CHAPTER 11

MUDARABAH

This is a kind of partnership where one partner gives money to

another for investing in a commercial enterprise. The investment
comes from the first partner who is called "Rab-ul-Maal" while
the management and work is an exclusive responsibility of the
other, who is called "Mudarib" and the profits generated are
shared in a predetermined ratio.

Types of Mudarabah
There are two (2) types of Mudarabah namely:

1) Al Mudarabah Al Muqayyadah (Restricted Mudarabah)

Here, the Rab-ul-Maal may specify a particular business or a
particular place for the mudarib to carryout the business, in
which case, he shall invest the money in that particular
business or place. This is called “Al Mudarabah Al Muqayyadah”
(Restricted Mudarabah).

2) Al Mudarabah Al Mutlaqah (Unrestricted Mudaraba)

However, if Rab-ul-maal gives full freedom to the Mudarib to
undertake whatever business he deems fit, this is called “Al
Mudarabah Al Mutlaqah” (Unrestricted Mudarabah). However,
the Mudarib cannot, without the consent of Rab-ul-Maal, lend
money to anyone. The Mudarib is authorized to do anything,
which is normally done in the course of business. However, if
Mudarib wants to have an extraordinary work, which is beyond
the normal routine of the traders, he cannot do so without
express permission of Rab-ul-Maal. He is also not authorized to:

a) Appoint another Mudarib or a partner

b) Mix his own investment in that particular Mudarabah
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without the consent of the Rab-ul Maal.

All conditions of offer and acceptance are applicable to both

the parties. The Rab-ul-Maal can execute a Mudarabah
contract with more than one person through a single
transaction. This means that the Rab -ul- Maal can offer his
money to 'A' and 'B' both so that each one of them can act
for him as Mudarib and the capital of the Mudarabah shall
be utilized by both of them jointly.

Difference between Musharakah and Mudarabah

Musharakah Mudarbah
All partners invest in the Only the Rab-ul-Maal invests in the
1. business. business.

All partners have the right to The Rab-ul-maal has no right to

2. participate in the management participate in the management which
of the business and work for it. is carried out by the Mudarib only.

All partners share the loss Only the Rab-ul-maal bears the loss
3. proportionately, to the extent of because the Mudarib does not invest
the ratio of their investment. anything.
However, this is subject to a condition
that the Mudarib has worked with
due diligence.

As soon as the partners mix up The goods purchased by the Mudarib

their capital in a joint pool, all are solely owned by Rab-ul-maal and
4. the assets become jointly owned the Mudarib can earn his share in
by all of them according to the the profit only if he sells the goods
proportion of their respective of the business in a profitable
investment. All partners benefit manner.
from the appreciation in the
value of the assets even if profit
has not accrued through sales.
 Chapter # 11: Mudarabah 129

Investment
In Mudarabah, the Rab-ul-maal provides the capital investment
and the Mudarib looks after the management. Therefore, the
Rab-ul-maal should hand over the agreed investment to Mudarib
and leaves everything to Mudarib with no interference from his
side but he may:

a) Oversee the Mudarib's activities and

b) Work with the Mudarib if the Mudarib consents

Here, the question arises, in what form should the Mudarabah

capital be? Can non-liquid assets like equipment, land etc. form
capital investments?

The basic principle is that the capital in Mudarabah is valid just

the way it is in Shirkah, which according to Hanafi fiqh should be
in liquid form. But, according to the other scholars, equipment
and land etc. can also be included as capital Investment. However,
all the scholars are unanimous on the following:

“Assets other than cash can be used as an intermediate step.

However, this is subject to the determination of the exact value
of the assets before they are used for the Mudarabah. If the
assets are not correctly evaluated, the Mudarabah is not valid.”

Mudarabah Expenses
The Mudarib shares profit of the Mudarabah as per the agreed
rate with the Rab-ul-Maal, but his expenses like meals, clothing,
conveyance and medical are not borne by Mudarabah. However,
if he is traveling on a business trip and is overstaying the night,
then the aforementioned expenses shall be covered from the
capital of Mudarabah. If Mudarib goes for a journey which
constitutes Safar-e-Sharai (more than 48 miles), but does not
 130 Meezan Bank’s Guide to Islamic Banking

overstay the night, his expenses will not be borne by Mudarabah.

All expenses which are incidental to the Mudarabah's function

like wages of employees/workers or commissions in buying/selling
etc have to be paid by the Mudarabah. However, all the expenses
can be included in the cost of commodities which Mudarib sells
in the market. For example, if the Mudarib is selling ready made
garments then the stitching, dyeing, washing expenses etc. can
be included by the Mudarib in the total cost of the garments.

