Asian Journal

Asian Research Consortium of Research in

Banking
and
Asian Journal of Research in Banking and Finance
Vol. 8, No. 6, June 2018, pp. 33-46. Finance
ISSN 2249-7323 www.aijsh.com
A Journal Indexed in Indian Citation Index
DOI NUMBER: 10.5958/2249-7323.2018.00042.1
SJIF IMPACT FACTOR = 5.489 (2017)

Mudarabah and its Applications in Islamic Finance:

An Analysis

Dr. Md. Habibur Rahman*

*Senior Lecturer,
School of Finance and Banking,
Faculty of Economics and Management,
Sultan Zainal Abidin University (UNiSZA).
habiburrahman@unisza.edu.my

Abstract

Mudarabah is an arrangement of a silent partnership comprises of capital and labor. It may be

concluded between investment account holder as providers of funds and the Islamic bank as a
mudarib. The Islamic bank becomes interested to receive the amounts from investment account
holders and to share the profit generating from them based on a pre-agreed ratio, while the losses, if
any, will be borne by the funds provider, except the case of a verified misconduct, negligence or
violation of the conditions by the Islamic bank. A mudarabah arrangement could also be concluded
between the Islamic banks, as the funds providers, on behalf of itself or on behalf of investment
account holders, and the businessmen as well as other craftsmen, like farmers, traders and so forth.
The significant relevance of a mudarabah arrangement may be actualized in the combination of
financial and managerial assets between the parties. Mudarabah is applicable to the general of
specific investment, project funding, bridge financing, working capital and small and medium
financing, interbank investment, structured products, investment deposits, and so on. The capital is
entrusted to the manager promotes mutual concern among the partners and channels funds to the
productive use. The manager in the position of trustee should act in fully integrity and is expected
to perform in the best manner to reach at the desired goal of the capital provider who has invested
his capital without having any control in the management of the venture.

Keywords: Mudarabah, Mudarib, Rabb al-Mal, Two-Tier Mudarabah.

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Introduction

Mudarabah contract is a profit-sharing contract employed by modern Islamic banks. Although

representing a growing market segment, currently, mudarabah along with musharakah cover less
than ten percent of all dealings of Islamic banking and finance world-wide. Despite numerous
efforts have been made to encourage the practice of mudarabahin Islamic banking and finance, the
usage of mudarabah is still considered to be enormously risky. Being a business entity which is
risky-averse in nature, Islamic banks still view these obstacles to be colossal impediments to its
implementation at least in the future decades. It is realized that the successful application of this
theory needs combined endeavors from a variety of quarters, including regulators, bankers, advisors
and the society at large.

Concept of Mudarabah

Mudarabah or silent partnership is identical to other Arabic terms, qirad and muqaradah, which
denote this kind of trade arrangement. All of these terms are compatible without any crucial
distinction in the sense and denotationamid them (IbnManzur). Perhaps this difference in
terminology was originally because of the geographical factors. Actually the term
qiradormuqaradah was familiar in the Arabian Peninsula, especially in the Hejaz (Zamakhshari),
and the term mudarabah was knownin Iraq (Zurqani). Consequently, the dissimilarity was
continuedby the legal schools, as the Maliki (IbnRushd) and Shafi‟I (Khatib) Schools adoptedthe
term qirad and, to a lesser degree muqaradah, and the Hanafi (Marghinani) and Hanbali Schools
(IbnQudamah) adopted the term mudarabah.

A prominent Hanafi jurist al-Sarakhsi opined that the term mudaraba his derived from the
expression „al-darb fi al-ard‟ which means „making a journey‟. This term used because the manager
(mudarib) deserves the return as a result of his attempt and labor. In fact he is considered the co-
worker of the investor concerning the profit, the capital used on the journey and express of an
auxiliary nature (Sarakhsi). The meaning of the word in this sense has been used in al-Quran. For
instance Allah says: “and when you go forth (to war) on earth, you will incur no sin by shortening
your prayers for” (Qur‟an: 3:101), in another place Allah says: “And give unto (such of) the needy
who, being wholly wrapped up in God's cause, are unable to go about the earth (in search of
livelihood)” (Qur‟an: 4:273).

