The term ‘Mudaraba’ has been derived from one of the meanings of the Arabic word ‘ﺏﺮﺿ’ which means ‘Travel’. Thus the word ‘Mudaraba’ means ‘Travel’ for undertaking business. Mudaraba is a partnership in profit whereby one party provides capital and the other party provides skill and labour. The provider of capital is called "Shahib al-maal", while the provider of skill and labour is called "Mudarib".
So, Mudaraba may be defined as a contract of partnership where the Shahib al-maal provides capital to the Mudarib for investing it in a commercial enterprise by applying his labour and endeavor. Both the parties share the profit as per agreed upon ratio and the losses, if any, being borne by the provider of funds i.e. Shahib al-maal except if it is due to breach of trust i.e. misconduct, negligence or violation of the conditions agreed upon by the Mudarib. If there is any loss incurred due to the reasons mentioned above, the Mudarib becomes liable for that.
So, Mudaraba may be defined as a contract of partnership where the Shahib al-maal provides capital to the Mudarib for investing it in a commercial enterprise by applying his labour and endeavor. Both the parties share the profit as per agreed upon ratio and the losses, if any, being borne by the provider of funds i.e. Shahib al-maal except if it is due to breach of trust i.e. misconduct, negligence or violation of the conditions agreed upon by the Mudarib. If there is any loss incurred due to the reasons mentioned above, the Mudarib becomes liable for that.
TYPES OF MUDARABA
Mudaraba Contracts may be divided into 2 types:
Mudaraba Contracts may be divided into 2 types:
1. Restricted Mudaraba (Al Mudaraba Al Muqayyadah)
A restricted Mudaraba (Al Mudaraba Al Muqayyadah) is a contract in which the Shahib al-maal impose any restrictions on the actions of the Mudarib but not in a manner that would unduly constrain the Mudarib in his operations.
A restricted Mudaraba (Al Mudaraba Al Muqayyadah) is a contract in which the Shahib al-maal impose any restrictions on the actions of the Mudarib but not in a manner that would unduly constrain the Mudarib in his operations.
Restricted Mudaraba may further be divided into three types:
i. Restriction in respect of time or period:
In this type of Mudaraba, the Mudaraba contract include a clause on duration of the business. After expiry of such period, the Mudaraba shall become void.
ii. Restriction in respect of place or location:
In this type of Mudaraba, the Mudaraba contract include a clause on place or location of the business. The Mudarib shall bound to do the business within the area of such place or location.
iii. Restriction in respect of business:
In this type of Mudaraba, the Shahib al-maal restricts the actions of the Mudarib to a particular type of business as he (Shahib al-maal) considers appropriate,
2. Unrestricted Mudaraba (Al Mudaraba Al Mutlaqah)
An unrestricted Mudaraba (Al Mudaraba Al Mutlaqah) is a contract in which Shahib al-maal permits the Mudarib to administer the Mudaraba capital without any restrictions. In this case, the Mudarib has a wide range of trade or business freedom on the basis of trust and the business expertise he has acquired. Such unrestricted business freedom must be exercised only in accordance with the interests of the parties and the objectives of the Mudaraba contract.
But, if Mudarib wants to have an extraordinary work, which is beyond the normal course of business, he cannot do so without express permission from Shahib al-maal. He is also not authorized to:
a. keep another Mudarib or a partner
b. mix his own capital in that particular Mudaraba without the consent of the Shahib al-maal.
Shariah Rules for Mudaraba
Rules relating to Mudaraba Contract
1. There are two contracting parties in Mudaraba Contract: the provider of the capital i.e. ‘Shahib al-maal’ and the Mudarib. Both parties should possess the legal capacity to appoint agents and accept agency.
2. The general principle is that a Mudaraba contract is not binding, i.e. each of the contracting parties may terminate it unilaterally except in two cases:
a. When the Mudarib has already commenced the business, in which case the Mudaraba contract becomes binding up to the date of actual or constructive liquidation.
b. When the contracting parties agree to determine a duration for which the contract will remain in operation. In this case, the contract cannot be terminated prior to the end of the specified duration, except by mutual consent of the contracting parties.
