Istisna’

Definition

Literally - the word istisna is a derivative from the root word sana or to manufacture or to construct something

Technically, it is a contract to purchase for a definite price something that may be manufactured later on according to agreedspecifications between the parties

Category

G1 - majority of jurists - istisna as part of salam price must be paid at the time of contract as in the case of salam.

G2- Hanafi jurists, istisna is another type of contract of sale, price can be paid later, not at the time of contract.
it involves labour, either to transform the raw material or to add value to it

Condition / Requirement

1. goods to be manufactured must be identified ( kind, type, measure, quality and quantity or any related specifications.
2. goods that can be manufactured (element of labour or manufacturing)
3. The manufacturer undertakes to construct the goods with his own material. Must from seller
4. price of the subject matter must be known

Prohibited Elements In Istisna

element of gharar - lack of knowledge on the specifications and the nature of subject matter to be manufactured

It is prohibited that the subject matter be already in existence at the time of the contract, or identified by designation.
The price could not be increased or decreased.
The raw material of the subject matter to be manufactured could not be supplied by the buyer
not permitted for the manufacturer to stipulate, that he will not be liable for defects in the subject matter
(Cost) cannot be drawn up on the basis of a murabahah sale or sale by determining the price on the cost plus basis.
In a parallel istisna’ , the institution or the bank cannot simply act as a financial intermediary - two contracts must be independently constructed.

Types Of Istisna

Ordinary istisna
Parallel istisna
Two contracts - independent but interrelated

1. between a bank as a seller/manufacturer who undertakes to manufacture a specified good, and a customer as the buyer to whom the goods will be delivered.

2. the bank as a buyer would request another company/producer to manufacture the same goods specified in the first istisna.

Binding Effect

Hanafi jurists

At the time of the contract before the commencement of the work by the manufacturer, all of them agreed that istisna is not binding at this stage and both parties reserve the right to revoke the contract.

After the commencement of the work and before the delivery to the buyer, they are also in agreement that it is not binding.

In the case of completion of the work and the delivery to the buyer, - binding (Imam Abu Yusuf)
* Imam Abu Hanifah was of the opinion that the parties still have the option to cancel the contract

Guarantee Clause

buyer may stipulate the collateral from the manufacturer either for the total amount he has paid or for the delivery of the subject matter in accordance with the specifications and due time.

manufacturer, he also has the right to a guarantee that the price is payable on due time.

Salam Contract (Forward Contract)

Introduction

Special device & special licence (rukhsah) for people to meet eco. needs & facilities in daily lives.
Now extended to new type of assets i.e. metal, shares etc.

Definition

Sale/purchase of a deferred item in exchange for immediate price.
Price paid in advance while commodity is deferred-at an agreed date in future.
E.g. Buy 2 tons of date
, deliver in 1 year later, price-paid on the spot.

Shafi’i: “A sale of a well defined commodity to be delivered by seller in the future”
Hanbalis: “A sale whereby the seller undertakes to supply some specific goods to the buyer at future date in exchange for an advance price fully paid on the spot.
Malikis: “A sale in which the capital sum is paid in advance, and the object of sale is deferred to a specific term”.

Salam Commodities conditions

Salam Commodities (Al muslam fihi)
Exception to the rule of impermissibility for the sale of non-existent items.
-Fulfil certain specific requirement -Fungible goods-can be specified by weight, and measured or counted. + seller can be held responsible.
Cannot be too specific “the product of a particular farm/field” or” fruit of a particular tree”
Reason:- Possibility –tree does not produce at time of harvest, crop destroyed before delivery-lead to gharar.
Clearly explained, determined, known to contracting parties, discrepancies (customary)- can be ignored

Note: Salam cannot affect goods which must be exchange on the spot. i.e. currency for currency or wheat for wheat.
Therefore price + object must be different. i.e animal for gold or goods for food.
-Salam commodities must be commonly available at the place where it should be available on delivery date.
Reason: Seller can discharge duties.
View 1-Hanafis-require commodity must be available from day of contracting.
View 2- Shafie, Hanbali, Maliki- must be available at time of contract (not a condition).-Prophet pbuh did not make it a condition.

