Finance

What Is Mudaraba in Islamic Finance and Banking?

Types of Mudaraba: There are two types of Mudaraba, and they are mentioned below:

(1). Al Mudaraba Al-Muqayadah:

Rabaul-Maal may specify a particular business or place for the Mudaarib, where he will invest the money for that specific business or home. This is called Al Mudaraba Al-Muqayadah (restricted Mudaraba).

The Scheme of Mudaraba transaction (trust) | Download Scientific Diagram

(2). Al Mudaraba Al Mutlaqah:

However, if Rab’ul-Maal gives full freedom to Mudaarib to undertake whatever business he deems fit, Al Mudaraba Al Mutlaqah (unrestricted Mudaraba). However, Mudaarib cannot, without the consent of Rab’ul-Maal, lend money to anyone. Mudaarib is authorized to do anything which is normally done in the course of business. However, if they want to have extraordinary work beyond the normal routine of the traders, they cannot do so without express permission from Rab’ul-Maal. He is also not authorized to:

a) keep another Mudaarib or a partner

b) mix his investment in that particular Modarabah without the consent of Rab-ul Maal.

Conditions of Offer and acceptance apply to both. A Rab’ul-Maal can contract Mudaraba with more than one person through a single transaction. It means that he can offer his money to ‘A’ and ‘B’ both so that each one can act for him as Mudaarib, and the Capital of the Mudaraba shall be utilized by both of them jointly, and the share of the Mudaarib.

Difference between Musharaka and Mudaraba

(1). In Musharaka, all partners invest; however, in Mudaraba Finance, only Rab’ul-Maal invests.

(2). In Musharaka, all partners participate in managing the business and can work for it. However, in Mudaraba, Rab’ul-Maal has no right to participate in the management, carried out by the Mudaarib only.

READ MORE :

(3). In Musharakha, all partners share the loss to the extent of the ratio of their investment. But in Mudaraba, only Rab’ul-Maal suffers loss because the Mudaarib does not invest anything. However, this is subject to a condition that the Mudaarib has worked with due diligence.

(4). In Musharaka, the liability of the partners is normally unlimited. If the business’s liabilities exceed its assets and it goes into liquidation, all the exceeding liabilities shall be borne pro rata by all partners. But suppose the partners agree that no partner shall incur any debt during business. In that case, the exceeding liabilities shall be borne by that partner who h,as incurred an obligation on the company in violation of the condition above. However, in Mudaraba, the liability of Rab’ul-Maal is limited to his investment unless he has permitted the Mudaarib to incur debts on his behalf.

(5). Once the partners mix up their Capital in a joint pool in Musharaka, all the assets become jointly owned by all the partners, according to the proportion of their respective investments. All partners benefit from the appreciation in the assets’ value even if profit has not accrued through sales. In Mudaraba financing, the goods purchased by the Mudaarib are solely owned by Rab’ul-Maal, and the Mudaarib can earn his share in the profit only if he sells the goods profitably.

Distribution of Profit & Loss

It is necessary for the validity of Mudaraba that the parties agree, right at the beginning, on a definite proportion of the actual profit to which each is entitled. The Shariah has prescribed no particular proportion; rather, it has been left to their mutual consent. They can share the profit in equal proportions, and they can also allocate different proportions for Rab’ul-Maal and Mudaarib. However, in extreme cases where the parties have not predetermined the profit ratio, the profit will be calculated at 50:50.

The Mudaarib & Rab’ul-Maal cannot allocate a lump sum of profit for any party, nor can they determine any party’s share at a specific rate tied up with the Capital. For example, if the Capital is 10,000 Pound Sterlings, they cannot agree on a condition that 1,000 Pound Sterlings out of the profit shall be the share of the Mudaarib, nor can they say that 20% of the Capital shall be given to Rab’ul-Maal. However, they can agree that 40% of the actual profit shall go to the Mudaarib and 60% to the Rab’ul-Maal or vice versa.

It is also allowed that different proportions are agreed upon in different situations. For example, the Rab’ul-Maal can say to Mudaarib, “If you trade in wheat, you will get 50% of the profit, and if you trade in flour, you will have 33% of the profit”. Similarly, he can say, “If you do business in your town, you will be entitled to 30% of the profit, and if you do it in another town, your share will be 50% of the profit”.

Apart from the agreed proportion of the profit, as determined in the above manner, the Mudaarib cannot claim any periodical salary or a fee or remuneration for the work done by him for the Mudaraba. All schools of Islamic Fiqh are unanimous on this point. However, Imam Ahmad has allowed the Mudaarib to draw his daily food expenses only from the Mudaraba Account. The Hanafi jurists restrict this right of the Mudaarib only to a situation when he is on a business trip outside his city. In this case, he can claim his expenses, accommodation, food, etc., but he is not entitled to get anything as daily allowances when he is in his city.

If the business has incurred a loss in some transactions and has gained profit in others, the profit shall offset the loss in the first instance. The remainder, if any, shall be distributed between the parties according to the agreed ratio.

The Mudaraba becomes void (Fasid) if the profit is fixed in any way. In this case, the entire amount (Profit + Capital) will be Rab’ul-Maal’s. The Mudaarib will be an employee earning Ujrat-e-Misl. The remaining amount will be called (Profit). This profit will be shared in the agreed (pre-agreed) ratio.

Uses Of Musharaka/Mudaraba:

These modes can be used in the following areas (or replace them according to Shariah rules).

Asset Side Financing

– Any term financing
– Project financing
– Small and medium enterprises set up the financing
– Large enterprise financing
– Import financing
Import bills drawn under import L/C
– Inland bills drawn under inland L/C
– Bridge financing
– LC without margin (for Mudarba)
– LC with margin (for Musharaka)
Export financing (Pre-shipment financing)
– Working capital financing
Running accounts financing/short-term advances

About author

I work for WideInfo and I love writing on my blog every day with huge new information to help my readers. Fashion is my hobby and eating food is my life. Social Media is my blood to connect my family and friends.
    Related posts
    Finance

    Do we need brokers to invest in share market?

    Finance

    Financing Options for REO Properties

    Finance

    How Can My Business Improve Its GRC Policies?

    Finance

    5 Ways to Prepare for a House Sitter

    Sign up for our newsletter and stay informed !