3. A Mudaraba contract is one of the trust based contracts. Therefore, the ‘Shahib al-maal’ invests Mudaraba capital on trust basis in which case the Mudarib is not liable for losses except in case of breach of trust, such as misconduct, negligence and breach of the terms of Mudaraba contract. In committing any of the above, Mudarib becomes liable for the Mudaraba capital.
2. The general principle is that a Mudaraba contract is not binding, i.e. each of the contracting parties may terminate it unilaterally except in two cases:
a. When the Mudarib has already commenced the business, in which case the Mudaraba contract becomes binding up to the date of actual or constructive liquidation.
b. When the contracting parties agree to determine a duration for which the contract will remain in operation. In this case, the contract cannot be terminated prior to the end of the specified duration, except by mutual consent of the contracting parties.
3. A Mudaraba contract is one of the trust based contracts. Therefore, the ‘Shahib al-maal’ invests Mudaraba capital on trust basis in which case the Mudarib is not liable for losses except in case of breach of trust, such as misconduct, negligence and breach of the terms of Mudaraba contract. In committing any of the above, Mudarib becomes liable for the Mudaraba capital.
Rules relating to Offer and Acceptance
The wording-"Offer and Acceptance" - by which both the contracting parties express their willingness to conclude a contract and must conform to the following:
1. The wording should explicitly or implicitly indicate the purpose of the contract.
2. Acceptance of the offer is contingent on its taking place during the time which both the parties are negotiating agreement to the contract. However, acceptance is not valid if one party refuses the terms of the offer or leaves the place where the negotiation of the contract is being made before the deal is concluded.
Contract is permissible by verbal utterance or in writing and signing it. It is also permissible through correspondence or by the use of modern communication means, e.g., Telex, Fax, E-mail or Internet.
Rules relating to Capital
This is the amount of money given by the provider of funds i.e. Shahib al-maal to the Mudarib with the purpose of investing it in the Mudaraba activity. The following conditions, in this respect, should be satisfied:
The wording-"Offer and Acceptance" - by which both the contracting parties express their willingness to conclude a contract and must conform to the following:
1. The wording should explicitly or implicitly indicate the purpose of the contract.
2. Acceptance of the offer is contingent on its taking place during the time which both the parties are negotiating agreement to the contract. However, acceptance is not valid if one party refuses the terms of the offer or leaves the place where the negotiation of the contract is being made before the deal is concluded.
Contract is permissible by verbal utterance or in writing and signing it. It is also permissible through correspondence or by the use of modern communication means, e.g., Telex, Fax, E-mail or Internet.
Rules relating to Capital
This is the amount of money given by the provider of funds i.e. Shahib al-maal to the Mudarib with the purpose of investing it in the Mudaraba activity. The following conditions, in this respect, should be satisfied:
1. The capital of Mudaraba should be provided in the form of cash. However, it may be presented in the form of tangible assets, in which case the value of the assets is the contribution to the Mudaraba capital. The valuation of the assets may be conducted by experts or as agreed upon by the contracting parties.
2. The capital of Mudaraba should be clearly known to the contracting parties and defined in terms of quality and quantity in a manner that eliminates any possibility of uncertainty or ambiguity.
3. It is not permissible to use a debt owed by the Mudarib or another party to Shahib al-maal as capital in a Mudaraba contract.
3. It is not permissible to use a debt owed by the Mudarib or another party to Shahib al-maal as capital in a Mudaraba contract.
4. The Mudaraba capital must be, either wholly or partially as per contract according to the nature of the business, put at the disposal of the Mudarib or the Mudarib must have free access to and control over the capital.
Rules relating to Profit and Loss
Profit is the amount earned in excess of capital. It is the end objective of Mudaraba contract. The following conditions should be satisfied relating to profit:
Profit is the amount earned in excess of capital. It is the end objective of Mudaraba contract. The following conditions should be satisfied relating to profit:
1. It should be for both the parties, and no party should have possession thereof without the other.
2. The mechanism for distribution of profit must clearly be expressed to eliminate uncertainty and any possibility of dispute. The distribution of profit must be on the basis of an agreed percentage of the profit and not on the basis of a lump sum or a percentage of the capital.