Issue: Immediate Delivery of Good
View 1: Hanafis, Malikis, Hanbalis: Deferment (delivering object) is a condition for validity.
View 2: Shafie-Ok, regardless deferred or not. –advantageous- 1) immediate- eliminate gharar, 2) after-still serve the purpose.

Delivery

On time
-Necessary to fix the period of delivery according to specification-buyer compelled to accept.
Earlier
Meet spec-purchaser may refuse-with valid reason i.e. does not harm him.
Delayed
If delivery deferred due to reasonable excuse- i.e. seller declared bankrupt-cannot perform obligation on time- should grant extension.-no penalty/penalty clause allowed.

Deliver but Not Meeting Requirement
But if the Spec is different:
a) Better/Higher quality-than agreed in contract-must accept-seller cannot ask for increase in price.
b) Lower quality- Right of option- accept or reject.-Parties may agree to a discounted price.
Note: But if the spec is vital to the contract, even tough superior i quality-contract is invalid.

Issue: Seller fails to perform-Due to unavailability of Salam Commodities at time of delivery
-if all or part unavailable- buyer has option:
i) either to wait until object available or
ii) Cancel the contract and recover paid up capital.

Replacement of Salam Commodity
Buyer may with agreement from Seller-change with other goods (suitable)- with the price of salam goods. –as long as does not involve riba- price not higher than the market value of the original salam commodities at time of delivery.
i.e. currency with currency.
Note: Should not be stipulated in the contract.

Time of Delivery

How Long is Deferment period? (from conclusion of contract to time of delivery)
View 1: Hanafis & Hanbalis: Approximately 1 month-earliest time than can be considered deferred.- if earlier is invalid.
Reason: Help small farmers & trader.

View 2: Imam Malik: Should be a minimum period; not less than 15 days-bcoz market rate may change a forth night.
Exception: Parties agrees to delivery of goods as soon as it arrives (from other cities).-still valid even if takes place after 2 days

View 3: Shafies & Some Hanafis: No minimum period-Prophet pbuh dis not set min.period, only condition is time delivery must be clearly defined.-Parties may fix any date-mutual consent.
More suited for contemporary practice.

Place of delivery

View 1- Hanafi
Must Specified Clearly -If Object not easily portable & require additional cost of transportation.

View 2- Abu Yusuf & Shaybani
No need to specify- Bcoz-the location of contracting is the location.-no need to specify.

View 3- More accepted view in Hanafi school
If goods are easily portable: - Wherever the contracting party meets.

Price of Salam

Can be in other than cash: (Type, form, kind, specification, quantity made known)
• Goods i.e. wheats
• Material value i.e. livestock
• Form of usufruct of certain assets
Rule:
As long as price of capital is known to contracting parties
Pay in full and immediate (majority view) but Imam Malik: seller may give 2 or 3 days concession to the buyers but it should not form part of the agreement.

Legal Consequences

Establish deferred ownership in exchange for immediate ownership (price)
Parties not allowed exchanging the salam goods with sthg else prior delivery.
Reason -delivery & immediate payment-prerequisite for salam.
In contrast-Regular Sale- Price can be deferred.

Partial Revocation
-Permitted by majority scholars.-buyer can revoke part of contract and maintain remaining, with seller’s consent.
Imam Malik-Disagree-choose either revoke or keep intact.

Not Permitted to Release Buyer of the Price without consent
If buyer consented- waiver is valid-same ceases to exist; result in non receipt of price.
If buyer refuse- contract remained valid.
In contrast-Normal sale-price is not a condition.

Termination or Revocation of salam

General rule: seller bound to deliver.
Situation which made it not possible:
i) Death
ii) Salam goods are destroyed.

Death of Seller- Salam will be terminated, buyer can claim price paid from heirs.
Death of Buyer- Contract remain operative.

Damage on goods will only nullify contract when it exceed normal extent of damage.

Majority view
- can fully or partially cancel the contract-upon both agreement, only before delivery.

Full Cancellation-seller must repay full amount of capital.

Partial cancellation-buyer has right of repayment for a corresponding price/capital of salam.
However,-Imam Malik & judge Ibn Layla-disagree- for them buyer should recover full amount.-hadith.
“Do not take anything other than the object of the forward sale or its price”.