The inhabitants of Medina called this arrangement muqaradah (or qirad), based on a report
concerning „Uthman B. Affan‟ the third Caliph, who entrusted funds to a man in the form of a
muqradah contract (Sarakhsi&Khatib). This term is derived from qard meaning cutting, and
concerning this contract, the investor cuts off the disposition of a sum of money from him and
transfers its dispositions to the manager. It is, therefore, designed by muqaradah
(Sarakhsi&Zurqani). The other term, mudarabah, corresponds to that which is found in the al-
Quran: „while others travel in the land (yadribuna fi al-ard) in search of Allah‟s bounty” (Qur‟an:
73:20), that is to say, travel for the purpose of trade of commerce (Sarakhsi, Khatib&IbnHumam).

From the legal perspective, the schools of shari‟ah law define mudarabahin various ways.
However, these variations are just only in words, the meanings of mudarabah are simply directed to
the same issue in question, the act of one party giving always his property as capital to a person for

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him to work with that capital. If the venture makes a profit, it will be shared between them
according to a certain ratio that they have agreed upfront. In case of losses, it will be entirely borne
by the Rab al-Mal and the worker receives nothing for his efforts. Some of these definitions are as
follows:

 The Malikis define it as an agency for trading in delivered cash for a part of profits.

 The shafi‟is define it as an agreement whereby an owner hands over the capital to a worker
who trades with it and the profit is to be shared between them.

 In same way the Hanbalis define it as a contract in which a person gives his capital to
another for business in order to share the profit according to their stipulation.

 The most lucid and comprehensive definition of mudarabahis to be found in the Hanafi
school of law. According to this school mudarabahis a partnership for participation in
profit in which capital is provided from one side, whereas labor or skill is from another
side.

 All these definitions give no emphasis on the outcome of the venture. However, this has
given some consideration in Bidayt al-Mujtahid. IbnRusd defines mudarabah as: “when a
party gives his property to another for purpose of trading, and if the venture generates
profit, the mudaribwill share his percentage of profit in accordance to their agreement,
one-third, or one-fourth or one-fifth”.

So it has been seen that all these definitions almost provide same meaning except some depth and
breadth of the definition. While some have just emphasized the act of contributing capital and labor
from the parties, some go beyond that by explaining the end result of the venture in, earning profits
or making losses. Some even go further by stating the form of capital in which the Rab al-Mal can
contribute and so on and so forth (INCEIF, 2011).

Generally, mudabrabah or muqaradah is a fiduciary deal in which an investoror a group of

investors entrust capital or merchandise to an agent-manager („amil, mudarib, muqarid) who is to
trade with it and then, without delay, return to their investor(s) the principal and a previously
agreed share of the profits. As a reward for his labor and management, the agent-manager receives
the remaining share of the profits. Any loss resulting from the exigencies of travel or from an
unsuccessful business venture is borne exclusively by the investor(s); the agent manager is in no
way liable for a loss of this nature, losing only his expended time and effort (Sarakhsi,
IbnRushd&Khatib).

The manager‟s full autonomy under normal trading circumstances from any liability for
the capital in the event of partial or total loss and the disjunction between the owners of the capital
and third parties are distinctive features of mudarabah, which made it an ideal instrument for the
purposes of long-distance trade and of obtaining a profitable contract. This type of contract was,
therefore, widely recognized and practiced in pre-Islamic times and subsequently (Joni, 2007).

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Legality of Mudarabah

Though mudarabah is not validated by explicit text of the Qur‟an, it is verified by Sunnah
(prophetic practice) and scholarly consensus (ijma‟) and more interestingly, on the practical
grounds of its economic function in society. It is unanimously agreed by jurists that the legal
validity of the mudarabah contract is derived from the traditional practice of the Prophet (pbuh).
There are numerous traditions which attribute its practice to the Prophet (pbuh), before his prophet
hood, and to his leading companions.

According to IbnIshaq, the Prophet himself, prior to his prophethood had acted as an agent
manager in a mudarabah contract with an investment provided by Khadijah Bt. Khuwaylid, a
merchant woman of dignity and wealth who later became his wife. He took her goods to Syria and
traded with them. He sold them at a profit and it amounted to double or thereabouts
(IbnIshaq).From this evidence, it appears that this is form of commercial association was popularly
practiced in pre-Islamic trade between the Quraysh and other tribes, and continued to be practiced
throughout the early centuries of the Islamic era as the ministry of caravan and long distance trade
(IbnHazm).

