Understanding Islamic Finance - Doha Academy of Tertiary Studies

322 Understanding Islamic Financeearned by the two brothers, because the public money in their hands was not the loan. CaliphUmar also used to invest orphans’ property on the basis of Mudarabah.This practice was rather needed, since weaker members of society could not undertakelong journeys for trading the way that most important professions of Arabs could at thattime. Al-Sarakhsi, in this regard, says:“Because people have a need for this contract. For the owner of capital may not find his way toprofitable trading activity and the person who can find his way to such activity may not have thecapital. And profit cannot be attained except by means of both of these, that is, capital and tradingactivity. By permitting this contract, the goal of both parties is attained”.By allowing Mudarabah, Islam has intended to fulfil an important economic function byway of encouraging the hiring of capital and that of trade skills on judicious terms of risksharing,leading to the benefit of society and the concerned parties. The Mudarib has to workin various capacities like trustee, agent, partner, indemnifier/liable and even wage-earner ifthe contract becomes void. Being an agent to the Rabbul-māl, he undertakes the businessand shares the profit. 56There could also be multilateral and sub-Mudarabahs. A multilateral Mudarabah may takevarious forms. A number of financiers may make a contract of Mudarabah with a singleperson, or a financier may contract Mudarabah with more than one worker, severally orjointly. Similarly, a number of workers may associate in order to work for one or more thanone subscriber. As regards a sub-Mudarabah, there seems to be a unanimity of opinion thata Mudarib may give the Mudarabah capital to a third party on Mudarabah terms only if thefinancier has allowed it either in clear terms or has left the business of the Mudarabah tothe discretion of the Mudarib. The absence of the owner’s permission will make the formercontract voidable. 57Mudarabah, like other contracts, calls for lawful items of trade, failing which the contractwill become void or voidable, as the case may be. Thus, a worker is not allowed to tradein wine or swine with the Mudarabah capital. The classical jurists generally restricted theuse of Mudarabah to the act of trade (buying/selling) 58 , but an overwhelming majority ofcontemporary jurists and scholars allow the use of Mudarabah with a wider scope for useby Islamic banks as an alternative to interest-based financing.Mudarabah is a contract of fidelity and the Mudarib is considered trustworthy with respectto the capital entrusted to him. He is not liable for the loss incurred in the normal courseof business activities. As a corollary, he is liable for the property in his care as a result ofthe breach of trust, misconduct and negligence. 59 A guarantee to return funds can be takenfrom him but can be enforced only in two situations: if he is negligent in the use of fundsor if he breaches the stipulated conditions of Mudarabah. 60 Hence, his actions should be inconsonance with the overall purpose of the contract and within the recognized and customarycommercial practice. In some situations, he becomes an employee when he performs someduty after the Mudarabah contract becomes invalid.56 For legality and rationale see AAOIFI, 2004–5a, pp. 240–241.57 Al Jaziri, 1973, 2, pp. 858–862.58 This is particularly the view of Shafi‘e jurists (Al Jaziri, 1973, 2, 847–848; see also the relevant chapter in Badai lil Kāsāni).Among the contemporary jurists, Hasanuz Zaman is in favour of a limited role for Mudarabah (Hasanuz Zaman, 1990).59 AAOIFI, 2004–5a, Standard on Mudarabah, clause 4/4, p. 232.60 AAOIFI, 2004–5a, Standard on Mudarabah, clauses 4/4, 6.