put into the business. • 2.Rights of the entreprenuer • -The entreprenuer as the active partner has the right to transact with the capital provided. Therefore he has the right sell and buy goods on credit and follow the customs of trade. • -He also the right to enter into a partnership with a third party and give out capital to a third party on the basis of another Mudharabah.
Rules in Mudharabah - He can purchase on credit beyond the capital of Mudharabah. This would result the partnership to be indebted to a third party.He needs to get the consent of the capital provider before entering into this kind of transaction. - He may lend the money to a third party or extend gift/donation with the capital of Mudharabah.
Application of Mudharabah • Double Mudharabah is like sub-leasing or sub-contracting, where the entrepreneur that received the Mudharabah capital, gives this money to another entrepreneur in a second Mudharabah agreement like the following Example 1: • 1.Farid gave RM 150,000 to Sharifah to start a grocery store on the basis of Mudharabah. • 2. Sharifah however extended this money on another Mudharabah basis to Sumaiyah to run the business. • Sharifah is the mudarib in the first Mudharabah and becomes the rabb al-mal in the second Mudharabah. This practice is allowable in Shariah and has important implication in the banking industry.
Application of Mudharabah • Example 2: • Ar Rajhi is a new Islamic bank that offers its depositors Mudharabah Investment Account (MIA). Depositors could place money in the MIA for different maturities. They would agree on a profit sharing ratio when placing money in the account. • The depositors are the capital provider while Ar Rajhi is the enterpreneur. The bank would then invest this money (usually in the capital market). • At maturity, Ar Rajhi bank would distribute any profit according to the PSR. If there are any lossess, the depositors would have to absorb it.
Application of Mudharabah • Example 3: • The depositor can invest the money in General Investment Account (GIA) or Special Investment Account (SIA). • GIA is based on Al-Mudharabah Al-Mutlaqah (Unrestricted Mudharabah) where the depositor does not have the option to set any condition to the bank’s investment policy. • SIA is based on Al-Mudharabah Al-Muqayyadah (Restricted Mudharabah) where the depositors could set conditions on the bank’s investment policy. • Due to this factor, SIA requires higher minimum investment amount and this in turn gives the SIA depositors the ability to negotiate the PSR with the banks. The GIA depositors on the other hand, are offered standard investment scheme and fixed PSR.
