Mudaraba: An Islamic finance and Banking Tool

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Mudaraba is a finance tool in Islamic bank account. The word refers to a kind of a commercial agreement in which one party carries money and the other individual. Mutual arrangement determines the proportionate share of gains.

However, the loss, if any, is only incurred by the owner, in which case the entrepreneur receives nothing to do with his work. The financial company is called "rabal-maal" and the business company is considered to be "mudarib."

Types of Mudaraba

Al Mudaraba Al-Muqayadah

Rab'ul-Maal is entitled to designate a particular company or place of business for the Mudaarib, in which case the money shall be invested in a certain business or location. Al-Muqayadah, Mudaraba restrained, is named.

Al Mudaraba Al Mutlaqah

But if Rab'ul-Maal gives Mudaarib complete liberty to do anything it considers appropriate, it is called Al Mudaraba Al Mutlaqah (unrestricted Mudaraba). But without Rabul-permission, Maal's Mudaarib cannot provide anybody with income. Mudaarib is permitted to do something that is usually done in company. However, he cannot do this without Rab'ul-clear Maal's approval if he wishes to do an exceptional job outside the trader's daily routine. It is not permitted to:

Hold a companion or another Mudaarib

Without Rab-ul Maal's agreement, combine his own investment in that particular Modarabah.

The Offer & Acceptance Conditions shall apply to both. A Rab'ul-Maal will make a single transaction between Mudaraba and more than one human. Their use, along with their share of the mudaarib, means that they should give their money 'A' or 'B' so that each one can serve as a mudaarib and the capital of the mudaraba.

Are Musharaka and Mudaraba Same?

In Musharaka, however, only Rab'ul-Maal invests in Mudaraba Finance.

Both partners in Musharaka are involved in and will work for management of the company. Rab'ul-Maal, however, has no right to take part in Mudaraba's administration of the Mudaarib.

Both partners in Musharakha share the loss in the sum of their contribution ratio. However, Rab'ul-Maal alone experiences loss in Mudaraba because Mudaarib invests none. This is also conditional on the due diligence of the Mudaarib.

The responsibility of the partners in Musharaka is generally unrestricted. If the company liability extends beyond its reserves and the business is liquidated, all outstanding obligations shall be met by each partner on a pro rata basis. However, if partners consent that during business no partner shall incur any debt, the partner, who in breach of the above-described clause, shall bear the exceeding liabilities alone. In Mudaraba, however, Rab'ul-responsibility Maal's is limited to its investment, even if it allows the Mudaarib to accept debts on its behalf.

Profit and Loss

The parties must at the outset settle on a certain share of the real benefit to which each one is entitled for the validity of Mudaraba. The Shariah did not recommend any specific proportion; it was therefore left to its mutual consent.

They can divide benefit equally and can even assign Rab'ul-Maal and Mudaarib separate proportions. In extremes, though, the benefit rate is to be calculated at 50:50 where the parties have not predetermined the profit ratio.

The Mudaarib and Rab'ul-Maal cannot provide any party with a lump sum of gains, nor can they assess any party's share at the defined rate linked to the equity.

When the money is 10.000 pounds Sterlings, for example, they do not agree to one requirement that the Mudaarib share of 1.000 Pound Sterlings is out of benefit, nor can they claim that Rab'ul-Maal is to be granted 20 percent of that capital.

However, they will accept that the Mudaarib would be the 40% of the real benefit and the Rab'ul Maal the 60% or vice versa.