BBA-Bai Bi Thamanaajil

Definition

Majallah - as Bay’ al-Muajjal.
BBA is a sale contract in which the payment of the price is deferred and payable at a certain particular time in the future
In Pakistan, Bangladesh, is called by MURABAHAH

Usage

can be implicated in any sale contract, including musawamah, and murabahah
BBA is not a kind of sale; rather it refers to the manner of payment via a deferred payment basis, be it a lump sum payment or installments
BBA can be applied for any types of sale except Salam

Increasing the price due to the deferment

•G1 - majority of jurists - is allowed.
•Ibn Rushd said: “The time has been given a share in the price
increase is permissible because it is against the commodity and not against money Thefore FOREX only can be on spot
•G2 - argued that BBA opens the back door/ camouflage to interest based transactions practice of BBA amounts to the prohibited “two sales in one”
•Siddiqi : overriding legal maxim that “anything leading to something prohibited stands prohibited”
•Council of Islamic Ideology (Pakistan) - not be advisable to use it widely or indiscriminately

Modus Operandi/ Application Malaysia

Refer IB 1005
Houses/shop houses, Land, Motor vehicle, Consumer goods, personal financing, etc
purpose :
1-to acquire a certain asset
2-is to make available a certain amount of cash – personal financing, refinancing

* the exact Shariah contract used is not BBA per se, rather it is another contract known as bai’ al-Inah

ISSUE 1
appointing the customer as the agent of the bank

invalid because in contract of exchange (mu’awadat),
same individual X become an agent or representative to two different parties at the same time (simultaneously).
lead to fraud - probably the said house does not exist
However, the bank can appoint the customer as its agent/representative to purchase a house from
the developer but the same customer is not allowed to purchase the said house for himself.

ISSUE 2:
Compensation Clause

Contemporary jurists are of different opinions.
G1 - Some jurists - the price should not be increased for the purpose of compensating the bank.
G2 - one opinion (said to be of the Malikis) allows this increase if the default was without a valid reason. as part of the punishment to the buyer, can deter
*shall not form part of the income of the seller/the financier.
*bound to spend it for a charitable purpose on behalf of the buyer.
accepted by the majority of contemporary jurists
G3 – SAC BNM & SC - Malaysia : allowed the imposition of one percent penalty rate on late payments
this money can form part of the income of the bank.
considered as ta’widh (compensation)
cannot be compounded

ISSUE 3:
Cross Default

SAC of BNM has allowed the imposition of such a clause provided that the client agrees to its incorporation in the financing document

ISSUE 4:
Validity of Provisions

The SAC of BNM rules that the clause to this effect is allowed provided that the invalidity of that clause would not affect the pillars or essential elements of the contract itself

ISSUE 5:
Selling of the Non-existent

If the opinion of the majority of jurists is to be applied, the BBA facility on property under construction is not allowed.
If If the opinion of Ibn Taymiyyah and Ibn al-Qayyim - will it pass the test of certainty of delivery?
recommended - parallel istisna

ISSUE 6:
Transfer of Ownership

the transfer of ownership and the taking of possession must truly happen
The possession, could be construed according to the custom
BBA in Malaysia, the execution of PPA and PSA in the facility should result in transfer of ownership, irrespective of whether the registration of the transfer is made or otherwise.

ISSUE 7 Floating Rate BBA

Ibra’ features
pay not more than the ceiling price that has been agreed upon upfront.

TAWARRUQ/COMMODITY MURABAHAH

Definition

From the root word wariq meaning silver or minted. Has been used to mean ‘seeking silver’ in the same way as ta’llum or seeking knowledge. Today it can be said it is the means of seeking money in any form to attain required levels of liquidity. First referred to by the students of Ahmad Ibn Hanbal where many contracts were utilized to obtain cash.

Islamic Fiqh Academy defines it as ‘the purchase of a commodity that is in the ownership and possession of the seller against a deferred price, and its subsequent sale by the purchaser to a party other than the seller on cash, for the purpose of obtaining cash’.

3 forms described by jurists

a)A person who needs cash buys a commodity on credit and sells it to another for cash, without any party being aware of his intention/need
b)A person needs a loan so a trader sells a commodity on credit at cash price. The person then sells the commodity at whatever price he can achieve
These 2 are agreed by all scholars
c)Similar to b) but the seller charges a higher price than the market value
Has a difference of opinions

Conditions

For the permissibility of tawarruq, if deemed to be for necessity, a person embarking on it should also have a case of genuine necessity and some even say if there is no other method available

Item is in existence at the time of sale and the seller must have ownership
Actual transfer of ownership so that the one who requires liquidity has the right to sell also
Sale to a different entity than the originator

Organized or regulated Tawarruq

Practice today can be for a bank to simply sign pieces of paper and collect the cash. Could be close to riba or still considered trading activity?