3. The parties should agree on the ratio of profit distribution when the contract is concluded. However, it is permissible to change the ratio of distribution of profit at any subsequent time.
2. The mechanism for distribution of profit must clearly be expressed to eliminate uncertainty and any possibility of dispute. The distribution of profit must be on the basis of an agreed percentage of the profit and not on the basis of a lump sum or a percentage of the capital.
3. The parties should agree on the ratio of profit distribution when the contract is concluded. However, it is permissible to change the ratio of distribution of profit at any subsequent time.
4. No profit can be recognised or claimed unless the capital of the Mudaraba is maintained intact. Whenever a Mudaraba operation incurs losses, such losses stand to be compensated by the profits of future operations of the Mudaraba. The losses brought forward should be set against the future profits. The distribution of profit depends on the final result of the operations at the time of liquidation of the Mudaraba contract. If losses are greater than profits at the time of liquidation, the balance (net loss) must be deducted from the capital. In this case, as the Mudarib is a trustee he is not liable for the amount of this loss, unless there is negligence or misconduct on his part. If the total Mudaraba expenses are equal to the total Mudaraba revenues, the Shahib al-maal will receive his capital back without either profit or loss, and the Mudarib is also not entitled to share any profit. But, if there is profit i.e. excess of revenues over expenses and is realized, it must be distributed between the parties as per the agreement.
5. The Mudarib is entitled to a share of profit as soon as it is clear that the operations of the Mudaraba have led to the realisation of a profit. However, this entitlement is not absolute, as it is subject to the retention of interim profits for the protection of the capital.
6. The Shahib al-maal bears all losses incurred from the Mudaraba, and the Mudarib shall not bear any portion thereof unless it arises from his breach of trust i.e. misconduct or negligence or violations of conditions agreed upon.
6. The Shahib al-maal bears all losses incurred from the Mudaraba, and the Mudarib shall not bear any portion thereof unless it arises from his breach of trust i.e. misconduct or negligence or violations of conditions agreed upon.
7. Periodic losses incurred in the course of a continuous Mudaraba shall be set off against previously earned profits that have not been distributed between both parties, if any.
8. In a continuous Mudaraba, periodic losses that cannot be set off against previously earned and undistributed profits shall be held in suspense until profits are realized thereafter and set off against them. Such profits shall not be distributed until the losses are made good.
8. In a continuous Mudaraba, periodic losses that cannot be set off against previously earned and undistributed profits shall be held in suspense until profits are realized thereafter and set off against them. Such profits shall not be distributed until the losses are made good.
Rules regarding Roles of Shahib al-maal
In Mudaraba, Shahib al-maal provides the capital and Mudarib undertake the management. Therefore, the Shahib al-maal should hand over the agreed capital to Mudarib and leaves everything to Mudarib with no interference from his side but he has the authority to:
a) Oversee the Mudarib's activities and
b) Work with Mudarib, if the Mudarib consents.
Rules relating to Duties and Powers of Mudarib
1. The Mudarib should employ his best efforts to accomplish the objectives of the Mudaraba contract. He should assure the Shahib al-maal that his capital is in good hands that will act to find the best ways of investing it in a permissible manner. The Mudarib acts as:
a. Trustee to look after the investment responsibly, except in case of natural calamities.
b. Wakeel (Agent/Advocate) to purchase from the funds provided by Shahib al-maal.
c. Shareek (Partner) for Sharing in any profit.
d. Zamin (Liable) to provide for the loss suffered by the Mudaraba due to any act on his part.
e. Ajeer (Employee) when the Mudaraba gets Fasid due to any reason, the Mudarib is entitled to only the salary, Ujrat-e-Misl. In case, there is a loss, the Mudarib will not even get the Ujrat-e-Misl.