Another tradition attributed to Prophet Muhammad (pbuh) is an unequivocal endorsement

and approval of those engaging in trade by means of Mudarabah. The Prophet (pbuh) was sent at a
time when people were using mudarabah is their dealing and he confirmed in this practice
(Sarakhsi). Aishah and „Abd Allah B. Umar are reported to have invested the money of orphans
and other money left in their safe keeping in mudarabah contracts. „Abd Allah B. Mas‟ud a
prominent companion of the prophet and al-Abbas B. „Abd al-Mutalib, the uncle of the prophet
engaged in Mudarabah contracts, the latter having obtained the prophet‟s (pbuh) approval for the
conditions he imposed upon his agent-manager to whom he entrusted his money (IbnIshaq). Based
on these narrations, Muslim jurists agreed unanimously that Mudarabah is permitted. As mentioned
by Ibn al Munzir in his book al-ijma‟, there is generally consensus among the jurists with respect to
the validity of mudarabah. According to the prominent Hanafi jurist al-Kasani, the practice of
mudarabah was carried out by the companions, and no disapproval was ever stated by the prophet
(Kasani).The above traditions indicate that the prophet (pbuh) approved of engagement in trade in
the form of mudarabah, and this approval amounts to his acknowledgement of the legality of
mudabrabah. This contract also constituted one of the most widespread tools of commercial activity
from the pre-Islamic Arabian caravan trade to the early centuries of the Islamic era.

It has also been noted by the jurists that one of the major reasons for its acceptance is the
resulting ease and efficiency achieved in the functioning of the economic system. In this regard al-
Sarakshi said that mudarabah is permissible on the basis of istihsan. He notes that this contract is
allowed because “people have a need for this contract. For the owner of capital may not find his
way to profitable trading activity, and the person who can find his way to such activity, may not
have the capital, and profit cannot be attained except by means of both of these, that is capital and
trading activity. By permitting this contract the goal of both parties is attained”(Sarakhsi).
Moreover, this type of business arrangement has a very healthy effect on the position of the
laborers. They feel happy and satisfied with the share of the profit. They will feel encourage to
work harder because every increases in the gross profits increases their share on the termination of
business.
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However,

 The Hanafis limited the scope of mudarabah to trading activities only, by buying ready-
made commodities at a low price and selling it higher to gain profit. It is not allowed for
agricultural and industrial activities as they involve some sort of work and services before
they are ready for sell.

 Shafi‟is agreed with this opinion, and the Zaidis and the imamates as well.

 The Hanbalis on the other hands uphold that mudarabah is a kind of shirkah,
IbnTaymiyyah, for instance, insists that though mudarabah in some part resembles a
contract of exchange (mu‟awadat), its resemblance is more towards musharakah (INCEIF,
2011).

Similarity between Mudarabah & Related Concepts

Although mudarabah stands as a contract on its own, there are other contracts which share some
similar features to that of mudarabah. As such, it is important to distinguish mudarabah from these
contracts, as follows:

Mudarabahand Ijarah

In a contract of hire, a party is obliged to perform of work for another and as a consideration a
given sum is to be paid to him. It may be seen that mudarabah become identical to hire contract, at
the time when mudarabah become void and invalid. Then Mudaribwill be as worker in a hire
contract. When mudarabah contract become invalid, the financier (rab al-mal) will take profit and
mudaribalso will get same amount as the payment for the work he performed (Hamdan, 2005).

Mudarabahand Partnership

Mudarabahmay become identical to musharakah. These are two contracts of partnership where
profits or losses are shared between the parties of the contract. However, there are some operational
differences between these two contracts. In mudarabah, one party provides capital and other party
comes with labor and he have to run the business only, whereas in musharakah, the capital is
provided by both parties. Hence, both of them will run the business together. Nevertheless, in
mudarabah, the losses must be borne solely by the capital provider; for the mudarib, his loss in the
form of losing out his time and efforts. He does not share in the losses. On the other hand, in
musharakah, profit will be distributed according to the ratio of capital contribution or according to
the agreement, as the case may be, and losses will be shared according to the ratio of capital
contribution (INCEIF, 2011).

