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Mudaraba



Sat, 24 Jul, 2010 | Sha'aban 11, 1431
Scope of the Presentation
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Mudaraba - Introduction

" known also a p  is a contract that arranges


cooperation in business investment between capital on one
hand and enterprenuership on the other, whereby the
contracting parties jointly and commonly own the realised
profit as per the agreement.

+party providing the capital is known O    and the


investor is known as  O  Ô 
 ÔÔ
p 
Permissibility of Mudaraba
a) From the Qur¶an is the saying of Allah, the Almighty,   
Ô    Ô   Ô Ô  

   
b) From Sunnah it is evident that the Holy Prophet (pbuh) himself
worked as a   in this type of contract for Bibi Khadijah
(SA).
c) It is reported on the authority of Ibn µAbbas, that his father,
al¶Abbas used to stipulate a condition whenever he gave his
money in a  that the   will not take his money
across the sea, into any valley, or buy any animal with a soft
belly, and if the  were to do any of those actions, then
he must guarantee the capital. The Prophet (pbuh) heard of this
practice and permitted it.
Kinds of Mudaraba
Mudaraba has two kinds:
ï *  " Restricted Mudaraba (
pcontract is a kind of Mudarabah in which the
capital provider restricts the Mudarib to perform business
as per the restrictions.

These restrictions may be for place (geographical


restriction), particular type of investment (sector wise
restriction) or any other restriction that does not unduly
constrain the Mudarib from business operations.
Kinds of Mudaraba
    " 
Unrestricted Mudaraba (  pcontract is a
kind of Mudaraba in which the capital provider (Rabbul
Maal) does not put any restriction the Mudarib.

So there is no any restrictions that constrain the Mudarib


from business operations.
Mudaraba Capital

K In principle, the capital of Mudaraba should be provided in


the form of cash.
K However, it may be presented in the form of tangible
assets which will be valued as mutual consent. The value
(in cash) of the assets will be the Mudaraba capital.
K The Capital of Mudaraba should be clearly known to the
contracting parties and defined in terms of quality and
quantity in a clear manner.
K Debt (receivable) can not be the capital of Mudaraba.
Profit and Loss distribution
K The contracting parties should stipulate in the contract the
profit shares (in defined terms) for each one.
K The profit sharing ratio should be a) specific b) of the profit
expected to be earned by the venture.
K Unknown ratio or ratio attributed to future settlement or ratio
linked with the capital (in terms of x% of the capital) is not
allowed and the transaction becomes void.
K A lump sum settlement as profit is not allowed.
K Losses in Mudaraba shall only be born by Rabb-ul-Mal and
not the Mudarib.
K Mudarib will suffer loss in shape of not receiving anything as
profit.
Profit and Loss distribution
K The Mudarib shall only be responsible for losses if there
were due to his negligence and willful misconduct.
K If the Mudarib has commingled his own funds with the
Mudaraba funds, the mudarib becomes a partner in
respect of his funds and a mudarib in respect of the funds
of the capital provider. The profit earned on the two
commingled funds will be divided proportionately to the
amounts of the two funds, in which case the mudarib
takes the profit attributable to his own funds, while the
remaining profit is to be distributed b/w the mudarib and
the capital provider according to the provisions of the
Mudaraba contract.
Mudaraba Model
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Scope of Mudaraba in Banking System

Mudaraba as a mode of finance used by Islamic Banks for the


following purpose:
K Mudaraba is considered to be the essential mode accredited
by the Islamic Banks in their relationship with depositors
who provide moneys to the Bank as Rabb-ul-Mal to be
invested by the Bank as Mudarib on the basis of profit
sharing according to specific ratios agreed upon.
K Islamic banks may use the same mode with the customer.
K Project Financing.
Problems and Risks for Islamic Banks

K Mudaraba is considered to be very high risk financing


activity.
K Collateral can be asked but could not be used in case of
real loss.
K Bank¶s existing competencies in project evaluation and
related techniques are limited.
K Dual book keeping trends in market.
K No legal mechanism for treatment with Mudaraba.
Jazakallah