Professional Documents
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Definition Types of Mudarabah Difference between Musharakah and Mudarabah Different capacities of the Mudarib Capital of Mudarabah Distribution of Profit and Loss Termination of Mudarabah Collective Mudarabah Running Mudarabah
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Definition
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 Rabb-ul-Maal (Investor) while the management and work is an exclusive responsibility of the other, who is called Mudarib (Working Partner) and the profits generated are shared in a predetermined ratio.
Types of Mudarabah
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Authority of Rabb-ul-Maal
Rabb-ul-Maal has authority to:
a) Oversee the Mudaribs activities and b) Work with Mudarib if the Mudarib consents.
Capital of Mudarabah
The capital in Mudarabah may be either cash or in kind. If the capital is in kind, its valuation is necessary, without which Mudarabah becomes void.
Musharakah vs Mudarabah
Musharakah All partners invests. All partners share the loss to the extent of ratio of the ratio of their investment All partners participate in the management and can work for the Musharakah The liability of the partners is normally unlimited. (debt is the responsibility of the one who takes it, given that debt was not allowed) As soon as capital is mixed, all assets are jointly owned and all benefit from any appreciation in value of investment Mudarabah Only Rab-ul-Maal invests. Rab-ul-Maal only loses, subject to sincere effort of the Mudarib Rab-ul-Maal has no right to participate in the management which is carried out by the Mudarib only The liability of the Rab-ul-Maal is limited to his investment unless he has permitted the Mudarib to take debt on his behalf The capital belongs solely to the Rab-ul-Maal and the Mudarib gets to share profit only is he sells goods profitably
It is necessary for the validity of Mudarabah that the parties agree, right at the beginning, on a definite proportion of the actual profit to which each one of them is entitled. They can share the profit at any ratio they agree upon. However in case the parties have entered into Mudarabah without mentioning the exact proportions of the profit, it will be presumed that they will share the profit in equal ratios. Some incentives my be given to the Mudarib.
Apart from the agreed proportion of the profit, the Mudarib cannot claim any periodical salary or a fee or remuneration for the work done by him for the Mudarabah. The Mudarib & Rabb-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.
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If the business has incurred loss in some transactions and has gained profit in some others, the profit shall be used to offset the loss at the first instance, then the remainder, if any, shall be distributed between the parties according to the agreed ratio.
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Termination of Mudarabah
Mudarabah can be terminated any time by either of the two parties by giving notice. If Mudarabah was for a particular term, it will terminate at the end of the term. Termination of Mudarabah means that the Mudarib cannot purchase new goods for the Mudarabah. However, he may sell the existing goods that were purchased before termination.
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Distribution at Termination
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 agreed ratio. If the assets of Mudarabah are not in cash form, they will be sold and liquidated so that the actual profit may be determined.
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Distribution at Termination
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Ameen (Trustee): The money given by Rabb-ul-maal (investor) and the assets required therewith are held by him as a trust.
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Wakeel (Agent) : In purchasing goods for trade, he is an agent of Rabb-ul-maal. Shareek (Partner): In case the enterprise earns a profit, he is a partner of Rabb-ulmaal who shares the profit in agreed ratio.
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Collective Mudarabah
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Expenses of Mudarabah
Direct expenses are borne by the Mudarabah pool. Indirect expenses are borne by the mudarib.
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Running Mudarabah
Investors come in and go out at different dates Profits are calculated on daily product basis. Redemption before maturity If the assets of mudarabah are in illiquid form, an investor may redeem his share by selling it to the pool. If the assets are in liquid form, a provisional amount may be given to him subject to final settlement
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Questions
Asim puts USD 1 million under the management of Ahmer, with profit to be divided equally. Asim will receive a fixed amount of USD 25,000 and Ahmer would get USD 10,000 for the legal and secretarial services which are in addition to the services deliverable under Mudaraba. There is a net profit of USD 200,000 (after deducting all expenses) at the end of the financial period. Q1)The profit distribution will be as follows: a) USD 100,000 each to Asim and Ahmer b) USD 125,000 to Asim and USD 75,000 to Ahmer c) USD 90,000 to Asim and USD 110,000 to Ahmer d) Mudaraba is void because the financier receives a fixed amount Q2. The ratio of profit distribution under Mudaraba should be: a) as agreed between financier and manager b) in proportion to the capital invested by the partners c) as decided by the financier d) in proportion to the capital and management contribution of both the parties
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