| Q.
What is Mudarabah? |
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1.
Mudarabah:
The
term refers to a form of business contract in which one party
brings capital and the other personal effort. The proportionate
share in profit is determined by mutual agreement. But
the loss, if any, is borne only by the owner of the capital,
in which case the entrepreneur gets nothing for his labour.
The financier is known as ‘rabal-maal’ and the entrepreneur
as ‘mudarib’. As a financing technique adopted
by Islamic banks, it is a contract in which all the capital
is provided by the Islamic bank while the business is managed
by the other party. The profit is shared in pre-agreed
ratios, and loss, if any, unless caused by negligence or violation
of terms of the contract by the ‘mudarib’ is borne
by the Islamic bank. The bank passes on this loss to
the depositors.
2.
Mudarabah:
We
may act as managing trustee (‘Modareb’) while you are the
beneficial owner (Rab El-Maal). It is our responsibility to
invest the funds that you provide. Alternatively, our roles
may be reversed, when you, as managing trustee, are responsible
for investing our funds. In each case, we shall agree on our
relative share of any profits.
3.
Mudarabah:
In
the theoretical model of Islamic banking Mudaraba has been
suggested a technique which shall provide the basis for the
Islamic re-organisation of commercial banking sector. In actual
practice of Islamic banking, Mudaraba has not made much progress
on t he asset side of the balance sheet, although on the liability
side the Islamic banks on Mudaraba accept the funds in investment
accounts. Mudaraba is mostly translated in English as profit
and loss sharing.
There
is no loss sharing in a Mudaraba contract. Profit and loss
sharing is more accurate description of the Musharaka contract.
The Mudaraba contract may better be represented by the expression
profit sharing Mudaraba is an Islamic contract in which one
party supplies the money and the other provides management
in order to do a specific trade. The party supplying the capital
is called owner of the capital. The other party is referred
to as worker or agent who actually runs the business. In the
Islamic Jurisprudence, different duties and responsibilities
have been assigned to each of these two.
As
a matter of principle the owner of the capital does not have
a right to interfere in to the management of the business
enterprise which is the sole responsibility of the Agent x.
However, he has every right to specify such conditions that
would ensure better management of his money. That is why sometime
Mudaraba is referred as sleeping partnership. An important
characteristic of Mudaraba is the arrangement of profit sharing.
The profits in a Mudaraba agreement may be shared in any proportion
agreed between the parties before hand. However, the loss
is to be completely borne by the owner of the capital. In
case of loss, the capital owner shall bear the monetary loss
and agent shall lose the reward of his effort. Mudaraba could
be individual or joint.
Islamic
banks practice Mudaraba in its both forms. In case of individual
Mudaraba an Islamic bank provides finance to a commercial
venture run by a person or a company on the basis of profit
sharing. The joint Mudaraba may be between the investors and
the bank on a continuing basis. The investors keep their funds
in a special fund and share the profits without even the liquidation
of those financing operations that have not reached the stage
of final settlement. Many Islamic Investment Funds operate
on the basis of joint Mudaraba.
4.
Mudarabah:
This
is an agreement made between two parties: one which provides
‘100 percent of the capital’ for the project and another party
known as a ‘Mudarib’ who using his entrepreneurial skills,
manages the project. Profits arising from the project are
distributed according to a predetermined ratio. Any losses
accruing are borne by the provider of capital. The provider
of capital has no control over the management of the project.
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Q
- Is it lawful for the investor to seek from the contractor
(agent-manager) payment of a specific percentage of the contract
(for the deal the agent-manager is to undertake as his/her
part of the mudarabah operation) in addition to (the agreed
upon return from) the capital invested? Regardless of the
amount financed, and regardless of whether the operation is
profitable or not?
W.Q
Saudi Arabia |
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A
- Such a contract will not be valid because it includes the
agent-manager's liability for the capital investment; when
the agent-manager is no more than a trustee of the capital
and cannot be made liable for it unless he/she has been negligent
or incompetent in its use. Secondly, the investor's stipulating
that the agent-manager pay a certain amount; when such a condition
invalidates the contract because it means that the two partners
will not share in the profits. |
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Q
- Where an Islamic Bank owing to its position in the international
banking community, undertakes mudarabah operations in partnership
with several other banks and financial institutions, some
of which are Islamic and some of which are not. And that the
bank serves as agent-manager for the group, using the funds
they invest to purchase goods and then sells them by means
of murabahah, such that the bank authorizes an international
firm, as its agent, to purchase goods on behalf of the bank
by means of a murabahah sales contract with that company.
Is this permitted under the Shariah?
H.Y
Geneva |
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A - The
jurists of all the major legal schools are agreed on the legitimacy
of mudarabah transactions. In this regard they cite texts
from the Qur'an and the Sunnah. In the Qur'an, the root for
the word mudarabah, d-r-b, is used in a verse that clearly
indicates the lawfulness of trade: And others who go forth
in the earth, seeking the bounty of the Almighty (73:20).
In the Sunnah, it is related that Ibn 'Abbas said, "Our
tribal leader, al 'Abbas ibn 'Abd al Muttalib, whenever he
paid money out in mudarabah, would stipulate to his partner
that he must not cross over water with his money, or make
camp in a dry riverbed, or buy a fractious mount with it.
If his partner did any of those things, he would be held personally
responsible. When news of these conditions reached the Prophet
of Allah, upon him be peace, he endorsed them."
Given
the lawfulness of mudarabah from a Shari'ah perspective, the
Board sees no impediment to the bank's purchasing goods on
the international market with funds gathered from other Islamic
banks and financial institutions in partnership, and then
its assuming the responsibility of managing the operation
(as agent-manager) as a mudarabah in which it also participates
as an investor, regardless of whether its dealings are undertaken
on a short or a long-term basis, or take the form of either
a sale of trust, such as murabahah, or an ordinary bargained
sale. |
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Q
- Is it lawful for the bank to charge its client for consultative
services ordered by the bank for the study of a project's
feasibility before investing in it with, or for, its client
by means of mudarabah?