Example of general practice,
-Bank purchases a commodity from an international market in cash
-Bank sells the commodity to the client on a murabahah basis
-Bank undertakes to sell the commodity on behalf of the client to a third party
-Proceeds are forwarded to the client who will repay with profit in deferment
-Brokers are also usually involved to purchase the commodity (brokerage fees)

Each bank can practice this differently than one another

Points to note

Each client has the freedom to choose the bank as the agent or undertake the selling himself
Agency fee cannot be based on a percentage relative to the facility but rather the price of similar activity
Some argue that the bank cannot make advances to the customer until the proceeds of the sale have been acquired
Promise is a critical part of tawarruq similar to murabahah. Al Rajhi Bank maintains stocks of regular items such as cars to eliminate this controversial issue

Application
Example of Personal Financing-i,
Includes a binding promise, three sale contracts and at least one agency contract

Risk for Return

Risk for Return

Factors justifying return or profit
1.Work or labour provided
2.Assumption of liability (dhoman) or guarantee (sharikat al-wujuh).
3.Assumption of risk of loss of asset or capital.
4.Alkharaj biddhoman (return for risk of loss).
5.Alghurmu bilghunmi (return for risk of liability)

Sales of goods

1-Transfer of ownership by sales
2-Shariah recognized khiyar (options) to the buyer/seller or both.
Liability on loss caused by ‘act – of – god’ <(marks deducted if this term act of god is used, since all things are act of god. Use natural disaster etc whatever.
The jurist differs in their opinion:
a-To the buyer, (the jurist consider the buyer is the legit owner) so any increment or loss belongs to him.
b-To the seller, (the jurists consider the seller is still the owner since the contract is still not completed).
c-Legal ownership is suspended pending finalization of option;
i.If the disaster happened while the item is still in the seller’s possession, he is to bear any loss or profit
ii.If the buyer has taken delivery, the jurists again differ in opinion:
- according to maliki school, the seller shall bear the consequences since the buyer take possession as a trustee
- for the hanafi, the buyer shall bear the consequences if the option is for his benefit. If the option is for the benefit of the seller, the buyer has to pay the market value, not the original price.
-for shafie school, the buyer is liable to pay the market price if the option is for the benefit of seller or both of them. If the option is for the buyer’s benefit, he has to pay the price to the seller.
-benefit of option comes with readiness to bear the risk.

Mudharabah – profit/loss sharing based on trust

-A type of syarikah
-Trust financing; different from equity or debt financing
-Capital provided by rabbulmal, effort and labor by the mudarib
-Rabbulmal assumes the loss, mudarib bears fault-based
-Profit is shared on pre-agreed ratio
-Guarantee to the capital is not allowed
-If for some reason the mudarabah becomes fasid, the mudarib is entitled for a fair remuneration (ujrat al-mithl).

Musharakah

The issues of preference share
-General rule in musyarakah is: - profit based on agreement, loss based on capital portion
-Preference share gives special treatment to holders in term of:
oPriority in dividend payment
oPriority in capital reimbursement upon dissolution of the company or sharikah @ winding up (partial protection of capital)
-As such, PSs is considered not permissible according to the view of majority comtemporary jurists as the practice is not in line with the risk for return principle.

The Application of Ujr

Introduction

The paid amount for service rendered is ‘ujr
Could arise from contract of wakalah, kafalah, ijarah and other contracts pending on circumstances .
‘ujr represents what someone is entitled to receive either due to nature of contract or occurrence if events that would trigger the payment of ‘ujr, though not it was not intended in the contract.

Definition

Same as above.
Even rental payment (‘ujrah) will also come under this.

Fees or wages are essentially the payment paid by the service seeker to the service performenr as the counter value (‘iwad) for the services. The ‘ujr necessarily need not be money.