Mudarabahand Wakalah

Mudarabah may be the identical to wakalah and follow the rules and regulations of wakalah, since
mudaribmay considered as the agent (wakil) of the financier (rab al-mal) in dealing; as it is the
dealing in other‟s wealth and business on behalf of him after getting his permission (Hamdan,
2005).

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Mudarabahand Loan

Although mudarabah and loan (qard) share the same features in term of capital contribution, that is,
in both contracts, only one party provides the capital; the nature of capital contribution is different.
In mudarabah, the capital provider gives his capital as a partner, thus entitling him to a share of the
profit. If the venture incurs losses, he will have to risk his capital as no guarantee is provided by the
mudaribto the capital as well as the profit. On the other hand, in a loan contract, since the capital
owner gives his capital to the borrower as a courtesy from him, he is not entitled to claim any
profit, if there is any, or otherwise the rule of riba is triggered. Adversely, if the venture fails, this
would not affect his capital at all as the borrower of the capital is liable to guarantee the return of
the capital, irrespective of the outcome of the venture (INCEIF, 2011).

Mudarabahand Wadi’ah

When mudaribreceives capital from rab al-mal it will be wadi‟ah and amanah in his hand up until
he starts the venture. He has to take care of this capital as he takes care of his personal belongings.
Any kinds of damage in the capital before starting the venture, mudaribh as to compensate if
damage comes on account of his fault and carelessness. In that sense mudarabahisidentical to
wadi‟ah (Kasani).

Classification of Mudarabah

There are two types of mudarabah:

Unrestricted Mudarabah

This is a type of mudarabah in which the capital is handed over to the mudaribwithout
determination of the type of work that is to be done, the time, the location, method of payment from
the client (cash or credit), the quality of work and the person with whom the mudaribmay or have to
trade etc. In the case of unrestricted or unlimited mudarabah, the investor authorizes the agent to act
completely at the letter‟s discretion in all business matters. Such authorization is conveyed by the
investor‟s statement to the agent: “Act with it (the investment) as you see fit” (Sarakhsi).

Restricted Mudarabah

The mudarabahcontract is considered to be restricted when the liberty of the mudaribin managing
the venture is restricted in term of kind, time and place. The AAIOFI standard defines restricted
mudarabah as: “a contract in which the capital provider restricts the actions of the mudaribto a
particular location or to a particular type of investments as the capital provider considers
appropriate, but not in a manner that would unduly constrain the mudaribin his operations”
(INCEIF).

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Applications of Mudarabah Contract

Simple Partnership

One party comes with capital and another party comes with labor and they participate in profits
according to the predetermined ratio. Any losses will be borne by the capital provider only and
agent manager (mudarib) loses his times and effort.

Investment Account

This investment can be either general named with “General Investment Account” (GIA) or specific
named with “Specific Investment Account” (SIA). GIA is a ready package of mudarabah contract
with a standard profit sharing ratio whereas SIA is a restricted mudarabah contract with a
negotiable profit sharing ratio. In SIA the funds are to be managed separately while the funds in
GIA are commingled and managed on a pool basis. Usually SIA is applied for a relatively big
amount of investment.

Project Financing

In the case of project financing, the traditional method of mudarabah and musharakah can be easily
adopted. If the financier wants to finance the whole project, the form of Mudarabah can come into
operation. If investment comes from both sides, the form of Musharakah can be adopted. In this
case, if the management is the sole responsibility of one party, while the investment comes from
both, a combination of musharakah and mudarabah can be brought into play according to the rules
and injunctions.

Mudarabah Financing in the Services Sector

The vast expansion lit the services sector necessitates its special mention. This sector produces and
sells services like education, health care, news, information, entertainment, etc. Capital invested in
this sector takes the form of building, equipment, highly skilled manpower, communication
network, etc. As in the case of industry, it is possible to wind up a services producing unit and
convert all its assets to cash. It is also possible to make an assessment of its net worth without
actually liquidating it. This being the case inmudarabah financing poses no problem. All that is
required for applying mudarabah to any profitable venture is that it should be possible to calculate
the profits or losses consequent to the induction of new capital acquired oil the basis of profit-
sharing. The nature of the product - whether it is tangible goods or intangible services- does not
affect the validity of applying mudarabah. Shari‟ahhas not linked the validity of mudarabah the
nature of the commodity being handled. Above we have seen that profit-sharing can be applied to
all productive ventures irrespective of the nature of the product, degree of risk or length of time
involved. What is necessary is that the product should be marketable and it should be possible to
calculate the profits.

