Professional Documents
Culture Documents
Mudaraba
Profit sharing
Loss sharing
Partnership venture
Learning Outcomes
After this lecture you should be able to understand
1. One of the most important mode of financing
Definition
This is a kind of partnership between the two parties
where one partner contributes capital and the other one
contributes efforts as manager or entrepreneur. The
profit of the venture is share at an agreed ratio while the
losses are borne by the capital provider.
The investment comes from Rabb-ul-Maal (Investor)
while the management and work is an exclusive
2. Capital
The capital shall be contributed by the capital
provider and shall be managed by the manager
to generate income.
2. Capital
Monetary assets of different currencies shall be valued according
to an agreed currency at the time of signing the Mudarabah
contract.
Illustration: Multi Currency Mudarabah Fund
An Islamic Financial Institution has launched a global Mudarabah
fund. The fund accepts investment in various currencies such as
USD, Euro, Ringgit Malaysia, Saudi Riyal etc. However, the
prospectus has stated that the Mudarabah fund is denominated in
2. Capital
The mutually agreed currency shall be
applicable throughout the Mudarabah business
venture. For example, any capital investments
2. Capital
Capital in the form of non-monetary assets which may
include intangible assets shall be valued based on the
valuation determined by a third party which may include
authoritative bodies, experts, or as agreed upon by the
contracting parties at the time of conclusion of contract.
2. Capital
Illustration: Non Monetary Mudarabah Capital Contribution
A public transportation company, XYZ applied for
Mudarabah-based financing from an Islamic Bank. The
bank approves the application and agrees to provide five
2. Capital
Debts such as account receivables or loans due to a
capital provider do not qualify as capital of Mudarabah.
The agreed capital shall be made available to the
manager to commence the business activities.
The capital may be fully or partially disbursed or made
2. Capital
Failure to provide capital by the capital provider as per
the agreed schedule shall constitute a breach of promise
according to specified terms and conditions of the
contract.
The manager has an option to terminate the agreement
or both parties may agree to revise the agreement based
2. Capital
Where the agreement is terminated the manager
2. Capital
Upon liquidation or maturity of the Mudarabah contract,
all outstanding capital shall be returned to the capital
provider.
2. Capital
The capital provider may require the manager to arrange
2. Capital
The Mudarabah third party guarantee may be in
the form of performance guarantee of the
Mudarabah transactions or Mudarabah capital
manger.
Manager shall not be liable for any loss of capital unless
it is due to any negligence, dishonesty, misconduct or
breach of contract.
Termination of Mudarabah
1. Mudarabah can be terminated any time by either of the
two parties by giving notice.
2. If Mudarabah was for a particular term, it will terminate
at the end of the term.
3. Termination of Mudarabah means that the Mudarib
Distribution at Termination
1. 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.
2. If the assets of Mudarabah are not in cash
form, they will be sold and liquidated so that the
actual profit may be determined.
Distribution at Termination
3. If there is a profit, it will be distributed
between Mudarib and Rab-ul-Maal.
4. If no profit is left, Mudarib will not get
anything.
Collective Mudarabah
1. Collective Mudarabah means a joint pool created
by many investors and handed over to a single
Mudarib who is normally a juristic person.
2. Collective Mudarabah creates two different
relationships:
a. Relationship between investors themselves, which
is Shirkah or Partnership.
b. Relationship of all the investors with Mudarib,
which is Mudaraba.
Running Mudarabah
1. Investors come in and go out at different dates