Conditions of ‘ujr

Three conditions
1.‘Ujr shall be a property which is fixed or known and of value (from shari’ah perspective)

The difference of opinion is only for the venue of settlement.
View 1- Hanafi (more suitable according to author)
Must Specified Clearly -If Object not easily portable & require additional cost of transportation.

View 2- Abu Yusuf & Shaybani
No need to specify - the location of contracting is the location.-no need to specify.

For the ‘ujr to be anything other than money
View 1- Abu Yusuf & Muhammad al-Shaybani
Prohibited –as this would lead to uncertainity

View 2- Abu Hanifa
Allowed – on the basis of istihsan or equity principle. Based on Qur’an “And the mothers should suckle their children for two whole years for him who desires to make complete the time of suckling; and their maintenance and their clothing must be-- borne by the father according to usage” [al-Baqarah: 233]

Islamic commercial law – mixture of both.

Conditional reduction
View 1: Majority
Prohibited- But if allowed should be for the price of the equivalent (determined from the market)
View 2: Abu Yusuf & Muhammad al-Shaybani
Allowed: as qualification of time is just to fix a certain time for performance. As long as ‘ujr is fixed and agreed it is ok.
Stipulation by AAOIFI – for floating rental, first period of rental should be fixed then the rental for subsequent periods could determined according to a benchmark. The benchmark or formula should not be subjective to dispute. E.g?

2.‘Ujr as cash or kind or benefit
For service- if it is different from the counter value of the service.
Hanafis – minority view for services exchanged in the same category.

3.‘Ujr as a part of services or part of end product of work (shuyu’)
View of Malikis (minority). Even Hanbalis tend to support this view. Derived from the basis of mudarabah and musaqah.

Why the majority declined? – wisdom

In present modern application, the view of Maliki and Hanbalis is to be preferred.

Prohibited elements of ‘ujr

a.Cannot be something unknown unless structured under ju’alah
b.Cannot be applied to contracts of exchange which are based on a profit margin

Types of “ujr

1.Payment to service provider for services performed
E.g. Kafalah, wakalah, ju’alah and hire contract
Ijarah – Benefit & rental
Ujr – Fee & services
2.Payment to service provider for the services given or offered
This is someone who provides some assets for leasing purposes.
‘ujir mithi – silent on the question of any payment. Example?

IJARAH

Definition
To give something on rent.
Technical meaning: two different connotations
1.To employ the services of a person on wages given to him as a consideration for his hired services. Employer – musta’jir, employee – ajir. Most common type of ijarah used in all service industry.
2.To transfer the usufruct of a particular property to another person in exchange of rent claimed from him. Lessor – mu’jir, lessee – musta’jir, rent- ujrah.

Conditions of Ijarah
1.The contracting parties which are the lessor or the owner of the asset, and a lessee or the party who benefits from the use of the asset
2.Offer(ijab) and acceptance(qabul)
3.Subject of the matter, the rent and the benefits (manfa’ah)

Lessor’s obligation
1.Ensuring the leased asset is available and utilizable
2.Guarantee in respect of defects
a.What is the position if there is a defect?
3.Maintenance of the leased asset. It could be asked for the lessee to maintain for the following conditions.
a.The operating maintenance that is required as a result of using the asset (e.g lubricants, petrol for cars and machines)
b.Periodic maintenance which is required for the asset to continue providing benefit
c.Maintenance that is specified in description and amount in the contract or according to practice irrespective of whether such maintenance is merely work or it involves the use of known materials or spare parts.

Lessee’s obligation
Required to utilize the leased asset according to the conditions of the contract. Or normal accepted practices. He should be a pay master. The asset is an amanah in the hand of the trustee (agreed by scholars).

Rahn

Definition
literally means constancy, or holding and binding

The Shafi’is - a non-fungible property which is used as insurance against a fungible debt, whereby the debt may be extracted from the held property if it is not repaid

The Malikis - the act of taking a valued property from its owner, as a means of insuring a loan that has matured or is about to mature.”

Nature Of Rahn Contract
•The contract of rahn is a voluntary charitable contract (tabarru’).
•not considered totally binding until the object of contract is delivered. (gifts (hibah), simple loans (ariyah), deposits (wadiah), and loans (qard hasan).