M.A
Jordan |
A
- There is no legal impediment to taking payment from a client
in return for actual consultation presented to the bank in regard
to the study and evaluation of projects for mudarabah, musharakah,
ijarah, etc. Services performed after a contract has been signed,
however, will be shared equally by the client and the bank;
except in regard to interest-free loans in which case all fees
will be paid by the client alone after the contract has been
signed. |
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Q
- What is the Shari'ah ruling in regard to the bank's paying
zakah on the profits earned by investors in mudarabah operations?
P.Z
Egypt |
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A - There
is no legal impediment to the bank's paying zakah from the
accounts of its investors so long as it does so with the approval
of investors who have authorized it in writing to deduct their
zakah portions from their investment accounts; either from
their profits or, if no profits are realized, then from the
capital investment itself. |
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Q
- It is a well-established fact in international economics
that the greater the amount of capital invested, the greater
the profits that may be expected. Will it be lawful, therefore,
to combine the capital from two or more mudarabah operations
in a single investment vehicle, especially when the mudarabah
operations are managed by a single firm?
A.M
Cayman Islands |
A
- The Board sees no legal impediment to combining the capital
from two or more mudarabah operations in a single account that
is maintained in accordance with the Shari'ah of Islam, so long
as the profits and losses are distributed in proportion to the
percentage of each shareholder's investment in the mudarabah. |
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Q
- To what extent will it be lawful to include the following
condition in a contract for an investment savings account:
The minimum daily balance acceptable for participation in
investment schemes will be one hundred Dinars. If the balance
falls below that amount, the account will become a regular
current account, and will no longer be subject to the rules
for a mudarabah investment.
R.H
France
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A - There
is no legal impediment to placing a minimum on the daily balance
in the conditions of the contract. If the balance falls below
one hundred, the account will be treated like an ordinary
current account because a musharakah may be dissolved by means
of such a condition. |
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Q
- Is it lawful to transfer mudarabah contracts from one agent
manager to another, when there is an express or implicit approval
for the same, and/or the transfer is agreed to either, individually
or collectively by the investing partners in their capacity
as the benefiting owners.
M.J
India
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A - It
is lawful to transfer mudarabah contracts in the light of
the legal principle which states that the agent-partner in
mudarabah transactions may be engaged under the following
conditions:
a) The
investors will not have to pay for the second agent-partner
brought in by the first. Rather the two will share in the
percentage of the profit specified for the first agent-partner
and agreed to by the investor(s).
b) Since
the mudarabah contract is not legally binding, it may be dissolved
at will by either of the contracting parties. |
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Q
- Is it lawful for the bank in a mudharabah sale transaction,
to invest in one of its accounts, a deposit (representing
5% of the value of the sale transaction) paid in by the purchase
pledger as a guarantee of payment.
M.S
USA |
A
- Such an investment is not lawful, regardless of whether the
deposit is kept in a current account or in an investment account.
This is because the deposit is a (the client's) guarantee against
payment and, if it is to be invested, it should be invested
to the benefit of the client. |
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Q
- Is the practice of the bank lawful, in coming to an agreement
with its clients on an amount that will serve as a ceiling
for their transactions over a specified period of time. And
within the framework of that agreement, dealings are undertaken
with the client by means of murabahah in which the amount
of profit is specified in advance of purchases, and on a deal
to deal basis. Is this practice in accordance with the Shariah?
S.A.O
Switzerland |
A
- There is no legal impediment of setting limits on the extent
the bank is willing to Finance a client in their original agreement,
or to specify the percentages of profit for each and every murabahah
deal when the bank receives the client's order, in the understanding
that the order represents the clients pledge to purchase. A
pledge to buy, however, is not the same as a sale, but rather
a binding agreement to but at the time the sale is ready to
be completed. |
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Q
- Will it be lawful to distribute monthly or periodical profits
to investors in long- term mudarabah operations that will
not yield returns until after the passing of several years?
I.M
U.K |
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A - There
is no legal impediment to an agent-manager's distribution
of profits from long term mudarabah operations to investors,
by periodically paying investors in the for of interest free
loans guaranteed by their capital investments. The periods
for such payments may be determined by the agent manager.
Furthermore the loans will be debited at the final accounting
of the profits. |
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Q
- How is the share of profits for each of the parties in a
mudarabah operation to be determined?
I.A
Sharjah, UAE |
A
- It is legally required that whatever is specified as profit
for both the bank (the agent-manager) and the investor (the
bank's client) be for-mulaled precisely from the joint share,
that it be known to both parties, and that it remain intact
throughout the mudarabah operation period. Such a determination,
moreover, must be included in the mudarabah contract either
at the time it is entered into or when it is renewed. If the
profit percentage is to be changed in the future, prior notification
of such a change must be made, and a period of time must be
set, the passing of which will be taken to indicate the investors
agreement to the change if he/she has not objected (to it by
that lime). |
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Q
- Is it lawful for the working partner in a mudharabah operation
to sell the possessions of the financing partner without seeking
the permission of the partner?
I.N
India |
A - It is not lawful for the working partner in mudarabah to
sell his own possessions in exchange for mudarabah money (that
he is administering), regardless of whether those possessions
are lar removed from the wealth of the (mudarabah financed)
company (operation), or actually considered a part of it. It
is likewise unlawful for the partner to buy merchandise from
the mudarabah operation for himself. In both cases, however,
if the financing partner gives special permission, the sale
will be lawful.
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