What Is Mudaraba in Islamic Finance and Banking?

Posted on Jul 19 2020 - 9:27am by Paul C. Lafferty

Types of Mudaraba: There are two forms of Mudaraba, and they’re referred to underneath:

(1). Al Mudaraba Al-Muqayadah:

Rab’ul-Maal may also specify a specific commercial enterprise or a specific region for the Mudaarib, in which case he’ll invest the money in that unique commercial enterprise or place. This is known as Al Mudaraba Al-Muqayadah (restrained Mudaraba).

(2). Al Mudaraba Al Mutlaqah:

However if Rab’ul-Maal offers full freedom to Mudaarib to undertake whatever business he deems healthy, that is known as Al Mudaraba Al Mutlaqah (unrestricted Mudaraba). However Mudaarib cannot, without the consent of Rab’ul-Maal, lend cash to all people. Mudaarib is authorized to do whatever, that’s typically carried out inside the path of commercial enterprise. However if they want to have an exquisite work, which is beyond the everyday routine of the traders, he cannot accomplish that with out specific permission from Rab’ul-Maal. He is also not authorized to:

a) preserve another Mudaarib or a accomplice

b) mix his very own funding in that unique Modarabah with out the consent of Rab-ul Maal.

Conditions of Offer & Acceptance are relevant to each. A Rabaul-Maal can agreement Mudaraba with multiple individual via a unmarried transaction. It means that he can provide his money to ‘A’ and ‘B’ each so that all of them can act for him as Mudaarib and the capital of the Mudaraba will be used by both of them collectively, and the percentage of the Mudaarib.


Difference among Musharaka and Mudaraba

(1). In Musharaka, all companions make investments, but in Mudaraba Finance, best Rab’ul-Maal invests.

(2). In Musharaka, all partners take part inside the control of the commercial enterprise and may work for it. However, in Mudaraba, Rab’ul-Maal has no proper to take part inside the control that’s accomplished by the Mudaarib best.

(three). In Musharakha, all partners share the loss to the extent of the ratio of their investment. But in Mudaraba, most effective Rab’ul-Maal suffers loss because the Mudaarib does not make investments anything. However this is subject to a circumstance that the Mudaarib has labored with due diligence.

(four). In Musharaka, the liability of the partners is generally unlimited. If the liabilities of commercial enterprise exceed its assets and the business goes in liquidation, all the exceeding liabilities will be borne pro rata by using all partners. But if the companions agree that no partner shall incur any debt at some stage in the path of commercial enterprise, then the exceeding liabilities shall be borne by way of that partner by myself who has incurred a debt at the enterprise in violation of the aforesaid condition. However in Mudaraba, the legal responsibility of Rab’ul-Maal is limited to his funding until he has authorized the Mudaarib to incur money owed on his behalf.

(5). Once the partners blend up their capital in a joint-pool in Musharaka, all the property turn out to be together owned by all of the partners, in keeping with the share of their respective investment. All companions enjoy the appreciation inside the value of the property even though income has no longer collected thru sales. In Mudaraba financing, the goods purchased with the aid of the Mudaarib are totally owned via Rab’ul-Maal and the Mudaarib can earn his proportion within the profit only in case he sells the goods profitably.

Distribution of Profit & Loss

It is important for the validity of Mudaraba that the events agree, proper at the start, on a precise share of the actual earnings to which each one in every of them is entitled. The Shariah has prescribed no precise share; as an alternative it’s been left to their mutual consent. They can share the profit in equal proportions and they can also allocate different proportions for Rabaul-Maal and Mudaarib. However in excessive case wherein the parties have now not predetermined the ratio of profit, the income might be calculated at 50:50.

The Mudaarib & Rab’ul-Maal can not allocate a lump sum quantity of profit for any celebration nor can they determine the percentage of any birthday celebration at a particular fee tied up with the capital. For example, if the capital is 10,000 Pound Sterlings, they can not agree on a situation that 1,000 Pound Sterlings out of the income will be the percentage of the Mudaarib nor can they say that 20% of the capital shall be given to Rab’ul-Maal. However they could agree that forty% of the real income shall visit the Mudaarib and 60% to the Rab’ul-Maal or vice versa.

It is likewise allowed that specific proportions are agreed in distinct situations. For example, the Rab’ul-Maal can say to Mudaarib “If you exchange in wheat, you’ll get 50% of the earnings and in case you change in flour, you will have 33% of the earnings”. Similarly, he can say “If you do the enterprise in your city, you may be entitled to 30% of the earnings and in case you do it in every other city, your percentage could be 50% of the profit”.

Apart from the agreed proportion of the income, as decided inside the above manner, the Mudaarib can’t claim any periodical revenue or a price or remuneration for the paintings accomplished by him for the Mudaraba. All faculties of Islamic Fiqh are unanimous in this factor. However, Imam Ahmad has allowed for the Mudaarib to attract his each day fees of meals simplest from the Mudaraba Account. The Hanafi jurists limit this right of the Mudaarib simplest to a scenario while he is on a commercial enterprise ride outdoor his own metropolis. In this case he can declare his non-public prices, lodging, food, etc. But he isn’t entitled to get something as each day allowances when he’s in his own town.

If the enterprise has incurred a loss in a few transactions and has gained profit in a few others, the income shall be used to offset the loss at the primary example, then the rest, if any, will be distributed among the events consistent with the agreed ratio.

The Mudaraba will become void (Fasid) if the earnings is fixed in any manner. In this case, the whole amount (Profit + Capital) will be the Rab’ul-Maal’s. The Mudaarib will simply be an employee earning Ujrat-e-Misl. The final quantity might be called (Profit). This earnings may be shared in the agreed (pre-agreed) ratio.

Uses Of Musharaka/Mudaraba:

These modes may be used inside the following regions (or can replace them consistent with Shariah guidelines).


Asset Side Financing

– Any term financing
– Project financing
– Small and medium organisations setup financing
– Large agency financing
– Import financing
– Import payments drawn beneath import L/C
– Inland payments drawn under inland L/C
– Bridge financing
– LC without margin (for Mudarba)
– LC with margin (for Musharaka)
– Export financing (Pre-cargo financing)
– Working capital financing
– Running debts financing/brief term advances

Liability Side Financing

– For modern/saving/month-to-month-profit/investment money owed (deposit giving Profit primarily based on Musharkah / Mudaraba – with predetermined ratio)
– Inter-Bank lending/borrowing
– Term Finance Certificates & Certificate of Investment
– T-Bill and Federal Investment Bonds/Debenture
– Securitization for massive initiatives (primarily based on Musharkah)
– Certificate of Investment based totally on Murabahah
– Islamic Musharaka bonds (based on tasks requiring big quantities – profit based on the return from the undertaking)

A one hundred% Online interactive lecture on Mudarabah Financing and many other Islamic Financial Instruments can be seen under FREE Islamic Finance Lectures at AIMS – Islamic Finance Institutes’ website.