Forms Of Al-Rahn
•Rahn Originating from Debt-generating Contract
•Rahn Originating after Establishment of Debt
•Rahn Originating Prior to Establishment of Debt (according to the Malikis and Hanafis)

Conditions of Pawned Object (Mal
Marhun)

Muslim jurists have agreed that the pawned object must satisfy the conditions as required for the object of sale.

Being valued property
Being known
Being able to be delivered
Being in the nature that the creditor is able to receive it
Being in ownership and possession of the debtor
Being attached to a non-pawned item
Being separate from other properties
Being distinguished from other properties

Procedures in the
case of failure of the debtor to pay his debt
If the pawned object is of the same genus as the underlying debt/liability, the creditor may extract his credit from the pawned object.

If the underlying liability is monetary, and the pawned object is a non-fungible property of a different genus, then the pawned object may be sold, and the debt may be repaid from the proceeds of the sale price.

If the underlying debt is commodities (not monetary), e.g. wheat, while the pawned object is another commodity of different genus, then repayment may be effected through exchange of these two counter values.

MUSHARAKAH

Definition

Terminology: sharing in the context of business and trade, a joint enterprise in which all the partners share the profit or loss of the joint venture

Modern terminology: as partnership where profits are shared as shared as per a agreed ratio & losses Are shared in proportion to the capital/investment of each partner
Profit & Loss

Profit=Are shared as shared as per a agreed ratio.
Loss=Are shared in proportion to the capital/investment of each partner.

Elements of Musharakah

1. Partner & Share Holder
2. Capital=Ra’sul Mal
3. Business Venture/Project =‘Amal
4. Profit / Loss= Nisbah
5. Ijab Qobul (Sighat)=offer & Acceptance

Basic Rules

1.Distribution of Profit
• Proportion of profit-> agreed upon at the time of effecting the contract. If not =>not valid
• The ratio of profit-> determined in proportion to the actual profit accrued to the business => no to the capital invested by him
• Distribution of profit should not be fixed as a lump sum amount or any rate of profit tied up with his investment. However. If lump sum amount or a certain percentage has been agree, so, it must be expressly mentioned
• The correct , distribution would be an agreed percentage/ratio of the actual profit accrued in the business

2.Sharing of Loss
• All muslim jurist are unanimous on the point the each partner shall bear the loss exactly according to the ratio of is investment. E.g Invest 40% = 40% loss not more or less
• Complete consensus of jurist for famous legal maxim “Profit is based on the agreement of the parties, but loss is always subject to the ratio of investment”

3.Management of Musharaka
• All partner have the right to take part in its management and to work for it since all of them contributed the capital for such a enterprise. 2 Options:
a. they may agree upon 1 of them shall carry out the management & other is sleeping partner => the profit only to the extent of his investment and ratio of profit is not exceed the ratio of his investment
b. If all agree work together for joint venture => each one should be treated as agent of the other & any work shall be deemed to be authorised by all partner

Mudharabah

Definition
The term mudarabah is derived from the phrase al-darb fi al-ard found in Quran which means to make a journey

al-qirad and al-muqaradah
Malikis - an agency for trading in delivered cash for a part of profits.

Shafi’is - an agreement whereby an owner hands over the capital to a worker who trades with it and the profit is to be shared between them.

Hanbalis - a contract in which a person gives his capital to another for business in order to share
the profit according to their stipulation.

Hanafis - a partnership for participation in profit in which capital is provided from one side, whereas labour or skill (‘amal) is from the other side. (comprehensible definition)

Majallah (Art. 1404) defines it as: “a type of partnership where one party supplies the capital and the other the labour. The person who owns the capital is called the owner of the capital and the person who performs the works is called the workman.”

Legality

not mentioned explicitly in the Quran or Sunnah

Al-Quran
“Others travelling through the land seeking Allah’s bounty.”
interpreted to mean those who travel for the purpose of trading and seeking permissible income, including those who work with another’s capital in exchange for part of the profits.

Al-Sunnah
It has been reported that the Prophet (pbuh) himself worked as a mudarib in this type of contract for Khadijah before he was appointed as a Prophet (pbuh). (well-accepted principle that the Prophet (pbuh) is protected from doing anything sinful, be it before or after his Prophetship)

“There is blessing in three transactions: credit sales, muqaradah and mixing wheat and barley for home consumption, not for trading”. (weakness in its chain of narrators)

tacit approval (taqrir) - al-‘Abbas used to stipulate a condition whenever he gave his money in a mudarabah that the mudarib will not take his money across the sea, into any valley, or buy any animal with a soft belly, and if the mudarib were to do any of those actions, then he must guarantee the capital. The Prophet (pbuh) heard of this practice and permitted it.

