Archive for Sukuk Mudharabah
“The Arabic word “mudharabah” means to travel the earth for trade or business. It is even a term mentioned in the Quran, the holy book of Islam revealed to the Prophet Muhammad (S) by the angel Gabriel. It is written: “Others (making dharb on earth) traveling through the land, seeking of Allah‘s bounty” [74:20]. The term refers to those who can almost be called nomadic businessmen, traveling around the world seeking God’s help and sustenance in business and trade.” (Huma Rashid)
This Islamic Finance structure is designed to allow entrepreneurs to carry out large-scale business projects, where one party provides the capital and the other party or the entrepreneur provides the know-how and management. The party, which provides the management, can also sub-invest the capital to another party to manage the investment. In terms of liability, the party providing the financing is liable to the extent of her capital, while the manager loses her time, work, and expected profit. Basically, only the party who provides the capital is liable for losses. The party providing the capital has no recourse to the manager except in the case of negligence and misconduct.
In this structure, it is possible to arrange profit distribution based on ratio or percentage. However, pre-arranging a fixed amount of profit is not possible unless subject to certain conditions. Waiver of certain profit based on performance is permissible. Mudharabah activities include construction and manufacturing, trading, services, investment, etc. This structure is generally used to encourage public participation in large investment projects.
“The worker should not use the money of Mudharabah for traveling or other expenses, unless she specified that to the owner of the capital and the latter agreed to it. The worker works in the Mudharabah to get a part of the profit only. Therefore, she is not supposed to get anything extra unless it is made clear at the start of the Mudharabah or the nature of the business that they do requires it.
The profit of the Mudharabah is not to be divided between the two before the end of the contract unless they both have agreed to that. This is because there may be a loss in the trade. If the profit is divided before the end of the contract and loss occurs later, there will be no funds to cover this loss. For this reason, the worker is not entitled to any of the profit until the completion of the contract.
The worker is a trustee in this contract, so she should fear Allah, subhanahu wa ta’ala, in what she is entrusted. Her claim of destruction or loss should be accepted. She should be believed in what she states about things purchased, whether they are for her own use or for the Mudharabah.” (http://al-inaam.com/library/business/mudharabah.htm)
If the Mudharabah contract is nullified, then the profit remits to the owner of the capital because it is an increase in her money and the worker gets paid for the work she completed.
According to Huma Rashid, “Mudharabah in Shar’iah, or Islamic law, refers to the payment of a specific amount of money to a person who uses it for business and makes a profit from it or an investment. This form of contract was present during the time of the Prophet (S) and he approved of it and it was also approved by his first four caliphs and others.
Ibn al Qayyim said, “The mudharib is a trustee, an employee, a deputy and a partner. She is a trustee when she takes the money; a deputy when she uses it, an employee in the work that she executes, and a partner in the profit. For Mudharabah to be (Islamically) valid, the share of the worker should be named.”
The Arab Muslims were prominent businessmen and responsible for much of the economic growth and triumph enjoyed by the Middle East and outreaching parts of the world for many, many centuries. In addition to that, the Qu’ran was not only a moral and religious guide, but a social, legal and business guide that instructed its followers on how to conduct themselves in business and other legal matters.”
Rulings on Partnerships in Mudharabah http://al-inaam.com/library/business/mudharabah.htm
Interesting Paper on Mudharabah http://www.iium.edu.my/enmjournal/92art3.pdf
Materials handed out at the Amanie Islamic Finance School Workshop in Dubai, UAE on December 14-15, 2008.