In Mudaraba, Shahib al-maal provides the capital and Mudarib undertake the management. Therefore, the Shahib al-maal should hand over the agreed capital to Mudarib and leaves everything to Mudarib with no interference from his side but he has the authority to:
a) Oversee the Mudarib's activities and
b) Work with Mudarib, if the Mudarib consents.
Rules relating to Duties and Powers of Mudarib
1. The Mudarib should employ his best efforts to accomplish the objectives of the Mudaraba contract. He should assure the Shahib al-maal that his capital is in good hands that will act to find the best ways of investing it in a permissible manner. The Mudarib acts as:
a. Trustee to look after the investment responsibly, except in case of natural calamities.
b. Wakeel (Agent/Advocate) to purchase from the funds provided by Shahib al-maal.
c. Shareek (Partner) for Sharing in any profit.
d. Zamin (Liable) to provide for the loss suffered by the Mudaraba due to any act on his part.
e. Ajeer (Employee) when the Mudaraba gets Fasid due to any reason, the Mudarib is entitled to only the salary, Ujrat-e-Misl. In case, there is a loss, the Mudarib will not even get the Ujrat-e-Misl.
2. If a Mudaraba contract is concluded on an unrestricted basis, the Mudarib is permitted, in general, to do what an entrepreneurs do in his field of activity, including the following:
i. Attending to all permissible investment or trading fields that are feasible and in which he believes that his expertise and technical and professional skills are likely to give him the ability to compete effectively.
ii. Carrying out the work himself or appointing another person to carry out some work, if necessary, such as buying a commodity or marketing it for him.
i. Attending to all permissible investment or trading fields that are feasible and in which he believes that his expertise and technical and professional skills are likely to give him the ability to compete effectively.
ii. Carrying out the work himself or appointing another person to carry out some work, if necessary, such as buying a commodity or marketing it for him.
iii. Choosing as far as possible appropriate places and markets that are seemingly free of risks.
iv. Safeguarding the Mudaraba funds or depositing them in the custody of a trustworthy person whenever appropriate.
v. Selling and buying on a deferred payment basis.
3. If a Mudaraba contract is concluded on a restricted basis and thus the Mudaraba business is restricted to a specified time and place or specific sectors, the Mudarib cannot do anything else otherwise specified.
iv. Safeguarding the Mudaraba funds or depositing them in the custody of a trustworthy person whenever appropriate.
v. Selling and buying on a deferred payment basis.
3. If a Mudaraba contract is concluded on a restricted basis and thus the Mudaraba business is restricted to a specified time and place or specific sectors, the Mudarib cannot do anything else otherwise specified.
4. The Shahib al-maal is not permitted to stipulate that he has a right to work with the Mudarib and to be involved in selling and buying activities, or supplying and ordering. However, the Mudarib should refer to him in performing any action and should not act without consulting him. Also, the Shahib al-maal is not entitled to lay down conditions that will restrict movements or actions of the Mudarib.
5. The Mudarib must carry out all the work that any similar asset or fund manager would be liable, by custom, to do. In this case, the Mudarib is not entitled to a fee for this work as this is part of his responsibilities.
6. The Mudarib is not entitled to sell items for the Mudaraba operation at less than the common or market price, or to buy items for the Mudaraba operation at a price higher than common prices, unless if such action in either case is intended to achieve an objective that is obviously for the interest of the Mudaraba.
7. It is not permissible for the Mudarib to make a loan or a gift or a charitable donation out of the Mudaraba funds. Likewise, the Mudarib is not entitled to waive a right associated with the Mudaraba operation unless the Shahib al-maal has consented to his doing so.
8. If the Mudarib has a right to receive living expenses while on travel outside the city for the purpose of the business from the Mudaraba funds as per contract that has been approved by the Shahib al-maal, then he is entitled to the amount so approved for him. If there is no agreement on this, then the Mudarib should take living expenses in accordance with custom and reason. The Mudarib is also entitled to traveling expenses in accordance with custom and reason.
6. The Mudarib is not entitled to sell items for the Mudaraba operation at less than the common or market price, or to buy items for the Mudaraba operation at a price higher than common prices, unless if such action in either case is intended to achieve an objective that is obviously for the interest of the Mudaraba.
