Mudarabah is a form of partnership where one party provides capital for an investment and the other party manages the project. Any profits are shared according to a predetermined ratio, while losses are borne solely by the capital provider. There are two types of Mudarabah: restricted, where the capital provider specifies the business or place; and unrestricted, where the manager has broader discretion. Mudarabah can be terminated by either party giving notice. While opinions differ, most scholars allow trading of Mudarabah certificates if non-liquid assets represent over 50% of the project's value. Mudarabah and Musharakah can also be used to finance single transactions like imports.

1. MUDARABAH
Presented By :
Faisal Hayat
Sarmad Jalal
Imstudies,University Of Peshawar !

2. Mudarabah
Definition :
This is a kind of partnership where one partner gives
money to another for investing in a commercial enterprise.
 The investment comes from the first partner who is called
“Rabb-ul-Maal” (Investor) while the management and work
is an exclusive responsibility of the other, who is called
“Mudarib” (Working Partner) and the profits generated are
shared in a predetermined ratio.

3. Difference Between Musharakah And Mudarabah
• The investment in
Musharakah comes from all
the partners.
• All the partners can
participate in the
management of the
business.
• All the parties will suffer
monetory loss according to
the ratio and proportion of
their share in the business.
• The liability of partners is
normally unlimited. So
exceeding liabilities shall
be borne to all the partners.
• While in mudarabah investment
is sole responsibility of rab ul
mal.
• Only Mudarib can participate in
the management.
• Rabb ul mal has to suffer all
monetory losses while mudarib
will only suffer from a fruitless
effort.
• Liability of Rabb ul mal is
limited to his investment unless
he has permitted mudarib to
incur debts on his behalf.

4. Continued…
• Goods are owned by all the
partners according to the
proportion of their
investment.
• All the goods purchased by
mudarib are solely owned
by rabb ul mal.

5. Business of the Mudarabah
• There are two types of Mudarabah :
1. Al Mudarabah Al Muqayyadah
(Restricted Mudarabah)
2. Al Mudarabah Al Mutlaqah
(Unrestricted Mudarabah)

6. Al Mudarabah Al Muqayyadah
(Restricted Mudarabah).
• Rabb-ul-Maal may specify a particular
business or a particular place for the mudarib,
in which case he shall invest the money in that
particular business or place. This is called Al
Mudarabah Al Muqayyadah (restricted
Mudarabah).

7. Al Mudarabah Al Mutlaqah
(Unrestricted Mudarabah)
• Rabb-ul-maal gives full freedom to Mudarib to
undertake whatever business he deems fit, this is
called Al Mudarabah Al Mutlaqah (unrestricted
Mudarabah)
• However, he is not authorized to:
a) keep another Mudarib or a partner
b) mix his own investment in that particular
Mudarabah without the consent of Rabb-ul Maal.

8. Authority of Rabb ul Maal
• Rabb-ul-Maal has authority to:
a) Contract mudarabah with more than
one person through a single transaction
b) Work with Mudarib if the Mudarib
consents.

9. Distribution of the profit and loss
• It is necessary for the validity of Mudarabah that the
parties agree, right at the beginning, on a definite
proportion of the actual profit to which each one of
them is entitled.
• They can share the profit at any ratio they agree
upon.
• However in case the parties have entered into
Mudarabah without mentioning the exact proportions
of the profit, it will be presumed that they will share
the profit in equal ratios.
• Some incentives my be given to the Mudarib.

10. Distribution of profit and loss
• Apart from the agreed proportion of the profit,
the Mudarib cannot claim any periodical salary
or a fee or remuneration for the work done by
him for the Mudarabah.
• The Mudarib & Rabb-ul-Maal cannot allocate
a lump sum amount of profit for any party nor
can they determine the share of any party at a
specific rate tied up with the capital.

11. Continued…
EXAMPLE:
• If the capital is Rs.100,000/-, they cannot agree
on a condition that Rs.10,000 out of the profit
shall be the share of the Mudarib nor can they
say that 20% of the capital shall be given to
Rab-ul-Maal. However they can agree that
40% of the actual profit shall go to the
Mudarib and 60% to the Rab-ul-Maal or vice
versa.

12. • If the business has incurred loss in some
transactions and has gained profit in some
others, the profit shall be used to offset the loss
at the first instance, then the remainder, if any,
shall be distributed between the parties
according to the agreed ratio.

