07/09/2023
Islamic Banking & Finance Mudarabah
MUDARABAH
Rehan Waheed
Source: Islamic Finance by Dr. Muhammad Imran Ashraf Usmani
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 Mudarabah
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Mudarabah Mudarabah - Defined
▪ This is a kind of partnership where one partner gives money to another for investing in a
commercial enterprise
▪ Investment comes from the first partner who is called ‘Rab-ul-Mal’ (Investor)
▪ 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 shared as per investment ratio i.e. to be borne by Rab-ul-Mal (investor)
▪ If losses occur due to intentional harm to the Rab-ul-Mal by Mudarib, or due to his misconduct,
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)
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Mudarabah Types of Mudarabah
Al Mudarabah Al Muqayyadah (Restricted Mudarabah)
▪ Rab-ul-Mal may specify a particular business or a particular place for 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 Mudarib to undertake whatever business he deems fit but within
the boundaries of Shariah
▪ Mudarib is authorized to do anything which is done in normal course of business
▪ If Mudarib wants to have an extraordinary work, i.e. beyond normal routine of business, he can
not do so without 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
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Mudarabah Mudarabah Investment
▪ Rab-ul-Mal provides capital investment and Mudarib looks after the management
▪ Rab-ul-Mal should handover agreed investment to Mudarib and leaves everything to him with no
interference from his side
▪ Rab-ul-Mal may oversee Mudarib’s activities
▪ Rab-ul-Mal may work with Mudarib only if the Mudarib consents
Capital of Mudarabah: In what form should Mudarabah 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 following
▪ Assets other than cash may be used as an intermediate step, subject to determination of
exact value of assets. If the assets are not correctly evaluated, Mudarabah is not valid
Mudarabah Mudarabah Expenses
Mudarabah Expenses
▪ Mudarib shares profit of Mudarabah as per agreed profit sharing ratio (PSR) 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 aforementioned
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 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
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Mudarabah Distribution of Profit & Loss
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 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 profit at any ratio they agree upon. However, the PSR cannot be 0:100
▪ In case the parties have entered Mudarabah without mentioning the exact proportions of profit, it
will be presumed that they will share profit in equal ratios
▪ Mudarib and 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 work done by him
Mudarabah Distribution of Profit & Loss
Distribution of Profit & Loss
▪ If business has incurred loss in some transactions and has gained profit in others, profit shall be
used to offset loss in the first instance
▪ Remainder profit shall be distributed between the parties according to the agreed ratio
▪ Mudarabah becomes fasid (void due to defect), if profit is fixed in any way
▪ In such a situation, 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
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Mudarabah Distribution of Profit & Loss
Example
▪ If capital is Rs.100,000. Partners cannot agree on a condition that Rs.10,000 out of actual 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, partners may agree that 40% of actual profit shall go to Mudarib and 60% to Rab-ul-
Mal or vice versa
Mudarabah Roles of Mudarib
Ameen (Trustee)
▪ Money is given by Rab-ul-Mal and assets acquired therewith are held by Mudarib as a trust
▪ Mudarib is responsible for safeguarding investment, except in case of natural calamities
Wakeel (Agent)
▪ In purchasing goods for trade, Mudarib is an agent of Rab ul Mal
Shareek (Partner)
▪ In case, enterprise earns profit, Mudarib is entitled to share profit
Zamin (Liable)
▪ If enterprise suffers loss due to Mudarib’s 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
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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 completion of this
period
▪ Physical liquidation is not necessary. Constructive liquidation can also be done
▪ 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 agreed ratio
▪ If assets of Mudarabah are not in cash form, these will be sold and liquidated so that 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 handed 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 investors with Mudarib, which is Mudarabah
▪ Direct expenses are borne by Mudarabah pool
▪ Indirect expenses are borne by Mudarib
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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 assets of Mudarabah are in illiquid form, an investor may redeem his share by selling it to
the pool
▪ If assets are in liquid form, a provisional amount may be given to him subject to final
settlement
Mudarabah Mudarabah in Banking
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Mudarabah Mudarabah in Banking
Deposits - The Bank as Mudarib
▪ Profit from Mudarabah activity is shared between Bank (as Mudarib) and investment account
holder (as Rab-ul-Mal) in a pre-agreed ratio
▪ Bank does not bear any loss but remains responsible for any misconduct, negligence or breach of
trust
▪ Bank is bound to return capital to the investors after deducting any losses or Mudarib’s share at
the time of winding up of the contract
Mudarabah Mudarabah in Banking
Investments - The Bank as Rab-ul-Mal
▪ Profit from Mudarabah activity is shared between Bank (as Rab-ul-Mal) and Mudarib in a pre-
agreed ratio
▪ Bank will bear all losses unless Mudarib violates the agreement
▪ Bank will pay to Mudarib, his share in return for the management of its funds
▪ Mudarib is bound to return capital to the bank after deducting any losses or Mudarib’s share at the
time winding up of the contract
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Mudarabah Musharakah vs Mudarabah
Musharakah Mudarabah
All partners invest in business Only Rab-ul-Mal invest in business
All partners have right to participate in Rab ul Mal has no right to participate in
management of the business and to work for it management of the business
All partners share loss proportionately as per the Only Rab ul Mal bears loss as Mudarib does not
ratio of investment invest anything. Mudarib may share loss only in
case of his misconduct, negligence or breach
On mixing of capital in a joint pool, all assets Goods purchased by Mudarib are solely owned
become jointly owned by partners as per their by Rab-ul-Mal and Mudarib can earn his share
ratio of investment. All partners benefit from the in profit only if he sells the goods of the
appreciation in value of assets even if profit has business in a profitable manner
not accrued through sales
Mudarabah Application of Mudarabah
Assets Side Financing Liabilities Side Financing
▪ Short/ medium/ long term financing ▪ Savings/ term-deposit accounts
▪ Project financing ▪ Inter-bank lending/ borrowing
▪ Working capital financing ▪ Term finance certificates
▪ Import financing ▪ T-Bills and federal investment bonds
▪ Export financing (pre-shipment) ▪ Islamic bank Musharakah bonds
▪ Running finance
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Mudarabah Islamic Banking & Finance
Source: Islamic Finance by Dr. Muhammad Imran Ashraf Usmani
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