What Is Mudaraba in Islamic Finance and Banking?

0
814

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

(1). Al Mudaraba Al-Muqayadah:

Rabaul-Maal may also specify a specific commercial enterprise or region for the Mudaarib, where 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 exquisite work beyond the traders’ everyday routine, they cannot accomplish that without specific permission from Rab’ul-Maal. He is also not authorized to:

a) preserve another Mudaarib or an accomplice

b) mix his very own funding in that unique Modarabah without the consent of Rab-ul Maal.

Conditions of Offer and acceptance are relevant to each. A Rabaul-Maal can agree to Mudaraba with multiple individuals via an 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.

Mudaraba

Difference among Musharaka and Mudaraba

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

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

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

READ MORE :

(4). In Musharaka, the liability of the partners is generally unlimited. If a commercial enterprise’s liabilities exceed its assets and the business is liquidated, all the exceeding liabilities will be borne pro rata using all partners. But suppose the companions agree that no partner shall incur any debt at some stage in the path of commercial enterprise. In that case, the exceeding liabilities shall be borne by my partner, who has incurred debt at the enterprise violating the condition above. 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 turns out to be owned by all of the partners, in keeping with the share of their respective investments. All companions appreciate the property’s value even though income has no longer been collected through sales. In Mudaraba financing, the goods purchased with the aid of the Mudaarib are owned via Rab’ul-Maal, and the Mudaarib can earn his proportion within the Profit only if 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 one of them is entitled. The Shariah has prescribed no accurate claim; as an alternative, it’s been left to their mutual consent. They can share the Profit equally and allocate different proportions for Rabaul-Maal and Mudaarib. However, in an excessive case wherein the parties have not predetermined the profit ratio, the income might be calculated at 50:50.

The Mudaarib & Rab’ul-Maal can not allocate a lump sum 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, suppose the Capital is 10,000 pounds sterling. In that case, they can not agree that 1,000 pounds sterling 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 upon 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 if 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 in the above manner, the Mudaarib can’t claim any periodical revenue, price, or remuneration for the paintings he accomplished for the Mudaraba. All faculties of Islamic Fiqh are unanimous in this factor. However, Imam Ahmad has allowed the Mudaarib to attract his daily meals from the Mudaraba Account. The Hanafi jurists limit the Mudaarib’s right to a scene while on a commercial enterprise ride outdoors in his metropolis. In this case, he can declare non-public prices, lodging, food, etc. But he isn’t entitled to get something as a day’s allowance when he’s in his town.

I suppose the enterprise has incurred a loss in a few transactions and has gained Profit in a few others; in that case, the income shall be used to offset the loss at the primary example, and 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 are fixed in any manner. In this case, the whole amount (Profit + Capital) will be Rab’ul-Maal’s. The Mudaarib will be an employee earning Ujrat-e-Misl. The final quantity might be called (Profit). These earnings may be shared in the agreed (pre-agreed) ratio.

Uses Of Musharaka/Mudaraba:

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

finance

Asset Side Financing

– Any term financing
– Project financing
Small and medium organizations set financing
– Large agency financing
– Import financing
– Import payments are 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 debt 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 & Certificates 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 large quantities – Profit based on the return from the undertaking)

One hundred online interactive lectures on Mudarabah Financing and many other Islamic Financial Instruments can be seen under FREE Islamic Finance Lectures on the AIMS – Islamic Finance Institutes website.