13. Termination of Mudarabah
Procedure:
• Mudarbah can be terminated any time by either of
the two parties by giving notice.
• The profit earned on the principle amount shall be
distributed between the parties according to the
agreed ratio.
• If assets are not in cash form , the mudarib shall
be given opportunity to liquidate them and
determine actual profit.
• If no profit is left, Mudarib will get nothing.

14. Difference of Opinion
• There is a difference of opinion of muslim jurists
about the termination of Mudarabah.
1. Hanafi and hanbali Schools : Mudarabah can be
restricted to a particular term like One year or
Six Months after which it will come to an end
without any notice.
2. Shafi and Maliki Schools : Mudarabah can not
be restricted to a particular period.
• Each party is at liberty to terminate the contract
whenever he wishes. But this may create some
difficulties.

15. Combination of Musharakah and
Mudarbah
• There may be situations where mudarib also
wants to invest some of his money into the
business of Mudarbah.
• In such cases, Mudarabah and Musharakah are
combined together.
• For Example, A gave to B 100000 in a contract of
Mudarabah. B added 50000 from his own pocket
with permission of A. Here Musharakah and
Mudarabah is combined
• And mudarib will get additional profit percentage
for the amount he has invested as a Sharik.

16. Musharakah & Mudarabah
As Modes Of Financing
• Musharakah and Mudarabah are contracts meant
for initiating a joint venture whereby all the
partners participate in the business right from its
inception and continue to be partners upto the end
of the business.
• The classical books of Islamic finance lack the
concept of running business because there were
no large scale enterprises at that time.
• However it does not mean that the concept of
Mushakarah and Mudarabah cannot be used for
financing a running business.

17. Basic principles of Musharakah &
Mudarabah
• Financing through musharakah and mudarabah
does never mean advancing of money. It means to
participate in the business.
• An investor must share the loss incurred by the
business to the extent of his financing.
• The partners are at liberty to determine, with
mutual consent, the ratio of profit allocated to
each one of them. Which may differ from the ratio
of investment.
• The loss suffered by each partner must be exactly
in proportion of his investment.

18. Project Financing
• In case of project financing, both musharakah and mudarabah
can come into operation.
• Here Musharakah and Mudarabah can be combined if
management is sole responsibility of one party while
investment comes from both.
• If financier wants to withdraw from the musharakah, while the
other party wants to continue, the latter can purchase the share
of the former at an agreed price.
• The latter also can sell out the first financier’s share to some
other person who can substitute the financier.
• The share of the financier can also be devided into smallers
units and each unit can be sold after a suitable interval,
reducing the share of financier.

19. Securitization of Musharakah
• Musharakah can be securitized easily, especially, in the case of
big projects.
• Why ?
 Because a huge amount is required. And
 A limited number of people cannot afford to
subscribe.
Equal Ownership: Every subscriber can be given a musharakah
certificate which represents his equal ownership in the assets of
the musharakah.
Negotiable Instruments: After the project is started by getting
considerable non-liquid assets, these musharakah certificates can
be treated as negotiable instruments and can be bought and sold
in the secondary market.

20. • However, trading in these certificates is not allowed when all
these certificates are in liquid form i.e. cash
• Subscribing to a musharakah is different from advancing a
loan.
• The musharakah certificate Represent ownership of the holder
in the assets of the project.
• If all the assets of the joint project are in liquid form, the
certificate will represent a certain proportion of money owned
by the project.
• For example :
one hundred certificates, having a value of Rs. one million
each, have been issued.

21. • It means that the total worth of the project is Rs. 100 million.
• If nothing has been purchased by this money, every certificate
will represent Rs. one million.
 Money is exchanged for money .
 Purchasing non-liquid assets
• In most cases, the assets of the project are a mixture of liquid
and non-liquid assets.
• The question arises about the rule of Shari'ah in a situation
where the assets of the project are a mixture of liquid and non-
liquid assets, whether the musharakah certificates of such a
project can be traded in?

