MUDHARABAH

SPECULATIVE PARTNERSHIP IN ISLAM

By Veronika Matulova

Definition of speculative partnership: Mudharabah

Mudharabah, according to legal terminology, is a contract in which owner or proprietor (Rabb al Maal) offers certain property or stock (Raas al Maal) to other party (Mudharib) in order to create partnership, where both parties will participate in profit.1

The Legal Justification

1) Quran Allah, Exalted be He, in the translation of the meaning said, and others traveling throughout the land seeking [something] of the bounty of Allah (Al Muzzammil: 20) This verse involves seeking bounty through trade and striking of deals.2 2) Sunnah Mudharabah was practiced by many companions such as Umar ibn Khattaab or Uthmaan ibn Affaan during the life time of Prophet approved of it. 3) Consensus of the scholars (ijma) Scholars agree regarding the permissibility of such contract.3
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and he

Al Mahjubi; Sharh Wiqayah, vol. 3., p. 816 Salih al Fawzan; A Summary of Islamic Jurisprudence Vol.2, p. 131

Description of Rabb al Maal - Investor

Investor is a silent partner whose sole responsibility is to provide capital. It will be only the investor who will suffer loss, if any, except if the loss has been caused by negligence or misconduct on the part of the speculator (entrepreneur). He (investor) has no right to participate in the management of the enterprise. However the investor owns all the goods, which are purchased by the speculator. And unless the investor has allowed the speculator to incur debts on his behalf, his liability is limited to his investment only.4 He may also stipulate a future condition before starting the partnership, for example to specify a certain month for the speculator to start using the money.

Description of Mudharib - Speculator

The mudharib is an entrepreneur or entrusted speculator who is exclusively responsible for the management and work of the mudharabah venture, and it is not his responsibility to provide capital. By unanimous agreement of scholars, he has the right to stipulate a certain proportion of the profit from the beginning.5 However he is not entitled to claim shares in the actual assets, because he is able to earn shares only from the profit, if he sells the goods profitably. Also he does not participate in loss in general. His loss is restricted to his labor, unless he caused it by his negligence. In such case he will be liable.6 In addition, he is not allowed to work as a partner for another investor, if that would negatively affect his first partner, unless the latter gives him permission.

Types of the Mudharabah

Salih al Fawzan; A Summary of Islamic Jurisprudence Vol.2, p. 131 Muhammad Taqi Usmani; An Introduction to Islamic Finance, p. 31-32 5 Statement of Ibnul Mundhir, Sheikh Salih al Fawzan; A Summary of Islamic Jurisprudence, vol.2, p. 132 6 Muhammad Taqi Usmani; An Introduction to Islamic Finance, p. 31-32
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There are two types of mudharabah ventures. 1) Al Mudharabah al Muqayyadah restricted Mudharabah. The investor will specify a particular business he would like to invest to. 2) Al Mudharabah al Mutlaqah unrestricted Mudharabah The speculator can choose whatever permissible business he wishes and he will be authorized to invest money of the investor as he deems fit. The investor is not restricted to contract business with only one speculator through a single transaction. He can offer his money to two parties and both of them will be acting as his speculators. In such case they will jointly utilize his investment and their shares will be divided according to the agreed proportions. 7 The speculator is authorized to do anything that would be normally done, however if he wants to do anything beyond that, he needs to seek permission from the investor.

Distribution of the Profit

One of the conditions for the validity of this type of business is mutual consent of both parties on a definite proportion of the actual profit at the beginning of their contract. By their mutual consent they can divide profit in equal proportions or if they wish, they can allocate different portions for both parties for example 60% to the investor and 40% to the speculator. Profit has to be divided by certain share such as one-third or 50%, not by lump sum or share at a specific rate tied up with the capital. The investor can also allocate profit tied to some type of condition. He can say, for example, If you trade in corn, you will get 45% of the profit and if you will trade in flour, you will have 40% of the profit. Or If you will trade in your

Ibn Qudamah, Al-Mughni, 5:145.

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country, you will get 40%, but if you will trade outside the country, you will have 50% of the profit.8 All the schools of thought agree that the speculator cant claim any periodical salary or fee for the work done by him.9 Only Imam Ahmad has allowed the speculator to draw his daily expenses, for food only, from the mudharabah account.10 The Hanafi jurists agree that the speculator is allowed to claim his personal expenses, accommodation, food, etc. only if he is on a business trip outside of his own city.11 In general, the profit should not be distributed as long as the contract of the mudharabah is in effect, unless both parties agree to divide it, because the profit is regarded as a means of protecting the capital. If it is divided, it will not be possible to make up for any accidental loss.

Diagrammatical Illustration
Following is a simple diagrammatical illustration of traditional flow of Mudharabah in financing structure.

Rabb al Maal Investor

Pre-agreed ratio

Profit Loss

Pre-agreed ratio

Mudharib Speculator

100% Capital

Opportunity cost

Mudharabah Venture

Entrepreneurship

Example based on similar from Badai al-Sanai (6:99) by Al Kasani. Hanafi fiqh. Al-Sarakhsi, al-Mabsut, 22:14950. 10 Ibn Qudamah, Al-Mughni, 5:186. 11 Al-Kasani, Badai al-Sanai, 6:109.
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Termination of Mudharabah
There is a difference in opinion among the scholars about whether a period of mudharabah contract can be specified. However the difference relates only to the maximum time-limit. The Hanafi and Hanbali schools are of the view that contract can be restricted to a particular term and once this period is over, the mudharabah contract ends without a notice. On the other hand, Shafii and Maliki schools hold the opinion that mudharabah cannot be restricted to a particular time.12 In general the contract of mudharabah can be terminated at any time by either of the two parties; however they should give a notice to the other party. If the partnership is canceled, the profit will be for the investor as the capital as well as its increase belongs to him. The speculator will receive his wage.

Mudharabah in Islamic Banking

Following are some of the examples of usage of mudhrabah concept in Islamic banking today. Bank Rakyat in Malaysia is using this concept in the retail banking practice of fixed deposit taking. The customer becomes the capital provider (Rabb al Maal) while the bank assumes the role of both business manager and entrepreneur. 1314 Al Baraka Islamic Bank in Bahrain is using this type of contract to finance potentially successful projects or professionals such as engineers, craftsmen etc. The bank is acting here as the capital owner.15

Ibn Qudamah, al-Mughni, 5:18586 and al-Sarakhsi, al-Mabsut, 22:133. Islamic Finance: An Introduction to Islam Finance and Common Terminologies by CPA Australia and AmInvertment Bank. 14 www.bankrakyat.com.my 15 www.barakaonline.com
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BIBLIOGRAPHY
Al Baraka. www.barakaonline.com. Al-Kasani. Badai al-Sanai. Al-Sarakhsi. al-Mabsut. AmInvestment Bank, CPA Australia. Islamic Finance: An Introduction to Islamic Finance and Common Terminologies. Carr, Muhammad. Mudarabah according to Shaafi'ee Fiqh. Doi, 'Abdur Rahman I. Shari'ah: The Islamic Law. London: Ta-Ha Publishers Ltd. Fawzan, Salih Al. A Summary of Islamic Jurisprudence. Jusoh, Abdul Hadi B. Hj. Mahjubi, Al. "Sharh Wiqaayah." vol. 3, p. 816. Lahore. Qudamah, Ibn. Al-Mughni. Rakyat, Bank. http://www.bankrakyat.com.my. The Noble Qur'an - Sahih International Translation. Usmani, Muhammad Taqi. An Introduction to Islamic Finance. Karachi.

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