Letter of Credit based on Mudarabah

The client who needs LC for purchasing or importing goods informs bank of his LC requirements
and negotiates terms and conditions. After successful negotiation the client will place a deposit with

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the bank, and then acting as the mudaribbank will establish the LC and pay the proceeds to the
negotiating bank utilizing the client‟s deposit. After disposing the goods, the bank will share with
the client the profit from the venture according to the terms and agreement of the venture.

Mudarabah in Industrial Operations

A purecase of mudarabahin an industrial operation will be one in which one person. A, finances an
industrial project, say a shoe factory which is managed solely by another person, B. The factory
isset up, from the scratch, with A's money and in the end everything, including the used machinery
etc. is sold out, so that nothing remains of the project but cash. Assuming a profitable ending, A's
capital would first be paid back to him and the remaining cash will he distributed between A and B
in the proportion agreed in the beginning. In case the amount of cash in the end is less than what A
had invested, i.e. there is a loss, B gets nothing and A takes back what is left of his capital.

Mudarabahin Takaful Model

Modern takaful contracts can also be devised using the mudarabahmodel. In Malaysia, Takaful
Malaysia and Takaful Nasionaluse this model for their operations.

Mudarabah Bank and Collective Investment

The classical contract of mudarabah is an agreement between the capital owner and the working
partner. He offers his capital to someone he knows and trusts and who trusts him, usually the same
village or city, only two parties‟ involvement in this venture. Because of modern economic
conventions, the contract has become much more complex when used by Islamic banks, because of
three parties‟ involvement in the system, namely, the entrepreneur, the bank, which serves as a
partial user of these funds; as intermediary, and the depositors with the bank.

Today the mudarabah has been changed. In the mudarabah contract, all the capital is
provided by the bank to the working-partner and also all financial losses are borne exclusively by
the bank. The bank will choose its working partner and forward the capital, which has already been
deposited by the bank‟s clients as „investment account‟. The agent will invest the funds in
profitable ventures.

From the legal point to view, the bank remains as the legal owner of the capital and invests
in the mudarabah investment throughout its duration, despite not taking part in the management.
But the bank must be sure of proper use of the capital avert losses due to mismanagement by the
working partner. To find the right investment it is usual for the bank to seek the services of an
investment expert. The bank will not participate in the routine transaction of the business in which
the funds are invested. Some conditions may, however, be settled in consultation with the
entrepreneur at the time the contract is drawn up regarding the nature, the size, and the power of the
entrepreneurs. For instance if it is specified in the mudarabah agreement that the capital produced
from the bank will be invested in a specific trade or industry, it will not be permissible for the
entrepreneur to invest the capital in any other enterprise.

From the aspect of the Mudarabah agreement, the Islamic bank will be empowered to
prevent the entrepreneurs from taking such steps which may result in a loss due to lack of planning.

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Hence, the most appropriate procedure for the mudarabah agreement between the Islamic bank and
the entrepreneur would be to afford fullest freedom of working the detailed in principle. The
Islamic bank would make certain also that when offering investment there will not be a fixed rate of
return. Instead the depositor would be a shareholder in the bank and therefore entitled to a share of
the profit made b the bank (Sadr).

Under Islamic jurisprudence, the bank will only obtain the profit after the mudarabah is
completed. But the mudarabah contract may not be made and be completed within the same
financial period. Thus the bank will add individual mudarabah. Then the total balance if there is a
profit will be distributed among the depositors proportionately according to their capital after the
bank has deducted its percentage. If there is a loss of one of the mudarabah contracts, it will be
obtained from the bank‟s share (Bedewai).

Traditionally, mudarabah has been applied to short duration commercial activities. The
percentage of profit which is taken by the bank varies from one mudarabah transaction to another,
taking into consideration the skills and efforts of each entrepreneur (Kiran). Normally, the bank
does not interfere in the management but can periodically ask for an audit. If the bank takes a
practical part in management of the business, when it provides the part of the capital, this form will
be amusharakah participation (Nawawi, 2009).

