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.