Islamic Banking & Finance BS Accounting & Finance

MUDARABAH
 Mudarabah Outline of the Presentation

▪ Mudarabah
▪ Types of Mudarabah
▪ Mudarabah Investment
▪ Mudarabah Expenses
▪ Distribution of Profit & Loss
▪ Roles of Mudarib
▪ Termination of Mudarabah
▪ Collective Mudarabah
▪ Running Mudarabah
▪ Mudarabah in Banking
▪ Difference b/w Musharakah & Mudarabah
▪ Application of Mudaraba
Mudarabah Mudarabah – Defined

▪ This is a kind of partnership where one partner gives money to another for investing in a
commercial enterprise
▪ The investment comes from the first partner who is called “Rab ul Mal” (Investor)
▪ The management and work is an exclusive responsibility of the other partner, who is called
“Mudarib” (Working Partner)
▪ Profit is shared as per pre-agreed ratio
▪ Losses are borne by Rab ul Mal
▪ If Losses occur due to intentional harm to the Rab ul Mal by Mudarib, or due to negligence or
breach of trust, then it be will be borne by Mudarib
Mudarabah Types of Mudarabah

There are two types of Mudarabah

▪ Al Mudarabah Al Muqayyadah (Restricted Mudarabah)
▪ Al Mudarabah Al Mutlaqah (Unrestricted Mudarabah)
Mudarabah Types of Mudarabah

Al Mudarabah Al Muqayyadah (Restricted Mudarabah)

▪ Rab ul Mal may specify a particular business or a particular place for the Mudarib to carryout
business
▪ He shall invest the money in that particular business or place but within the boundaries of Shariah
Mudarabah Types of Mudarabah

Al Mudarabah Al Mutlaqah (Unrestricted Mudarabah)

▪ Rab ul Mal gives full freedom to the Mudarib to undertake whatever business he deems fit but
within the boundaries of Shariah
▪ Mudarib is authorized to do anything which is done in the normal course of business
▪ If Mudarib wants to have an extraordinary work, i.e. beyond the normal routine of business, he
can not do so without the express permission of Rab ul Mal
▪ Without the consent of Rab ul Mal, Mudarib is not authorized to:
▪ Lend money to any one
▪ Appoint another Mudarib or partner
▪ Mix his own investment in that particular Mudarabah
Mudarabah Mudarabah Investment

▪ Rab ul Mal provides the capital investment and the Mudarib looks after the management
▪ Rab ul Mal should handover the agreed investment to Mudarib and leaves everything to Mudarib
with no interference from his side
▪ He may oversee the Mudarib’s activities
▪ Work with the Mudarib only if the Mudarib consents
Capital of Mudarabah: In what form should the Mudaraba Capital be?
▪ According to Hanafi school of fiqh, Capital should be in liquid form
▪ Other scholars allow to accept equipment and land etc. as Capital
▪ Scholars have Ijma on the following:
“Assets other than cash can be used as an intermediate step. But this is subject to determination of
the exact value of assets. If assets are not correctly evaluated, Mudarabah is not valid.”
Mudarabah Mudarabah Expenses

Mudarabah Expenses
▪ Mudarib shares the profit of the Mudarabah as per the agreed ration with Rab ul Mal
▪ Expenses like meal, clothing, conveyance and medical are not borne by Mudarabah
▪ If Mudarib is travelling on a business trip and is overstaying at night , then the afore-mentioned
expenses shall be covered under Mudarabah
▪ If Mudarib goes for a journey which constitutes Safar e Sharai (more than 48 miles) but does not
overstay in night, his expenses will not be borne by Mudarabah
▪ All expenses which are incidental to the Mudarabah function like wages, commission in
buying/selling etc. have to be borne by Mudarabah
▪ All expenses can be included in the cost of commodities which Mudarib sells in the market
Mudarabah Distribution of Profit & Loss

▪ It is necessary for the validity of Mudarabah that the parties agree, right at the beginning, on a
definite proportion of the actual profit to which each one of them is entitled
▪ Shariah has prescribed no particular proportion; rather it has been left to the partners mutual
consent
▪ They can share the profit at any ratio they agree upon. However the PSR can not be 0:100
▪ In case the parties have entered into Mudarabah without mentioning the exact proportions of the
profit, it will be presumed that they will share the profit in equal ratios
▪ Mudarib & Rab ul Mal cannot allocate a lump sum amount of profit for any party nor can they
determine the share of any party at a specific rate tied up with the capital
▪ Mudarib cannot claim any periodical salary or a fee or remuneration for the work done by him
Mudarabah Distribution of Profit & Loss

▪ If the business has incurred loss in some transactions and has gained profit in others, the profit
shall be used to offset the loss in the first instance
▪ The remainder (if any) shall be distributed between the parties according to the agreed ratio
▪ Mudaraba becomes void (fasid), if the profit is fixed in any way
▪ In such a situation, the entire amount (Capital + Profit) will go to Rab ul Mal
▪ Mudarib will be entitled to Ujrat e Mithl (market equivalent salary/wage)

