Principle of Mudarabah

CategoriesTrade, Business & All Things Money [488]

Fatwa ID: 01456

Answered by Mufti Mohammed Tosir Miah

Question:

Principle of Mudarabah

Answer:

Bismillah

In the name of Allah, the most Beneficent, the most Merciful.

Mudarabah is a special kind of partnership where one partner providers the capital (rabb-ul-maal) to the other (mudarib) for investment in a commercial enterprise.

According to Mufti Taqi Usmani Damat Barakhatuhum, a mudarabah arrangement differs from the musharakah in five major ways:

  1. The investment in musharakah comes from all the partners, while in mudarabah, investment is the sole responsibility of rabb-ul-maal.
  2. In musharakah, all the partners can participate in the management of the business and can work for it, while in mudarabah, the rabb-ul-maal has no right to participate in the management which is carried out by the mudarib only.
  3. In musharakah all the partners share the loss to the extent of the ratio of their investment while in mudarabah the loss, if any, is suffered by the rabb-ul-mal only, because the mudarib does not invest anything. His loss is restricted to the fact that his labor 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 musharakah 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 mudarabah. Here the liability of rabb-ul-maal is limited to his investment, unless he has permitted the mudarib to incur debts on his behalf.
  5. In musharakah, as soon as the partners mix up their capital in a joint pool, all the assets of the musharakah become jointly owned by all of them according to the proportion of their respective investment. Therefore, each one of them can benefit from the appreciation in the value of the assets, even if profit has not accrued through sales. The case of mudarabah is different. Here all the goods purchased by the mudarib are solely owned by the rabb-ul-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.

Types of Mudarabah

  1. The rabb-ul-maal may specify a business in which to invest, in which case the mudarib is restricted only to such business as pointed out by rabb-ul-maal. This is called restricted mudarabah or al-mudarabah al-muqayyadah.
  2. If rabb-ul-maal has not specified a business in which to invest, it is considered an unrestricted mudarabah or al-mudarabah al-mutalaqah.

Distribution of Profit

The distribution of profit must be pre-determined by the two parties. Furthermore, the amount of profit ascribed to either of the parties must be independent of the capital amount, dependent solely on the actual profit realized by the commercial enterprise. That is, the profit assigned to a party cannot be a percentage of capital amount contributed as that would be considered a fixed return, or interest. The profit assigned to either of the parties cannot be a lump sum amount either as this would also constitute interest.

As such, the only determination of profit distribution that is permissible is based on the actual profit earned by the enterprise.

The Shari'ah does not restrict or specify proportions to be distributed between the parties, leaving it to the best judgement of the two independent parties.

Termination of Mudarabah

The mudarabah contract can be terminated by either of the two parties at any time as long as a notice, per the contract terms, is given to the other party.

Furthermore, Hanafi and Hanbali jurists are of the opinion that a maximum term of the mudarabah contract can be set, where after the contract is terminated automatically. The Shafe'i and Maleki jurists are of the opinion that no term restriction can be added to the mudarabah contract. All jurists agree that one may not specify a minimum term of the mudarabah contract. (Extracted from An Introduction to Islamic Finance p.47 – p.51)

The Prophet of Allah ṣallallāhu 'alayhi wa sallam (peace and blessings of Allāh be upon him) has said ‘There is blessing in three transactions; credit sales, silent partnerships and mixing wheat and barely for home, not for trading.’   (Sunan Ibn Majah)

Like with ‘buyuu’ transactions, Imam Abu Hanifah raḥimahullāh (may Allāh have mercy upon him) lists offer and acceptance as the cornerstone of silent partnership.  Similarly one must use one of the common Arabic terms for this contract such a ‘mudarabah’, qiradh’, ‘muqaradah’ or any language that implies silent partnerships.   (Badaius Sanai p.79 v.6)

The majority of the scholars have ruled that the capital must be delivered to the worker to enable him to do his work and more importantly, establish the capital as a trust in his possession.  This is the fundamental difference between silent partnerships and regular partnerships where each partner may keep his capital in his possession.   (Financial Transactions in Islamic Jurisprudence p.495 v.1)

From the aforementioned discussion we can derive that the money given by the rabbul maal to the mudaarib is considered as a trust, hence, whenever he wishes to terminate the mudarabah contract he will be able to claim the capital and the profits one took is lawful as this is part of the contract.

Saaiduna Abu Hurairah raḍyAllāhu 'anhu (may Allāh be pleased with him) narrates that the Prophet of Allah ṣallallāhu 'alayhi wa sallam (peace and blessings of Allāh be upon him) has said, "There are three signs of a hypocrite: whenever he speaks, he lies; whenever he makes a promise, he breaks it; and whenever he is trusted, he betrays his trust." (Sahih Bukhari)

How to claim the debt

With regards to this situation where the debtor is defaulting in the payment of a loan, there are two ways to deal with the situation. If the debtor is poor or bankrupt and does not possess the means to pay off the loan, then the creditor should give him respite until he becomes capable of paying it off.

Allah subḥānahu wa ta'āla (glorified and exalted be He) in the Holy Qur’an has said:

"If the debtor is in a difficulty, grant him time till it is easy for him to repay" (Surah Baqarah v.280)

Saaiduna Abu Hurairah raḍyAllāhu 'anhu (may Allāh be pleased with him) narrates that the Prophet of Allah ṣallallāhu 'alayhi wa sallam (peace and blessings of Allāh be upon him) has said: “Whosoever gives respite to a borrower who is in difficulty or forgives him altogether, Allah subḥānahu wa ta'āla (glorified and exalted be He) will give him refuge under the shadow of His thrown on the Day when there will be no other shadow." (SunanTirmizi p.244 v.1)

However, if the debtor is rich and has the means to pay off the loan, yet he still refuses to pay it off, then in the eyes of Allah subḥānahu wa ta'āla (glorified and exalted be He) such a person is considered cruel and unjust.  The Prophet of Allah ṣallallāhu 'alayhi wa sallam (peace and blessings of Allāh be upon him) has said: "Delay in payment on the part of a rich man is injustice." (Sahih Bukhari, Sunan Abi Dawud & Sunan Tirmizi p.244 v.1)

Finally, I will like to advise both parties to obey and listen to the arbitrator, which they have appointed for this dispute.  Imam Quduuri raḥimahullāh (may Allāh have mercy upon him) has said that it is obligatory to follow and obey the decision of the arbitrator if he is from the “people of testimony” i.e. one is sane, mature, and righteous. (Mukhtasarul Quduuri p.227)

Allah subḥānahu wa ta'āla (glorified and exalted be He) in the Holy Quran has said:

O those who believe, obey Allah and obey the Messenger and those in authority among you…” (Surah Nisa v.59)

Only Allah Knows Best

Mohammed Tosir Miah

Darul Ifta Birmingham.

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