Two-tier Mudarabahin Current Practice

When the ultimate goal in mudarabah contract is to make profit and as the profit is not dependent
solely on the person who involves in business, rather it can be earned by mudarib directly or by
someone determined by mudarib. The question is, whether or notmudraib is allowed to give the
capital to another person for profit. To answer this question, we have here different points of view
from different Schools of Shari‟ah, which are as follows:

According to Hanafi, Zaydi&Imamiyah Schools of law,though mudarabah is an

unrestricted contract, mudaribis not allowed to give the capital to other for business. The common
rule of Islamic shari‟ah regarding trade also does not allow this practice, as this leads tohand over
the control upon another‟s property to someone without the owner‟s permission. In addition, it
gives the second mudaribto participate in profit from the capital provided by rab al-mal, whereas he
did not give his consent to anyone‟s participation except the first mudarib. So, without the
permission of capital provider, it will not be valid to allow the third partyto participate in the profit
generating from his capital (Salman, 2007).

Sarakhsi, one of the famous Hanafi scholars, mentioned that if one gives other thousand
dirham and do not said „do business with this whatever you like‟,in this case it will not be valid for
mudaribto give this money to any third party on mudarabahbas is. This is because he makes another
person similar to him in other‟s right which allows the second mudaribto claim profit in the capital
of financier while the financier is not agreed except the first mudarib‟s participation. So, first
mudaribhas no right to allow others to participate in profit without consent of the capital provider
(Kasani, IbnQudamah). However, if capital provider authorizes mudaribto operate business
enterprise according to his own wayand to give capital to any third party then he can do that as it is
one of the ways for managing the business as well as conforms to the requisite of contract. When

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the capital provider says that “do with this capital according to your own understanding and way”,
this does not mean anything except the mudaribcan do everything that he thinks is better for the
venture (Kasani, Marghinani).

On the other hand, Majority of scholars including scholars of Maliki School as well as
some from Shafi‟i and Hanbali Schools opine that two tier mudarabah, which means giving the
capital of mudarabah to the third party is not valid unless there is explicit permission from the
capital provider. Concerning this, Qarafi mentioned in his book named „Zakhirah‟ that the capital
of mudarabah cannot be given for another mudarabah as because the consent of capital provider
with the trusteeship of third party is not disclosed (Khatib). In fact, the Maliki scholars observed the
personage of mudaribwhich mandates that the capital should be in his liabilities and it cannot be
transferred to any third party. Without the explicit authorization of capital provider the capital
cannot be given to any third party (Salman).

Nevertheless, the preferred opinion of Shafi‟i School is that, mudaribdoes not have any
authority to give the capital of mudarabahto the third party, though he has positive indication for
this from the capital provider. KhatibSharbini, one scholar of Shafi‟i School mentioned that
theqirad (i.e. mudarabah) is basically an exception from the usual analogy, which means one of the
parties will be the owner of capital and he will not have any involvement in management, while
another party will be the agent manager and he will not have any share in capital, even if there are
more than one person in management. So with more than one agent manager it is not valid
(Khatib). The general rule is any contract which is legalized in shari‟ahas an exception from
general analogy that shall be confined in the parameter permitted by the legal text.
mudarabahpractice only permitted in a way that capital will be from one side and management will
be from another side. So giving capital of mudarabahto third party cannot be valid according to the
general rule mentioned earlier (Hamdan).

Moreover, Qadi from Hanbali School opines that mudarib has authority to give the capital
of mudarabah to the third party based on the contract per se, and he is not required to get
permission from the capital provider, as the agent can authorize another person without the
permission of the principal.However, IbnQudamhmentioned that mudarib cannot give capital of
mudarabah to third party.Qadivalidated it based on the principle of wakalah, where the agent can
authorize a third person without getting permission from the principal. The reason for this, the
agentis given the authority to do whatever he wants in the matter he has been authorized, so he can
hand over his authority to his representative (IbnQudamah).

Thus, classical shari‟ah scholars opine that the usual procedure of mudarabah transaction
is not to be an obstacle for the validity of third party involvement in mudaraba hinvestment.
However, since by this practice the individuality of mudarib might be hampered, the majority
scholars opine that the general and unrestricted contract does not allow to do this unless
mudariblosses his personal enthusiasm to run the venture. Some scholars opine that general and
unrestricted contract is enough for two-tier mudarabah as if there is any objection from capital
provider he will disclose it. Another third opinion goes here that for this kind of practice the
explicit permission from rab al-mal is required which indicates his spontaneous consent. But the
preferred opinion of Shafi‟i School which is mentioned earlier is that kind of practice, to give the

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capital of mudarabahto third party is not permissible even with the full consent of financier
(Hamdan).