If the Mudarib manages the Mudarabah within his city, he will

not be allowed any expenses, but only his due profit share.
Similarly, if he keeps an employee, this employee will not be
allowed any expenses, but his salary.

If the Mudarabah agreement becomes invalid (Fasid) due to any

reason, the Mudarib's status will be that of an employee, meaning:

a) Whether he is traveling or doing business in his city, he will

not be entitled to any expense such as meal, conveyance,
clothing, medicine etc.

b) He will not be sharing any profit and will just get Ujrat-e-Misl
(prevalent remuneration) for his job.

Distribution of Profit & Loss

It is necessary for the validity of Mudarabah that the contracting
parties agree, right at the beginning, on a definite proportion of
the actual profit to which each one of them is entitled. The
Shariah has prescribed no particular proportion; rather it has
been left to the partners' mutual consent. They can share the
profit in equal proportions and they can also allocate different
proportions for the Rab-ul-Maal and Mudarib. However, in such
cases where the parties have not predetermined the ratio of
 Chapter # 11: Mudarabah 131

profit, the profit will be shared at the ratio of 50:50.

The Mudarib and the Rab-ul-Maal 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. For example,
if the capital is Rs.100,000/-, they cannot agree on a condition
that Rs.10,000/- out of the profit will be the share of the Mudarib,
nor can they say that 20% of the capital will be given to Rab-ul-
Maal. However, they can agree that 40% of the actual profit will
go to the Mudarib and 60% to the Rab-ul-Maal or vice versa.

It is also allowed that different proportions could be agreed for

different situations. For example, the Rab-ul-Maal can say to the
Mudarib "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 the business in your own town, you will be
entitled to 30% of the profit and if you do it in another town,
your profit share will be 50%".

Apart from the agreed proportion of the profit (as determined

in the above mentioned manner), the Mudarib cannot claim any
periodical salary or a fee or remuneration for the work done by
him for the Mudarabah.

All schools of Islamic Fiqh are unanimous on this point. However,

Imam Ahmad has allowed for the Mudarib to draw his daily
expenses for food only from the Mudarabah Account. The Hanafi
jurists restrict this right of the Mudarib only to a situation where
Mudarib is on a business trip outside his own city. In this case,
he can claim his personal expenses for accommodation and food,
etc. but he is not entitled to get anything as daily allowances
when he is in his own city.

If the business has incurred loss in some transactions and has

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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 the agreed ratio.

The Mudarabah becomes void (Fasid) if the profit is fixed in any

way. In this case, the entire amount (Profit + Capital) will be of
Rab-ul-Maal's. The Mudarib will just be an employee earning
Ujrat-e-Misl (market equivalent salary/wages). The remaining
amount will be called Profit. This profit will be shared in the
agreed ratio.

Roles of the Mudarib

Ameen (Trustee) Responsi ble for safeguarding the

investments, except in the case of natural
calamities.

Wakeel (Agent) To make purchases from the funds provided

by the Rab-ul-Maal.

Shareek (Partner) Sharing in any profit from the business.

Dhamin (Liable) To provide for the loss suffered by the

Mudarabah due to any act of negligence on
his part.

Ajeer (Employee) When the Mudarabah gets Fasid due to any

reason, the Mudarib is entitled to only the
salary, Ujrat-e-Misl.

Termination of Mudarabah
The Mudarabah will stand terminated when the period specified
in the contract expires. It can also be terminated any time by
either of the two parties by giving notice. In case the Rab-ul-Maal
 Chapter # 11: Mudarabah 133

has terminated the services of the Mudarib, the latter continue

to act as Mudarib until he is informed of the termination and all
his previous acts will remain a part of the Mudarabah.

If all assets of the 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 according to
the pre-agreed ratio. However, if the assets of the Mudarabah
are not in cash form, they will then be sold and liquidated so that
the actual profit may be determined.

All loans and payables of the Mudarabah will be recovered. Before

termination the provisional profit earned by Mudarib and Rab-
ul-Maal will also be taken into account and when total capital is
drawn, the principal amount invested by Rab-ul-Maal will be
given to him and the balance will be called profit which will be
distributed between Mudarib and Rab-ul-Maal at the agreed
ratio.

If no balance is left, then the Mudarib will not get anything. If

the principal amount is not recovered fully, then the profit shared
by the Mudarib and Rab-ul-Maal during the term of the
Mudarabah will be withdrawn to pay the principal amount to the
Rab-ul-Maal. The balance will be profit, which will be distributed
between the Mudarib and the Rab-ul-Maal. In this case too if no
balance is left, Mudarib will not get anything.

Uses of Musharakah / Mudarabah

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

Asset Side Financing

• Short/medium/long-term financing
• Project financing