Lecture 4
MUDARABAH
1
Overview
What is Mudarabah?
How Does Mudarabah
Work?
Rules of Mudarabah
Difference between Musharakah and
Mudarabah
2
Mudarabah is a partnership agreement
where one party invest all capital and the
other manages the business, simply to say the
other party is responsible for management of
day to day businesses.
Rabb-ul-Maal – capital invested by party,
literally transled as the owner of capital.
Mudarib- efforts and management invested
by other party.
3
Rules of Mudarabah
Capita
l
Manageme
nt
Profit and
Loss
Settlemen
t
Securi
ty
4
Rules of Mudarabah - Capital
Form must be liquid or other kinds of assets
It should be both quantified and specified
If fixes assets are being contributed, so the
value of these assets should be agreed
5
Rules of Mudarabah -Management
Rabb-ul-maal does not have right to take a
part in management of specific project.
6
Rules of Mudarabah - Profit and Loss
Profits shall be distributed in the proportion mutually agreed in the
contract.
Determined as percentage of profit and not a fixed sum of the money
or percentage of capital invested. Mudarib can not claim any
periodical payment during a project life.
If one or more partners choose to become non-working or silent
partners. The ratio of their profit cannot exceed the ratio which
their capital investment bears so the total capital investment in
Mudarabah.(those who invested capital).
The proportion of profit to be distributed between the partners must
be agreed upon at the time of effecting the contract. If no such
proportion has been determined, the contract is not valid in Shari‘ah
All investors will have to share any loss in exact proportion to their
investment. Rabb-ul-maal lose the capital invested and Mudarib
loses efforts made to manage the business.
7
Rules of Mudarabah -Settelment
Every partner has a right to terminate the Mudarabah at
any time after giving his partner a notice to this effect,
whereby the Mudarabah will come to an end.
In this case, if the assets of the Mudarabah are in cash
form, all of them will be distributed pro rata between the
partners.
But if the assets are not liquidated, the partners may agree
either on the liquidation of the assets, or on their
distribution or partition between the partners as they are.
8
Rules of Mudarabah -Settelment
If any one of the partners dies during the
Mudarabah , the contract of Mudarabah with him
stands terminated. His heirs in this case, will
have the option either to draw the share of the
deceased from the business, or to continue with
the contract of Mudarabah.
If any one of the partners becomes insane or
otherwise becomes incapable of effecting
commercial transactions, the Mudarabah stands
terminated.
9
Rules of Mudarabah -Security
In the case of Mudarabah agreement
between bank and client, the bank can obtain
adequate security from client against
negligence or misconduct.
10
Application of Mudarabah
An Investor would like to establish a business by opening student
recruitment agency office in Russia. They did investment appraisal and
come up with total initial investment cost of $ 30 000. However, the
investor has capital but does not have a experience and knowledge about
Russia’s market. So the investor decides to find a partner who is resident
and has got expertise in Russia, but that partner will not put any capital,
they will enter into agreement of Mudarabah. In that type of agreement,
all parties agreed that profit ratio is equally divided. At the end of maturity
of this project, they realized $ 50 000 as a pure profit. The there is
income tax of 35% and zakat of 2.5%.
What is amount of tax paid after generating profit? Zakat?
What is profit of Rabb-ul-maal and Mudarib?
11