Joint Venture with the Capital of Mudarabah

If mudarib involves with the capital of mudarabahin a joint venture with a third party, in this case
there are different opinion from different schools of shari‟ah law as the case of involving in re-
mudarabah. The preferred opinion here which comes from Hanafi School is that, mudarib cannot
take part in any joint venture with third party as a partner by the capital of mudarabah based on
general and unrestricted contract. However, if capital provider says “do whatever you seem fruitful
for businesses” or give clear permission for involving such activities as joint venture with third
party etc then mudarib can join in partnership business with third party by the capital of mudarabah,
if he thinks it is more fruitful way for their mudarabah transaction (Hamdan).

Structuring Sukuk Mudarabah

Sukuk can be issued based on the shri‟ah principles of mudarabah (profit sharing). Setting up of
this mudarabah venture as follows:

a. Pursuant to the concession agreement, the issuer is set up to undertake the assigned
business.

b. For the purpose of undertaking the assigned business, the issuer shall invite the inventors
to participate in the mudarabah venture. Under this venture, the issuer shall be the
entrepreneur (mudarib) whereas the investors shall be the capital providers (rab al-mal).

c. The rab al-mal shall contribute financing capital (mudarabah capital) to fund the
mudarabah venture.

d. The mudaribshall issue a sukukmudarbah to the rab al-mal (also referred to as the
sukukmudarabahholder), evidencing the rab al-mal‟s participation in mudarabahventures.

e. The sukukmudarabahshall be represented by global sukukmudarabah certificates

evidencing the sukukmudarabah holder‟s participation and beneficial interest in the
mudarabahventure, hence entitling the sukukmudarabah holders to receive the
distributable profit i.e. the budgeted profit for the collection period based on the formula
of profit equals budgeted expenditure, subject to availability of the same.

f. The obligation of the sukukmudarabah holders shall be limited up to the amount invested
in the mudarabah venture. The assigned business under the mudarabah venture shall be, at
all time developed, operated, managed and represented by the issuer (as the mudarib).

g. Under the mudarabah venture, the mudarib shall distribute the distributable profit to the
sukuk mudarabah holders based on an agreed profit sharing ratio.

h. Either upon each maturity of the serial sukuk mudarabah or upon declaration of any event
of default, the issuer shall aquire the interest in the mudarabah venture. Upon completion
of the purchase, the mudarabah venture shall then be dissolved.

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 Rahman (2018). Asian Journal of Research in Banking and Finance,
Vol. 8, No.6, pp. 33-46.

Based on this structuring, we can say that mudarabahsukuk are conceptually equity-based and are
not debt instruments. The mudarabahsukuk represent the sukuk holder‟s proportionate rights over
the mudarabah project and revenue. Thus, the secondary trading of mudarabahsukuk on the
secondary market is not generally a sale of debt (unless it can be shown that the mudarabah project
has been liquidated and all its assets are in the form of cash or receivables). It should be noted that
it is not permissible to guarantee the capital or profit in a mudarabahsukuk transaction. The
mudaribis considered as the manager and trustee (amin) of the mudarabahfund and its project.
Thus, the mudarib is not to be made responsible for losses unless due to negligence,
mismanagement and dishonesty leading to losses. However, it is permissible for an independent
third party to give guarantee for preservation of mudarabahcapital (SC, 2009).

Conclusion

To conclude, mudarabah is a solely shari‟ah based transaction. In modern times, the classical
application of the mudarabah contract has been extended to cover various businesses. However, full
potential mudarabah technique of financing not yet been realized. It is understood that various
obstacles and hindrances have impeded the successful implementation of PLS contracts in general
and mudarabahin particular. In addition to this, practicing mudarabah is more difficult compared to
musharakah and so on, since in mudarabah bank does not have any involvement in venture and the
management will be left solely to the mudarib. Consequently, high confidence on the ability of the
mudaribto manage the business is extremely needed.

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