▪ Loss will be borne by Rab ul Mal

Mudarabah Distribution of Profit & Loss

Example
▪ If the capital is Rs.100,000. They cannot agree on a condition that Rs.10,000 out of the profit shall
be the share of the Mudarib nor can they say that 20% of the capital shall be given to Rab ul Mal
▪ However they can agree that 40% of the actual profit shall go to the Mudarib and 60% to the Rab
ul Mal or vice versa
Mudarabah Roles of Mudarib

Ameen (Trustee)
▪The money is given by Rab ul Mal and the assets acquired therewith are held by him as a trust
▪ He is responsible for safeguarding the investment, except in case of natural calamities
Wakeel (Agent)
▪ In purchasing goods for trade, he is an agent of Rab ul Mal
Shareek (Partner)
▪In case the enterprise earns a profit, he is entitled to share the profit
Zamin (Liable)
▪ If the enterprise suffers a loss due to his negligence or misconduct, he is liable to compensate
Ajeer (Employee)
▪ If Mudarabah becomes void, Mudarib is entitled to get a fee for his services i.e. Ujrat e Mithl
Mudarabah Termination of Mudarabah

▪ If Mudarabah was for a particular term, it will terminate at the end of the term
▪ Mudarabah can be terminated any time by either of the two parties by giving notice
▪ If a time period is fixed in Mudarabah, then, all partners will be responsible for the completion of
this period
▪ Physical liquidation is not necessary. Constructive liquidation can also be conducted
▪ If all assets of Mudarabah are in cash form at the time of termination, and some profit has been
earned on the principal amount, it shall be distributed between the parties as per the agreed ratio
▪ If the assets of Mudarabah are not in cash form, they will be sold and liquidated so that the actual
profit may be determined
▪ If there is a profit, it will be distributed between Mudarib and Rab ul Mal
▪ If no profit is left, Mudarib will not get anything
Mudarabah Collective Mudarabah

Collective Mudarabah
▪ “Collective Mudarabah” means a joint pool created by many investors and handled over to a
single Mudarib who is normally a juristic person.
▪ Collective Mudarabah creates two different relationships:
▪ Relationship between investors, which is Shirkah or Partnership
▪ Relationship of all the investors with Mudarib, which is Mudarabah
▪ Direct expenses are borne by Mudarabah pool
▪ Indirect expenses are borne by Mudarib
Mudarabah Running Mudarabah

Running Mudarabah
▪ Investors come in and go out at different dates
▪ Profits are calculated on daily product basis
▪ Redemption before maturity
▪ If the assets of Mudarabah are in illiquid form, an investor may redeem his share by selling it
to the pool
▪ If the assets are in liquid form, a provisional amount may be given to him subject to final
settlement
Mudarabah Mudarabah in Banking

Deposits - The Bank as Mudarib

▪ Profit from the Mudaraba activity is shared between the Bank (as Mudarib) and the investment
account holder (as Rab ul Mal) in a pre agreed ratio
▪ The Bank does not bear any loss but remains responsible for negligence or misconduct
▪ The Bank is bound to return the capital to the investors after deducting any losses or Mudarib
share at the time of winding up the contract
Mudarabah Mudarabah in Banking

Investments - The Bank as Rab ul Mal

▪ Profit from the Mudarabah activity is shared between the Bank (as Rab ul Mal) and the Mudarib in
a pre agreed ratio
▪ The Bank will bear all the loss unless the Mudarib violates the agreement
▪ The Bank will pay to the Mudarib, his share in return for management of its funds
▪ The Mudarib is bound to return the capital to the Bank after deducting any losses or Mudarib
share at the time winding up of the contract
Mudarabah
Musharakah
All partners invest in the business
All partners have right to participate in the
management of the business and to work for it
All partners share the loss proportionately as
per the ratio of investment
On mixing of capital in a joint pool, all assets
become jointly owned by the partners as per
their ratio of investment. All partners benefit
from the appreciation in the value of assets
even if profit has not accrued through sales
Musharakah vs Mudarabah
Mudarabah
Only Rab ul Mal invest in the business
Rab ul Mal has no right to participate in the
management of the business
Only Rab ul Mal bears the loss as Mudarib does
not invest anything. Mudarib may share loss
only in case of his negligence
The goods purchased by Mudarib are solely
owned by Rab ul Mal and Mudarib can earn his
share in the profit only if he sells the goods of
the business in a profitable manner
Mudarabah
Assets Side Financing
▪ Short/ Medium / Long term financing
▪ Project financing
▪ Working capital financing
▪ Import financing
▪ Export financing (Pre-Shipment)
▪ Running finance
Application of Mudarabah
Liabilities Side Financing
▪ Savings / Term deposit accounts
▪ Inter-bank lending / Borrowing
▪ Term finance certificates
▪ T-Bills and Federal Investment Bonds
▪ Islamic bank Musharakah bonds
Islamic Banking & Finance BS Accounting & Finance

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