7. It is not permissible for the Mudarib to make a loan or a gift or a charitable donation out of the Mudaraba funds. Likewise, the Mudarib is not entitled to waive a right associated with the Mudaraba operation unless the Shahib al-maal has consented to his doing so.
8. If the Mudarib has a right to receive living expenses while on travel outside the city for the purpose of the business from the Mudaraba funds as per contract that has been approved by the Shahib al-maal, then he is entitled to the amount so approved for him. If there is no agreement on this, then the Mudarib should take living expenses in accordance with custom and reason. The Mudarib is also entitled to traveling expenses in accordance with custom and reason.
Rules relating to violation on the part of the Mudarib
If the Mudarib violates the terms or purposes of the contract or the restrictions placed on him by Shahib al-maal, he is guilty of misconduct and his status as a holder of the funds on trust changes into that of a guarantor, i.e., the nature of the possession of the funds changes from a Mudaraba to a debt due from the Mudarib.
Rules relating to Guarantee in Mudaraba
The Shahib al-maal is permitted to obtain adequate and enforceable guarantees from the Mudarib or from any third party on behalf of the Mudarib. This is circumscribed with a condition that the Shahib al-maal will not enforce these guarantees except in cases of misconduct, negligence or breach of contract on the part of Mudarib.
Rules regarding Mudaraba Expenses
The Mudarib shares profit of the Mudaraba business as per agreed ratio with Shahib al-maal but his expenses like meals, clothing, conveyance and medical are not borne by Mudaraba.
All expenses which are incidental to the Mudaraba's function like wages of employees/workers or Commission in buying/selling etc have to be paid by the Mudaraba. However, all expenses will be included in the cost of commodities which Mudarib is selling for i.e. if he 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 Mudaraba agreement becomes void (Fasid) due to any reason, the Mudarib's status will be like an employee, meaning:
a) whether he is traveling or doing business in his city, will not be entitled to any expense such as meals, conveyance, clothing, medicine etc.
b) he will not be sharing any profit and will just get Ujrat-e-Misl (ordinary pay) for his job.
Rules relating to liquidation/termination of Mudaraba ContractA Mudaraba contract can be liquidated / terminated in the following manner:
If the Mudarib violates the terms or purposes of the contract or the restrictions placed on him by Shahib al-maal, he is guilty of misconduct and his status as a holder of the funds on trust changes into that of a guarantor, i.e., the nature of the possession of the funds changes from a Mudaraba to a debt due from the Mudarib.
Rules relating to Guarantee in Mudaraba
The Shahib al-maal is permitted to obtain adequate and enforceable guarantees from the Mudarib or from any third party on behalf of the Mudarib. This is circumscribed with a condition that the Shahib al-maal will not enforce these guarantees except in cases of misconduct, negligence or breach of contract on the part of Mudarib.
Rules regarding Mudaraba Expenses
The Mudarib shares profit of the Mudaraba business as per agreed ratio with Shahib al-maal but his expenses like meals, clothing, conveyance and medical are not borne by Mudaraba.
All expenses which are incidental to the Mudaraba's function like wages of employees/workers or Commission in buying/selling etc have to be paid by the Mudaraba. However, all expenses will be included in the cost of commodities which Mudarib is selling for i.e. if he 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 Mudaraba agreement becomes void (Fasid) due to any reason, the Mudarib's status will be like an employee, meaning:
a) whether he is traveling or doing business in his city, will not be entitled to any expense such as meals, conveyance, clothing, medicine etc.
b) he will not be sharing any profit and will just get Ujrat-e-Misl (ordinary pay) for his job.
Rules relating to liquidation/termination of Mudaraba ContractA Mudaraba contract can be liquidated / terminated in the following manner:
1. Being a non-binding contract, it can be liquidated by unilateral termination of the contract by one of the parties as described in chapter 3.01.2.
