Moudaraba

Mudarabah

Mudaraba is considered to be the essential mode accredited by the Islamic banks in their relationship with the depositors who tender their moneys to the bank as capital owners to be invested by the bank as Mudarib on the basis of profit sharing according to specific ratios agreed upon.

The Islamic banks use the same mode with the investors who are capable to work whether they are physicians or engineers or they are traders or craftsmen. The bank provides the adequate finance as a capital owner in exchange of a share in the profit to be agreed upon.

It is worth noting that this mode is a high risk for the bank because the bank delivers capital to the Mudarib who undertakes the work and management and the Mudarib shall only be a guarantor in case of negligence and trespass.
The Islamic banks usually take the necessary precautions to decrease the risk and to guarantee a better execution for the Mudaraba and pursues this objective with seriousness.

Definition

Mudaraba in essence is based on the concurrence of those who have capital with those who expertise, where the first party provides capital and the other party provides the expertise with the purpose of earning Halal profit (lawful) which will be divided between them in ratios agreed upon.

This mode achieves the interest of both parties, the capital owner and the Mudarib (agent).

* The capital owner may not have the time or the experience to turn over capital and trade with.
* The agent (the Mudarib) may not have the adequate capital to put to use his experience.

The following is an illustration of the steps of the Mudaraba contract.

The Practical Steps of Mudaraba

1. Establishing a Mudaraba project:
The Bank: provides the capital as a capital owner.
The Mudarib: provides the effort and expertise for the investment of capital in exchange for a share in profit agreed upon.

2. The results of Mudaraba:
The two parties calculate the earnings and divide the profits at the end of Mudaraba, this can be done periodically in accordance with the agreement along with observance to legal rules.

3. The participation in capital:
The bank recovers the Mudaraba capital it contributed before dividing the profits between the two parties because profit is protection of capital. In case of agreement to distribute profits periodically before the final settlement it must be on account until the security of capital is assured.

The participation in capital:
* In case of loss, the capital owner (the bank) bears the loss.
* In the event of profits, they are divided between the parties in accordance with the agreement between them with observance to the principle "profit is protection to capital".

Evidence of Legality

1. Others traveling through the land Seeking of Allah's bounty; Al-Muzzammil 20
It is no crime in you If ye seek of the bounty of your Lord.

Al-Baqara 198

2. It was proved in the "Sira" biography of the Prophet (PBUH), that before prophethood, he traveled to Syria as a Mudarib with the capital of Khadeeja (may Allah be pleased of her) and the Messenger of Allah related that after the Message approving it.

3. The companions (may Allah be pleased with them) transacted in Mudaraba and none of them was reported to have adverse opinion. There is also a consensus among the Ummah for generations on the permissibility of Mudaraba.