MUDAARABA
A Mudaraba is a contract in profit sharing, with one party providing funds and the other his management expertise. In other words, Mudaraba is a contract between the provider of funds (Rab al-Maal) and the managing trustee (Mudarib), who is provided financial resources to run a particular project with the object of making lawful profits. Profits are shared between the provider of funds and the managing trustee in a ratio agreed in advance. For a Mudaraba to be valid, it is necessary that the parties agree before embarking on the venture, on a definite ratio at which the generated profits will be shared.
Typically, the Rab al-Maal takes a higher portion of the profits. Mudarabas are typically used for trade and project financing. However, the relationship that exists between Lotus Capital and investment account holders is another example of a type of Mudaaraba. - Lotus Capital is a fund manager (Mudaarib) and the Investment account holders are the Rab al-Maal . The investment account holders provide the funds while Lotus Capital provides the expertise and enters into lawful business transactions on behalf of the investment account holders. Profits are shared in a pre agreed ratio.
Features of Mudaarabah
(I) The provision of investable assets is the responsibility of the Rab al-Maal.
(2) The Rab al-Maal has the option to restrict the Mudarib to a specified purpose, period, level of risk etc., or to authorize him to use his discretion in managing the affairs of the Mudaaraba.
(3) In the case of any loss, losses are the liability of the Rab al-Maal, and the Mudaarib loses the benefit from his efforts, i.e. his expected share in the profits. If however, the Mudaarib is guilty of willful negligence, fraud or breach of trust in handling thefunds, he will be held responsible forthe losses
(4) The liability of the Rab al-Maal is limited to his investment, unless he has permitted the Mudaarib to incur debts on his behalf.
(5) All the assets in trust of the Mudaarib are owned by the Rab al-Maal, and the Mudaarib can earn his share in the profit only when he makes returns on the funds of the Rab al-Maal. Therefore, he is not entitled to claim his share in the assets themselves, even if their value has increased.
(6) The funds are to be used only for Islamically permitted activities.
(7) ARab al-Maal can contract Mudaraba with more than one person through a single transaction. It means that he can offer his money to A and B so that each one of them can act as Mudaaribs, the capital of the Mudaaraba utilized by both of them jointly.
Types of Mudaarabah
There are-two types of Mudaaraba namely: Restricted Mudaaraba (Mudaaraba AI Muqayyada): The Rab al-Maal may specify a particular purpose, location, period, level of risk etc. for the Mudaarib, in which case he shall invest the Mudaaraba funds only in the way specified by the Mudaarib.
Roles of the Mudaarib
A Mudaarib acts in the following capacities; As a Trustee (Ameen), he looks after the investment responsibly, except in, case of natural calamities. As an Agent (Wakeel), to purchase from the funds provided by the Rab al-Maal As a Partner (Shareek), he shares in any profit from the Mudaraba As an-Employee (Ajeer), If the Mudaaraba becomes void for any reason, the Mudaarib is only-entitled to a salary.
A generic Mudaaraba process takes the following basic form:
Step I: The investor and the Mudaarib agree on the nature of the venture and the terms of profit sharing.
Step 2: The investor provides capital to the Mudaarib.
Step 3: The Mudaarib undertakes the venture agreed upon
Step 4: Profits from the investment are shared between the investor-and the Mudaarib.
Termination of Mudaaraba
A Mudaaraba contract can be terminated at any time by either of the two parties (except if it has been otherwise stated in the Mudaaraba contract). The only condition is-that adequate notice be given to the other party. If all the assets of the Mudaaraba are liquid 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 pre-agreed ratio. However, if the assets of the Mudaaraba are not liquid, the Mudaarib shall be given an opportunity to sell and liquidate them, so that the actual profit may be determined.
Conclusion The underlying feature of a Mudaaraba transaction is the creation of an avenue for the need of two parties to be met for mutual benefit. The provider of fund! benefits from creating additional lawful wealth; and the manager who uses hi! expertise to manage funds on behalf of the Rab al-Maal also creates wealth for himself since he shares in the generated profits, This is an ideal structure to make much needed capital available to entrepreneur! in away that is equitable. Furthermore, it is an attractive and halal alternative to interest based debt. This Islamically structured financial instrument provides a chain of wealth creation that benefits the overall economy.
This article was culled from the publications of Deen Communication Limited