TYPES
1. Unrestricted mudarabah (mudarabah mutlaqah)
capital is handed over to the mudarib without determination of the type of work that is to be done, the location, the time, method of payment from the client (cash or credit), the quality of work and the person with whom the mudarib may or have to trade, etc.

discretion of the mudarib to run the business according to his expertise and experience.

authority is absolute and he can use the capital in the manner he deems fit.

The mudarib cannot commit the rab al-mal beyond the capital provided in the venture. (leveraging beyond the amount of the capital is not allowed, except with prior permission from the rab al-mal.)

Mudharib not permitted to borrow money on behalf of the mudarabah venture unless he is specifically permitted to do so.

2. Mudarabah muqayyadah
liberty of the mudarib in managing the venture is restricted in terms of kind, time and place.
AAIOFI “a contract in which the capital provider restricts the actions of the mudarib to a particular location or to a particular type of investment as the capital provider considers appropriate, but not in a manner that would unduly constrain the mudarib in his operations.”

e.g. - The restriction to purchase goods from a particular place only is valid according to the Hanafis and Hanbalis but invalid according to the Malikis and Shafi’is.

specify a period say one year - valid according to the Hanafis and Hanbalis but invalid according to the Malikis and Shafi’is.
Most contemporary jurists & AAOIFI allow fixation of time in which early withdrawal is not allowed at all.

Condition / Requirement

1. Contracting Parties
Full legal capacity of the parties - the rab al-mal must be competent to appoint an agent and the mudarib is competent to accept agency.
Majority - The religion of the party is irrelevant.

2. CAPITAL

a. Type
G1 - the majority - only cash money.
G2 - The Hanafis and Hanbalis - rejecting the use of fungible non-monetary goods as capital. (immovable property)
G3 -Ibn Abi Layla and al-Awza’i allowed the use of non-monetary properties as capital. (To value these properties, the prevailing market price)

AAOIFI - “In principle, the capital of mudarabah must be provided in the form of cash. However, it may be presented in the form of tangible assets, in which case the value of the assets is the contribution to the mudarabah capital. The valuation of the assets may be conducted by experts or as agreed upon by the contracting parties.

b. The capital must also be present during the conclusion of the contract (not permitted to use debt owed by the mudarib or another party to the rab al-mal)
* However, if the rab al-mal instructs the mudarib to collect his debts from a third party and use them as capital in their mudarabah, the contract is valid, provided the debt is due (dayn hal) and in fact ready for collection.

c. The existing capital must be delivered to the mudarib (constructively delivered if the mudarib is allowed free access to the capital )

d. This capital must be known and certain.( it must be definite in terms of its quality and quantity)

3. PROFIT
a. distribution of the profit must be made clear and known to both parties (percentage and not as a specific or fixed figure)

b. The determination of the profit ratio must be made in advance or at the time of the contract.
(If not fixed any ratio of profit at the time of the contract, the profit will be shared between them equally)

c. The profit to be divided between the parties is the net profit after all expenses and losses have been written off and the capital has been fully restored. (Any distribution of profits before the termination of the mudarabah agreement will be considered as an advance and as such is not allowed.)


4. LABOUR/WORK

the labour of the contract must be provided by the mudarib. (condition that restricts him from doing his normal work is not allowed.) applicable in mudarabah mutlaqah (unrestricted mudarabah).

If the mudarabah is restricted mudarabah, then the mudarib is bound to follow the restrictions imposed upon him.

rab al-mal cannot make a condition that stipulates his involvement in the mudarabah contract. (invalid)

G1- The Shafi’iS - labour should only be confined to trade in its narrowest scope (involvement of the capital in other spheres of activities such as industrial and agricultural projects is not allowed at all.)

G2 - Hanbalis and Hanafis - extended this scope to cover also contracts that are agricultural in nature such as muzara’ah and musaqat as long as the ultimate intention is the selling of the products.

G3 -The Hanbalis, - extended the scope of to anything that would result in trading and making profit.
Anything that can be done under musyarakah, can also be done under mudarabah.