Mudarabah: Week 4

Mudarabah
Week 4
Mudeer Ahmed, PhD
Copyright © 2015 INCEIF e Learning. All rights reserved.

Mudarabah
• A form of partnership where one party provides the funds while the other party
provides expertise.
• The people who bring in money are called "Rab-ul-Maal“ while the management and
work is an exclusive responsibility of the "Mudarib".
• The profit sharing ratio is determined at the time of entering into the Mudarabah
agreement whereas in case of loss it is borne by the Rab-ul-Mal only.
• In case of Islamic banks, the depositors are called Rabb-ul-Maal and the bank is called
Mudarib
• It is necessary for the validity of Mudarabah that the parties agree on a certain formula
of sharing the actual profit right at the beginning of the contract.
• The Shariah has prescribed no particular proportion of profit sharing rather it has been
left to the mutual consent of the parties.
• Mudarabah agreement cannot allow a lump sum amount of profit for any party nor can
it determine the share of any party at a specific rate tied up with the capital.
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Types
Unrestricted Mudarabah
• The investor has granted the working partner the permission to undertake any
lawful investment.
• The working partner is allowed to invest in any suitable investment that is
reasonably expected to yield profits.
• It is the responsibility of the working partner to avoid unlawful and high-risk
investments, and
• The working partner is liable for any losses suffered from such investments.
Restricted Mudarabah
• The investor has specified investment details in the Mudarabah contract and has
restricted the working partner within the scope of such specifications.
• Due care and precaution must be taken by the working partner to honor the
restrictions imposed by the investor.
• The working partner is liable for any losses suffered from such investments.
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Roles of Rabb-ul-Maal
• Oversee the Mudarib’s activities and
• Work with Mudarib if the Mudarib consents.

Roles of Mudharib
• Trustee: Capital handled is an Amanah –So without

negligence- Mudharib is not liable
• Agent: Mudharib becomes an Agent of Rabbul-Mal.So, all the
business activities will be carried out on behalf of the
principal.
• Partner: In case of profit, Mudarib is partner in that business
to the extent of his profit share.
• Liable: If Mudarib disobeys the instructions of Rab al mal, he
is liable for loss.
• Employee: If Mudarabah becomes void due to any reason,
then Mudarib is Employee. He is entitled to get normal salary
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Mudarabah Capital
Cannot be in the form of

Cash is acceptable
debt (receivables)
should be clearly known

to the contracting parties
Capital can be in kind
and defined in terms of
(tangible assets)
quality and quantity in a
clear manner
If the capital is in kind, its

valuation is necessary, without
3/12/2021 which Mudarabah becomes void.
Profit & Loss Distribution
The contracting parties should stipulate The profit sharing ratio should be
in the contract the profit shares (in Specific; and of the profit expected to be
defined terms) for each one earned by the venture
Profit agreed cannot be:

• Unknown ratio;
• A ratio attributed to future settlement; Losses in Mudaraba shall only be born
• A ration linked with the capital (in by Rabb-ul-Mal and not by the Mudarib
terms of x% of the capital); The Mudarib shall only be responsible
• A lump sum settlement as profit; for losses if the loss happened due to his
negligence and wilful misconduct
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Termination
When all assets are in form
of cash and some profit has
At any time by either of the been earned on the principle
two parties after giving a amount, it shall be
notice to the other party distributed between the
parties according to the
agreed ratio.
If the assets of the

Mudaraba are in illiquid
form the Mudarib shall be
given an opportunity to
liquidate them and the actual
profit may be determined.
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Application of Mudharabah
• Deposits in Islamic Banks
Investments
• Project Financing
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Differences between Musharakah & Mudharabah
Musharakah: Mudarabah:
− The contribution comes − The contribution comes
from Rabbul Maal (the
from all partners in form investor).
of cash, commodities, − The Rabbul Maal (investor)
services is not permitted to manage
− The work, as a general the business.
rule, is to be done jointly − The Mudarib will only
by the parties. manage the business.
− Loss is solely borne by the
− A partner or some
capital provider unless
partners may be sleeping. negligence, misconduct or
− Loss is shared according breach of contract from
to the invested capital Mudarib
ratio
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Exercise
1. What are the differences between Musharakah & Mudharaba?

2. Discuss the validity of the following transactions with reference to Mudharabah
a) Ali contributed Rs. 100,000 as capital to the Mudharabah and both Ali and
Ali’s partner agreed that Rs. 50,000 out of the profit shall be the share of the
Mudarib
b) Ahmed entered into a Mudharabah with Hassan and contributed Rs. 50,000
as capital and agreed with Hassan that Ahmed is entitled to profit equivalent
to 20% of the capital he contributed
c) Moosa and Eliza entered into a mudharabah contract. Moosa is the rabb al
mal and he gave Rs. 20,000 as capital. Eliza, the managing partner agreed
with moosa that 20% of the profit is entitled to eliza and 80% of the profit
received will go to Moosa.
3/12/2021
Thank You
Mudeer Ahmed, PhD

Assistant Professor
[email protected]
3/12/2021

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Mudarabah

Mudeer Ahmed, PhD

Copyright © 2015 INCEIF e Learning. All rights reserved.

• Oversee the Mudarib’s activities and

• Work with Mudarib if the Mudarib consents.

• Trustee: Capital handled is an Amanah –So without

Cannot be in the form of

should be clearly known

If the capital is in kind, its

Profit agreed cannot be:

If the assets of the

• Deposits in Islamic Banks

1. What are the differences between Musharakah & Mudharaba?

Mudeer Ahmed, PhD

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