Mudarabah Contract

When investment is made by one partner and the services are provided by the other partner, it is called Mudarabah in Islamic banking. The investor of that mudarabah contract is called “Rabb-ul-Mal”, the working partner is called “Mudarib” and investment is called “Ras-ul-Maal”.

Mudarabah in Islamic Banking:

Hazrat Khadijah Kubra (RTA) used to give capital for business and our Holy prophet Muhammad (SAW) do business from her capital.

In Mudarabah Mutlaqa (Un-restricted Mudarabah) no restriction from the Rabb-ul-Mal regarding the business. However In Mudarabah Muqayyada (Restricted Mudarabah) some restrictions implemented from the Rabb ul Mal (Investor)

Profit may be distributed at any agreed ratio. In case of loss, all loss will be borne by the “Rabb-ul- Mal”. Mudarib’s share of profit will not be given to Mudarib.


Different Capacities of Mudarib in Mudarabah Contract:

AMEEN (Trustee):
The capital of Mudaraba is an Amanah in the hand of Mudarib, therefore, if any loss to business without negligence of Mudarib, Mudarib will not be responsible for the loss.

WAKEEL (Agent):
In Mudaraba, when Mudarib starts the business, he becomes an Agent of Rabb-ul-Mal. Therefore, if principal/Rabb ul Mal gives some instructions; Mudarib is bound to comply with these instructions.

SHAREEK (Partner):
In case of profit, Mudarib is partner in that businesses to the extent of his profit share.

ZAAMIN (Liable):
If Mudarib disobeys the instructions of Rab ul Mal, he is liable for loss.

AJEER (Employee):
If Mudaraba becomes void due to any reason, then Mudarib is Ajeer. He is entitled to get normal salary (Ujrat-e-Misl).

Requirements Related to Capital:
  • In principle, the capital of Mudarabah in Islamic banking must be provided in the form of cash. However, it may be presented in the form of tangible assets, in which case the market value of the assets is the contribution to the Mudarabah capital. The valuation of the assets may be conducted by experts or as agreed upon by the contracting parties.
  • Practical application: An Islamic Bank/branch can receive capital from the deposit holders in cash. Accordingly, Islamic Bank/branch will become Mudarib and the depositors will become Rabb-ul-Maal, , as it is discussed in course title IBF-512, which is one of the Islamic banking courses offered by AIMS. This certification leads to Islamic finance certification and Islamic banking diploma.
  • If the mudarib has committed his own funds with the Mudarabah funds, the Mudarib becomes a partner in respect of this 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 between the mudarib and the capital provider according to the provisions of the Mudarabah contract.
Practical Application of Mudarabah:

In case of loss in the banking business of an Islamic Bank/branch, the depositors will have to bear the loss of their deposits but subject to the ratio of each deposit in the total pool of deposits. If the Islamic Bank/branch has also put its equity (according to Shariah term Mudarabah Mushtaraka) then this equity will also become a part of deposits.

Supposing The Following Data:

Loss incurred by an Islamic Bank/branch for $1,000,000

Total deposits of the depositors are $3,000,000,000

Equity of the Islamic bank/ branch is $50,000,000

The deposit of deposit holder “A” is $3,000,000

Now the loss of Depositor “A” will be: $3,000,000 / 3,000,000,000 + 50,000,000 x 1,000,000 = $984. The general principle is that a Mudarabah contract is not binding, i.e. each of the contracting parties may terminate it unilaterally except in two cases:

  • When the mudarib has already commenced the business, in which case the Mudarabah contract becomes binding up to the date of actual or constructing liquidation. For example, during the currency of a tenor an Islamic Bank/branch has a right to refuse the pre-matured encash-ment of any term deposit constructive liquidation of Mudarabah operations.
  • When the contracting parties agree to determine a duration for which the contract will remain in operation. In this case, the contract cannot be terminated prior to the end of the designated duration, except by mutual agreement of the contracting parties. Example: Term deposits received by the Islamic bank/branch.
Termination of Mudarabah:
  • Each partner can terminate Mudarabah contract at any time.
  • If a time period is fixed in Mudarib, then, all partners will be responsible for the completion of this period.
  • Physical liquidation is not necessary. Constructive liquidation can also be conducted.
  • After liquidation of Mudaraba, all business expenses excluded from the capital.
  • Mudarib will bear all those expenses, which are normally considered the responsibility of Mudarib. Although, the expenses, which are not considered the responsibility of Mudarib will be deducted from the total capital.
  • Capital of investor will be returned to him.
  • Remaining amount will be the profit and distributed according to agreed ratio.

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