22. • The opinions of the contemporary Muslim jurists are different
on this point.
• Shafi'i School :
o This type of certificate cannot be sold.
o Non-liquid part of the business is separated and is sold
independently.
• Hanafic School :
o It can be sold and purchased for an amount greater.
• Suppose ; the Musharakah project contains 40% non-liquid
assets i.e. machinery, fixtures etc. and 60% liquid assets, i.e.
cash……

23. • According to the Hanafi view :
oTrading will be allowed even if the non-liquid
assets are less than 50%
• However, most of the contemporary scholars, including
those of Shafi'i school :
oTrading will be allowed if the non-liquid assets
of the business are more than 50%.

24. Financing of a single transaction
• Musharakah and mudarabah can be used more easily for
financing a single transaction.
• Import and export:
 It can be used for financing import and export.
• Letter of credit:
 Open without any Margin (Mudarabah)
 Open with some margin (Musharakah or Both)
• After the imported goods are cleared from the port, their sale
profits may be shared by the importer and the financier
according to a pre- agreed ratio.

25. • Ownership of the imported goods : shall remain with the
financier to the extent of the ratio of his investment.
• Sole Owner: If the imported goods are not sold in the market
up to the expiry of the term, the importer may himself
purchase the share of the financier, making himself the sole
owner of the goods.
 Similarly, musharakah will be even easier in the case of export
financing.
• The price on which the goods will be exported is well-known
before hand, and the financier can easily calculate the expected
profit.
• He may finance him on the basis of musharakah or mudarabah
• Financier will be answerable to bear and loss

26. Financing of the working capital
Mutual Agreement: The capital of the running business may be
evaluated with mutual agreement.
Imam Malik’s View :That it is nor necessary that the capital of
musharakah is contributes in cash form. Non Liquid can also be a
part of capital .
• This view can be adopted here that the amount given by the
financier can be treated as his share of investment.
• Percentage of the profit should not exceed the percentage of
the investment of the financier .
• the profit may be distributed on the basis of this evaluation.
• Although, according to the traditional concept, the profit
cannot be determined unless all the assets of the business are
liquidated . Then they are distributed on which the party agrees

27. Example : Total value of A is 30 unit and B is 20 Units .Total
units 50.B contributed 40% and A contributed 60% . At the end of
The term Total worth increased to 100.if the share of B is
purchased by A , he should paid him 40 unit because he owns 40
percent .
Reflect the Agreed Ratio: Business shall be divided between the
parties in the ratio of 20% and 80% ( determined in the contract
for the purpose of distribution of profit )
• Increase in value of business 50 so according to 20% and 80 %
ratio 10 units will be earned by B. And will be added to its
original unit 20 So 20+10=30.
• While Loss Will be divided exactly in the ratio of their
agreement (40% and 60%) As value decreased by 10 . The
total number will be reduced to 10 so loss of 4 units will be
borne by B (40% of Loss ) So 20 will be reduced to 16

28. Sharing in the gross profit
Financing on the basis of musharakah according to the above
procedure may be difficult in a business because. The major
difficulties in these cases arise in the calculation of indirect
expenses, like depreciation of the machinery, salaries of the staff
etc.
 Solved Problem : Parties should agree on gross profit instead
of net profit. Means ;
• Indirect expenses : shall be tolerated by the industrialist
voluntarily
• Direct expenses (like those of raw material, direct labor,
electricity etc.) shall be tolerated by the musharakah.

29. • Example of a factory is given in the book in which they
sought finance from the bank on the basis of Musharakah.
After the termination of Musharakah after one year .the profit
will be distributed among the parties on agreed ratio and all the
direct expenses will be deducted from the income .the direct
expenses may include .
• 1. the amount spent in purchasing raw material.
• 2 the wages of the labor directly involved in processing the
raw material
• 3. the expenses for electricity consumed in the process
• 4. the bills for other services directly rendered for the
musharakah

30. • Building, Machinery and staff salary has no concerned with
Musharakah .Therefore, the whole cost of the building and the
machinery cannot be borne by this short-term musharakah.
• What can be done at the most is that the depreciation caused to
the building and the machinery during the term of the
musharakah is included in its expenses.
• But it will be very difficult to determine the cost of
depreciation Therefore, there are two practical ways to solve
this problem.
1. The parties may agree that the musharakah portfolio will pay
an agreed rent to the client for the use of the machinery and
the building owned by him. This rent will be paid to him from
the musharakah fund.
2. Instead of paying rent to the client, the ratio of his profit is
increased.it is justified in the view of Imam Ahmad.