MUDARABAH

A form of partnership where one party provides

the necessary capital (called Rab ul Mal) and the
other provides human capital (called Mudarib)
needed for economic activity to be undertaken.
Investment is called Ras-ul-Mal.
The Contract of Mudarabah (Muqaradah) is
traditionally applied to commerce alone, but it
provides the basis of the relationship between
banks, depositors and the entrepreneurs. It can be
applied in all sectors of the economy like trade,
industry, agriculture, etc. Mudarabah is also a
type of Shirkah when used as a broad term.
THE PROOF OF MUDARABAH
Hazrat Khadijah Kubra (RTA) used to
give capital for business and our Holy
prophet Muhammad (SAW) do business
from her capital.
Mudarabah may be of various types, which
may be multi purpose or specific purpose,
perpetual, or for a fixed period, restricted or
unrestricted and close or open ended in
accordance with the conditions respective to
each of them.
 Types of Mudarabah
A. Restricted Mudarabah (Mudarabah Al
Muqayyadah): Rab ul Maal may specify a particular
business or a particular place for the Mudarib to carry
out the business.
B. Unrestricted Mudarabah (Mudarabah Al
Mutalaqah): Rab ul Maal gives full freedom to the
Mudarib to undertake whatever business he deems fit.
However, the Mudarib cannot lend money to anyone
without the consent of Rab ul Maal. He is also not
authorized to indulge in the following without the
express approval of Rab ul Maal:
1) Appoint another Mudarib or a partner
2) Mix his own investment in that Mudarabah
A Mudarib who runs the business can be a
natural person, a group of persons, or a legal
entity or a corporate body. Mudarabah shall
include banks, mutual funds or any other
institutions or persons by whatever name
called.
The liability of Rab ul Mal is limited to his
investment, unless otherwise specified in the
Mudarabah Contract.
Profit of a Mudarabah project can also be re-
invested in the business (combination of
Musharika and Mudarabah)
 Capital of Mudarabah
Capital of Mudarabah may be in cash or in
shape of tangible asset . If it is in shape of
tangible asset it will be valued with mutual
consent. The determined value will be the
Mudarabah capital.
Capital must be handed over to the Mudarib
Capital must be specified (Maaloom)
Capital must be existing
Debt could not be considered as capital of
Mudarabah
 RULES OF PROFIT & LOSS IN
MUDARABAH
Profit may be distributed at any agreed ratio.
In case of loss, all loss will be borne by the Rabb-ul-
Mal.
Profit will be agreed according to percentage not in
lump sum.
Agreed percentage must be a percentage of profit not of
capital.
Different proportion of percentages could be agreed for
different situations.
The Mudarib cannot claim any periodical salary or a
fee or remuneration for the work done by him for the
Mudarabah.
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, then the remainder, if any, shall be
distributed between the parties according to
agreed ratio.
 Participation from Mudarib
It is permissible for Mudarib to add capital in
Mudarabah with permission of Rab ul Mal.
This transaction becomes a combination of
Shirkah and Mudarabah, therefore it is called
Mudarabah Mushtarikah or Musharakah.
In such case Mudarib will take along share
of some profit on his capital also to the extent
of his share in capital or weightages.
 More then one Rab ul Mal

In mudarabah Rab ul Mal may be more

than one.
In such case they will be partners (shareek)
among themselves and will be considered
as a legal entity.
The share of Rab ul Mal will be divided
among them according to their contribution
ratio considering the weightages (if any)
DIFFERENT CAPACITIES OF MUDARIB
1. AMIN (Trustee)
The capital of Mudarabah is Amanah in the hand of
Mudarib, therefore, if there is any loss to business without
negligence of Mudarib, Mudarib will not be responsible for
the loss.

2. WAKEEL (Agent)
When Mudarib starts the business, he becomes an Agent of
Rab-ul-Mal. Therefore, if principal/ Rab-ul-Mal gives some
instructions; Mudarib is bound to comply with these
instructions.
3. SHAREEK (Partner)
In case of profit, Mudarib is partner in that businesses to the
extent of his profit share.

4. ZAMIN (Liable)
If Mudarib disobeys the instructions of Rab ul Mal, he is
liable to make up the loss if any.
5. AJEER (Employee)
If Mudarabah becomes void due to any reason, then
Mudarib is Ajeer. He is entitled to get normal salary
(Ujrat-e-Misl).
 DIFFERENCES BETWEEN
Shirkat & Mudarabah
S.No SHIRK AT MUDARABAH
1- Investment from each Investment from one partner while
partners. other are working partners.
2- Every partner can work for Rab ul Mal cannot work for business.
business.
3- Every partner bears loss Only Rab-ul-Mal suffers loss
according to ratio of his
investment
4- All Partners liability is Rab-ul-Mal is liable up to the amount
unlimited. of investment
5- Asset given by the investor Asset given by the investor as an
as an investment, all investment, remains in the ownership
partners will be co-owners of investor before sale. Therefore, if
of that asset so if value of Mudarabah is terminated at this
that Asset is increased, all stage, Mudarib is not entitled to share
will get benefit. in the exceeding price of that asset.
TERMINATION OF MUDARABAH
1) Each partner can terminate Mudarabah at any time.
2) If a time period is fixed in Mudarabah, then, all
partners will be responsible for the completion of
this period.
3) Physical liquidation is not necessary. Constructive
liquidation can also be conducted.
4) After liquidation, all direct expenses will be
excluded.
5) Mudarib will bear all those expenses, which are
normally considered the responsibility of Mudarib
(in-direct expenses). The expenses, which are not
considered the responsibility of Mudarib (direct
expenses) will be deducted from the total capital.
6) Capital of investor will be returned to him.
7) Remaining amount will be the profit and
distributed according to agreed ratio.
8) If one investor wants to leave Mudarabah before
constructive liquidation mudarib or other investors
can purchase his share paying him provisional
amount subject to adjustment at the time of closing
if mudarabah consists of fixed asset less then 10%.
9) If mudarabah consists of fixed asset more then
10% then out going investors share could be
purchased at any price with mutual consent subject
to the agreed price which must be more than the
ratio of cash and receivables in his share.
 Some Observations in Mudarabah
The parties should agree on the ratio of profit distribution
when the contract is concluded. It is also permissible for the
parties to change the ratio of distribution of profit at any
time and to define the duration for which the agreement will
remain valid.
It is not permissible for the capital provider to give the
mudarib two amounts of capitals on condition that the profit
earned on one of the two amounts would be taken by the
mudarib while the capital provider would take the profit
earned on the other amount.
It is also not permissible for the capital provider to state that
the profit of one financial period would be taken by the
mudarib and the capital provider would take the profit of
the following financial period.
It is not permissible to assign the profit from a particular
transaction to the mudarib and the profit from another
transaction to the capital provider.
 No profit can be recognized or claimed unless the capital of
the Mudarabah is maintained intact.
Whenever a Mudarabah operation incurs losses, such losses
stand to be compensated by the profits of future operations
of the Mudarabah. The losses brought forward should be set
against the future profits.
All in all, the distribution of profit depends on the final
result of the operations at the time of liquidation of the
Mudarabah contract. If losses are greater than profits at the
time of liquidation, the balance (net loss) must be deducted
from the capital. In this case, as Mudarib he is a trustee, he
is not liable for the amount of this loss, unless there is
negligence or misconduct on his part.
If the total Mudarabah expenses are equal to the total
Mudarabah revenues, the capital provider will receive his
capital back without either profit or loss, and there will be
no profit in which the mudarib is entitled to a share.
If profit is realized, it must be distributed between the
parties as per the agreement.