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Islamic Finance - Musharakah & Mudarabah
By Mufti Muhammad Taqi
Usmani
Mudarabah
1) Introduction.
2) Business of the Mudarabah.
3) Distribution of the profit.
4) Termination of Mudarabah.
"Mudarabah"
is a special kind of partnership where one partner gives money
to another for investing it in a commercial enterprise. The
investment comes from the first partner who is called "rabb-ul-mal",
while the management and work is an exclusive responsibility of
the other, who is called "mudarib".
The
difference between musharakah and mudarabah can be summarized in
the following points
(1) The
investment in musharakah comes from all the partners, while in
mudarabah, investment is the sole responsibility of rabb-ul-mal.
(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-mal 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-mal 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-mal, 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.
Business of
the Mudarabah : -
The rabb-ul-mal
may specify a particular business for the mudarib, in which case
he shall invest the money in that particular business only. This
is called al-mudarabah al-muqayyadah (restricted mudarabah). But
if he has left it open for the mudarib to undertake whatever
business he wishes, the mudarib shall be authorized to invest
the money in any business he deems fit. This type of mudarabah
is called 'al-mudarabah al-mutlaqah" (unrestricted
mudarabah)
A rabbul-mal
can contract mudarabah with more than one person through a
single transaction. It means that he can offer his money to A
and B both, so that each one of them can act for him as mudarib
and the capital of the mudarabah shall be utilized by both of
them jointly, and the share of the mudarib shall be distributed
between them according to the agreed proportion. In this case
both the mudâribs shall run the business as if they were
partners inter se.
The mudarib or
mudâribs, as the case may be, are authorized to do anything
which is normally done in the course of business. However, if
they want to do an extraordinary work, which is beyond the
normal routine of the traders, they cannot do so without express
permission from the rabb-ul-mal.
Distribution
of the profit : -
It is necessary
for the validity of mudarabah that the parties agree, right at
the beginning, on a definite proportion of the actual profit to
which each one of them is entitled. No particular proportion has
been prescribed by the Shari‘ah; rather, it has been left to
their mutual consent. They can share the profit in equal
proportions, and they can also allocate different proportions
for the rubb-ul-mal and the mudarib. However, they cannot
allocate a lump sum amount of profit for any party, nor can they
determine the share of any party at a specific rate tied up with
the capital. For example, if the capital is Rs. 100000/- they
cannot agree on a condition that Rs. 10000/- out of the profit
shall be the share of the mudarib, nor can they say that 20% of
the capital shall be given to rabb-ul-mal. However, they can
agree on that 40% of the actual profit shall go to the mudarib
and 60% to the rabb-ul-mal or vice versa.
It is also
allowed that different proportions are agreed in different
situations. For example the rabbul-mal can say to mudarib,
"If you trade in wheat, you will get 50% of the profit and
if you trade in flour, you will have 33% of the profit".
Similarly, he can say "If you do the business in your town,
you will be entitled to 30% of the profit, and if you do it in
another town, your share will be 50% of the profit.
Apart from the
agreed proportion of the profit, as determined in the above
manner, the mudarib cannot claim any periodical salary or a fee
or remuneration for the work done by him for the mudarabah.
All the schools
of Islamic Fiqh are unanimous on this point. However, Imam Ahmad
has allowed for the mudarib to draw his daily expenses of food
only from the mudarabah account.
The Hanafi
jurists restrict this right of the mudarib only to a situation
when he is on a business trip outside his own city. In this case
he can claim his personal expenses, accommodation, food, etc.,
but he is not entitled to get anything as daily allowances when
he is in his own city. If the business has incurred loss in some
transactions and has gained profit in some others, the profit
shall be used to offset the loss at the first instance, then the
remainder, if any, shall be distributed between the parties
according to the agreed ratio.
Termination
of Mudarabah
The contract of
mudarabah can be terminated at any time by either of the two
parties. The only condition is to give a notice to the other
party. If all the assets of the mudarabah are in cash form at
the time of termination, and some profit has been earned on the
principal amount, it shall be distributed between the parties
according to the agreed ratio. However, if the assets of the
mudarabah are not in the cash form, the mudarib shall be given
an opportunity to sell and liquidate them, so that the actual
profit may be determined.
There is a
difference of opinion among the Muslim jurists about the
question whether the contract of mudarabah can be effected for a
specified period after which it terminates automatically. The
Hanafi and Hanbali schools are of the view that the mudarabah
can be restricted to a particular term, like one year, six
months, etc, after which it will come to an end without a
notice. On the contrary, Shafi‘i and Maliki schools are of the
opinion that the mudarabah cannot be restricted to a particular
time.
However, this
difference of opinion relates only to the maximum time-limit of
the mudarabah. Can a minimum time-limit also be fixed by the
parties before which mudarabah cannot be terminated? No express
answer to this question is found in the books of Islamic Fiqh,
but it appears from the general principles enumerated therein
that no such limit can be fixed, and each party is at liberty to
terminate the contract whenever he wishes.
This unlimited
power of the parties to terminate the mudarabah at their
pleasure may create some difficulties in the context of the
present circumstances, because most of the commercial
enterprises today need time to bring fruits. They also demand
constant and complex efforts. Therefore, it may be disastrous to
the project, if the rabb-ul-mal terminates the mudarabah right
in the beginning of the enterprise. Specially, it may bring a
severe set-back to the mudarib who will earn nothing despite all
his efforts. Therefore, if the parties agree, when entering into
the mudarabah, that no party shall terminate it during a
specified period, except in specified circumstances, it does not
seem to violate any principle of Shari‘ah, particularly in the
light of the famous hadith, already quoted, which says:
All the
conditions agreed upon by the Muslims are upheld, except a
condition which allows what is prohibited or prohibits what is
lawful.
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Ayah/Hadith
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