Mudarabah is a special kind of partnership where one partner providers the capital (rabb-ul-maal) to the other (mudarib) for investment in a commercial enterprise.
According to Mufti Taqi Usmani, a mudarabah arrangement differs from the musharakah in five major ways:
- The investment in musharakah comes from all the partners, while in mudarabah, investment is the sole responsibility of rabb-ul-maal.
- In musharakah, all the partners can participate in the management of the business and can work for it, while in mudarabah, the rabb-ul-maal has no right to participate in the management which is carried out by the mudarib only.
- In musharakah all the partners share the loss to the extent of the ratio of their investment while in mudarabah the loss, if any, is suffered by the rabb-ul-mal only, because the mudarib does not invest anything. His loss is restricted to the fact that his labor has gone in vain and his work has not brought any fruit to him. However, this principle is subject to a condition that the mudarib has worked with due diligence which is normally required for the business of that type. If he has worked with negligence or has committed dishonesty, he shall be liable for the loss caused by his negligence or misconduct.
- The liability of the partners in musharakah is normally unlimited. Therefore, if the liabilities of the business exceed its assets and the business goes in liquidation, all the exceeding liabilities shall be borne pro rata by all the partners. However, if all the partners have agreed that no partner shall incur any debt during the course of business, then the exceeding liabilities shall be borne by that partner alone who has incurred a debt on the business in violation of the aforesaid condition. Contrary to this is the case of mudarabah. Here the liability of rabb-ul-maal is limited to his investment, unless he has permitted the mudarib to incur debts on his behalf.
- In musharakah, as soon as the partners mix up their capital in a joint pool, all the assets of the musharakah become jointly owned by all of them according to the proportion of their respective investment. Therefore, each one of them can benefit from the appreciation in the value of the assets, even if profit has not accrued through sales. The case of mudarabah is different. Here all the goods purchased by the mudarib are solely owned by the rabb-ul-maal, and the mudarib can earn his share in the profit only in case he sells the goods profitably. Therefore, he is not entitled to claim his share in the assets themselves, even if their value has increased.
Types of Mudarabah
- The rabb-ul-maal may specify a business in which to invest, in which case the mudarib is restricted only to such business as pointed out by rabb-ul-maal. This is called restricted mudarabah or al-mudarabah al-muqayyadah.
- If rabb-ul-maal has not specified a business in which to invest, it is considered an unrestricted mudarabah or al-mudarabah al-mutalaqah.
Distribution of Profit
The distribution of profit must be pre-determined by the two parties. Furthermore, the amount of profit ascribed to either of the parties must be independent of the capital amount, dependent solely on the actual profit realized by the commercial enterprise. That is, the profit assigned to a party cannot be a percentage of capital amount contributed as that would be considered a fixed return, or interest. The profit assigned to either of the parties cannot be a lumpsum amount either as this would also constitute interest.
As such, the only determination of profit distribution that is permissible is based on the actual profit earned by the enterprise.
The Shari'ah does not restrict or specify proportions to be distributed between the parties, leaving it to the best judgement of the two independent parties.
Termination of Mudarabah
The mudarabah contract can be terminated by either of the two parties at any time as long as a notice, per the contract terms, is given to the other party.
Furthermore, Hanafi and Hanbali jurists are of the opinion that a maximum term of the mudarabah contract can be set, whereafter the contract is terminated automatically. The Shafe'i and Maleki jurists are of the opinion that no term restriction can be added to the mudarabah contract. All jurists agree that one may not specify a minimum term of the mudarabah contract.