1. IB1005
DEPOSITS AND FINANCING PRACTICES
OF ISLAMIC FINANCIAL INSTITUTIONS
CHAPTER 10 : MUDARABAH FINANCING
COMPILED BY
HAMDAN HJ IDRIS, BSc Econs, MBA (Islamic Banking & Finance)
Certified Professional Trainer (MIM)
Industry Expert
INCEIF
PRESENTED BY
HJ MAHMUD HJ BUNTAT, MBA (AUOL, UK), DBM (Swansea Inst., UK), CIL (UIA)
Part-time Lecturer (INCEIF)
Former Head of Islamic Banking Division, OCBC Bank (Malaysia) Bhd

2. Chapter 10 :
Mudarabah Financing
• The Majallah al-Ahkam al-Adliyyah (Ottoman code
of Islamic civil law) defines mudharabah as “a
kind of partnership on the condition, that the
capital is to be found by one, and the labour and
work by the other ” Majallah al-Ahkam al-
Adliyyah, Book 10 (Sharikat), Ch.7 (Mudharabah),
Sect.1, Article 1404 and that one of the conditions
of mudharabah is “that the capital be delivered to
the mudarib.” Majallah al-Ahkam al-Adliyyah,
Book 10 (Sharikat), Ch.7 (Mudharabah), Sect.2,
Article 1410.

3. The Malaysian Accounting Standards Board
(MASB) in its Financial Reporting Standards
(FRS) for Islamic Financial Institutions (IFI)
defines the mudharabah contract as,
“Mudharabah (lit., profit sharing) MASB, FRSi-1
Article 6 thtp://www.masb.org.my/masb
FRS/masbstd_FRSi-1c.htm [URL @ Oct.’07] – A
form of partnership under which one party,
called Rabbul-Mal or principal, provides only
capital to a business venture. With or without
conditions, while another party, the Mudarib or
agent, contributes labour only.

4. • At the end of the Mudarabah period, profits from
the venture are shared between the two parties
according to a pre-agreed ratio.
 In the case of losses, the losses are borne solely
by the capital provider.”
 The mudarib, regarded as an entrepreneur,
contributes management input, itself viewed as a
form of capital.

5.  Widely agreed conditions applied to modern
mudarabah contracts are that:-
a) the investor is an investor on a non-executive
basis.
b) according to Imam Hanifa, the contribution of
capital to the mudarabah is to be made in the
form of cash Imam Malik however argues that a
non-cash contribution can be made provided that
its cash value can be established prior to
employment in the partnership. Thus material
contributions must first be valued or sold for cash
before establishing the contributor's share in the
mudarabah.

6. c) a profit share between mudarib(s) and
investor(s) is agreed at the outset. Profits can be
shared in any ratio agreed at the outset of the
mudarabah.
d) ownership of the invested assets remains with
the investor at all times.

7. e) losses should be shared according to the
financing share of each financier. The
financier's maximum loss is limited to his share
of the financing and the mudarib must not bear
any of loss attributable to invested capital.
f) With the permission of the investor, the mudarib
may contribute some of his own capital to the
project or raise fresh capital from others on the
basis of mudarabah.

8. g) the mudarib may only lend available funds with
the permission of the investor.
h) the mudarib is not allowed to draw remuneration
in any other form than profit-share.
i) Mudarabah may be enacted as a single-tier
agreement in which the investor deals directly
with the entrepreneur. In a two-tier mudarabah,
investors pool their funds with an intermediary
who subsequently deals with entrepreneurs.

9. j) The mudarib may be required by investors to
engage only in strictly defined activities in which
case the mudarabah becomes one of mudarabah
al-muqayadah. Where no restrictions apply, the
mudarabah becomes one of mudarabah al-
mutlaqah.
k) Imams Hanifah and Hanbal argue that the term
of a mudarabah can be restricted, whilst Shafie
and Malik argue against any such restriction.

10.  The Accounting and Audit Organization for
Islamic Financial Institutions (AAOIFI) expands
on the MASB definition, stating that, “the
Mudarib is investing capital on a trust basis in
which case the Mudarib is not liable for losses
except in case of breach of the requirements of
trust, such as misconduct in respect to the
Mudharabah fund, negligence and breach of the
terms of the Mudharabah contract. In committing
any of these, the Mudarib becomes liable for the
amount of the Mudharabah capital.”

11.  The Majallah continues, “The mudarib is a person
entrusted (amin). The capital in his hands is like
the property deposited for safekeeping (wadiah).
And as regards his disposing of the capital, he is
the agent (wakil) of the owner of the capital. And
if he makes a profit he is a partner in it.”
Majallah al-Ahkam al-Adliyyah, Book 10
(Sharikat), Ch.7 (Mudharabah), Sect.2, Article
1413

12. • A profit ratio should be pre-agreed, but if a
specific amount of the profit is pre-determined
then this invalidates the partnership, Shari’a
Standards, as AAOIFI explains (8/3): “The
parties should agree on the ratio of profit
distribution when the contract is concluded”, and
(8/5): “If one of the parties stipulate that he
should receive a lump sum of money, the
Mudharabah shall be void.

13.  Along with musyarakah, the mudarabah (trustee
partnership) is a primary direct equity
investment contract in Islamic finance.
 It comprises the capital provider (rabul-mal)
and the trustee partner (mudarib). It is ideally
suitable to micro finance, with one partner
providing the capital and the other the labour, for
which they have the right to share in any profits.

14.  If there are any losses, the financier loses his
capital and the mudarib loses his labour.

15. Mudarabah Financing
Rabbul Mal Mudarib
100% 0%
40% 60%
Capital 100,000 40,000 60,000
Sales 250,00
Expenses (110,000)
Gross Income 140,000
Less Capital (100,000)
Profit for 16,000 24,000
distribution 40,000
Return on capital invested 16.0% 24.0%

16.  Have a good day 
 May God bless you
 Thank you & Wassalam