2. With the mutual consent of both parties.
3. On the date of maturity, if the two parties had earlier agreed to set a time limit for it.
4. When the funds of Mudaraba contract have been exhausted or have suffered losses.
5. The death of Mudarib or the liquidation of the institution that acts as Mudarib.
2. With the mutual consent of both parties.
3. On the date of maturity, if the two parties had earlier agreed to set a time limit for it.
4. When the funds of Mudaraba contract have been exhausted or have suffered losses.
5. The death of Mudarib or the liquidation of the institution that acts as Mudarib.
Difference between Musharaka and Mudaraba1. The capital in Musharaka comes from all the partners, while in Mudaraba, it is the sole responsibility of Shahib al-maal.
2. In Musharaka, all the partners can participate in the management of the business and can work for it, while in Mudaraba, the Shahib al-maal has no right to participate in the management which is carried out by the Mudarib only.
3. In Musharaka all the partners share the loss to the extent of the ratio of their investment while in Mudaraba the loss, if any, is suffered by the Shahib al-maal only, because the Mudarib does not invest anything. His loss is restricted to the fact that his labour has gone in vain and his work has not brought any fruit to him. However, this principle is subject to a condition that the Mudarib has worked with due diligence which is normally required for the business of that type. If he has worked with negligence or has committed dishonesty, he shall be liable for the loss caused by his negligence or misconduct.
4. The liability of the partners in Musharaka is normally unlimited. Therefore, if the liabilities of the business exceed its assets and the business goes in liquidation, all the exceeding liabilities shall be borne pro rata by all the partners. However, if all the partners have agreed that no partner shall incur any debt during the course of business, then the exceeding liabilities shall be borne by that partner alone who has incurred a debt on the business in violation of the aforesaid condition. Contrary to this is the case of Mudaraba. Here the liability of Shahib al-maal is limited to his investment, unless he has permitted the Mudarib to incur debts on his behalf.
5. In Musharaka, as soon as the partners mix up their capital in a joint pool, all the assets of the Musharaka become jointly owned by all of them according to the proportion of their respective capital. Therefore, each one of them can benefit from the appreciation in the value of the assets, even if profit has not accrued through sales.
In the case of Mudaraba it is different. Here all the goods purchased by the Mudarib are solely owned by the Shahib al-maal, and the Mudarib can earn his share in the profit only in case he sells the goods profitably. Therefore, he is not entitled to claim his share in the assets themselves, even if their value has increased.
2. In Musharaka, all the partners can participate in the management of the business and can work for it, while in Mudaraba, the Shahib al-maal has no right to participate in the management which is carried out by the Mudarib only.
3. In Musharaka all the partners share the loss to the extent of the ratio of their investment while in Mudaraba the loss, if any, is suffered by the Shahib al-maal only, because the Mudarib does not invest anything. His loss is restricted to the fact that his labour has gone in vain and his work has not brought any fruit to him. However, this principle is subject to a condition that the Mudarib has worked with due diligence which is normally required for the business of that type. If he has worked with negligence or has committed dishonesty, he shall be liable for the loss caused by his negligence or misconduct.
4. The liability of the partners in Musharaka is normally unlimited. Therefore, if the liabilities of the business exceed its assets and the business goes in liquidation, all the exceeding liabilities shall be borne pro rata by all the partners. However, if all the partners have agreed that no partner shall incur any debt during the course of business, then the exceeding liabilities shall be borne by that partner alone who has incurred a debt on the business in violation of the aforesaid condition. Contrary to this is the case of Mudaraba. Here the liability of Shahib al-maal is limited to his investment, unless he has permitted the Mudarib to incur debts on his behalf.
5. In Musharaka, as soon as the partners mix up their capital in a joint pool, all the assets of the Musharaka become jointly owned by all of them according to the proportion of their respective capital. Therefore, each one of them can benefit from the appreciation in the value of the assets, even if profit has not accrued through sales.
In the case of Mudaraba it is different. Here all the goods purchased by the Mudarib are solely owned by the Shahib al-maal, and the Mudarib can earn his share in the profit only in case he sells the goods profitably. Therefore, he is not entitled to claim his share in the assets themselves, even if their value has increased.
No comments:
Post a Comment