Lecture 4 MUDARABAH 1 Overview What is Mudarabah

Lecture 4 MUDARABAH 1

Overview What is Mudarabah? How Does Mudarabah Work? Rules of Mudarabah Difference between Musharakah and Mudarabah 2

Mudarabah is a partnership agreement where one party invest all capital and the other manages the business, simply to say the other party is responsible for management of day to day businesses. Rabb-ul-Maal – capital invested by party, literally transled as the owner of capital. Mudarib- efforts and management invested by other party. 3

Rules of Mudarabah Capital Management Profit and Loss Settlement Security 4

Rules of Mudarabah - Capital Form must be liquid or other kinds of assets It should be both quantified and specified If fixes assets are being contributed, so the value of these assets should be agreed 5

Rules of Mudarabah -Management Rabb-ul-maal does not have right to take a part in management of specific project. 6

Rules of Mudarabah - Profit and Loss Profits shall be distributed in the proportion mutually agreed in the contract. Determined as percentage of profit and not a fixed sum of the money or percentage of capital invested. Mudarib can not claim any periodical payment during a project life. If one or more partners choose to become non-working or silent partners. The ratio of their profit cannot exceed the ratio which their capital investment bears so the total capital investment in Mudarabah. (those who invested capital). The proportion of profit to be distributed between the partners must be agreed upon at the time of effecting the contract. If no such proportion has been determined, the contract is not valid in Shari‘ah All investors will have to share any loss in exact proportion to their investment. Rabb-ul-maal lose the capital invested and Mudarib loses efforts made to manage the business. 7

Rules of Mudarabah -Settelment Ø Every partner has a right to terminate the Mudarabah at any time after giving his partner a notice to this effect, whereby the Mudarabah will come to an end. Ø In this case, if the assets of the Mudarabah are in cash form, all of them will be distributed pro rata between the partners. Ø But if the assets are not liquidated, the partners may agree either on the liquidation of the assets, or on their distribution or partition between the partners as they are. 8

Rules of Mudarabah -Settelment Ø If any one of the partners dies during the Mudarabah , the contract of Mudarabah with him stands terminated. His heirs in this case, will have the option either to draw the share of the deceased from the business, or to continue with the contract of Mudarabah. Ø If any one of the partners becomes insane or otherwise becomes incapable of effecting commercial transactions, the Mudarabah stands terminated. 9

Rules of Mudarabah -Security In the case of Mudarabah agreement between bank and client, the bank can obtain adequate security from client against negligence or misconduct. 10

Application of Mudarabah An Investor would like to establish a business by opening student recruitment agency office in Russia. They did investment appraisal and come up with total initial investment cost of $ 30 000. However, the investor has capital but does not have a experience and knowledge about Russia’s market. So the investor decides to find a partner who is resident and has got expertise in Russia, but that partner will not put any capital, they will enter into agreement of Mudarabah. In that type of agreement, all parties agreed that profit ratio is equally divided. At the end of maturity of this project, they realized $ 50 000 as a pure profit. The there is income tax of 35% and zakat of 2. 5%. What is amount of tax paid after generating profit? Zakat? What is profit of Rabb-ul-maal and Mudarib? 11