Understanding Islamic Finance - Doha Academy of Tertiary Studies

Participatory Modes: Shirkah and its Variants 32312.4.1 The Nature of Mudarabah CapitalAs described in the discussion on Shirkah, Mudarabah capital should preferably be in the formof legal tender money, because capital in the form of commodities may lead to uncertaintiesand disputes. The value of illiquid assets must be clearly determined in terms of legal tenderat the time of entering into the Mudarabah contract and there should be no ambiguity oruncertainty about its value. It is not permitted to use a debt owed by the Mudarib or anotherparty to the capital provider as capital in a Mudarabah contract. 61 This is because the capitalto be given for Mudarabah business should be free from all liabilities. The conversion ofdebt into a Mudarabah is prohibited to safeguard against the abuse of usurious loan beingcamouflaged as a Mudarabah, where, in essence, the financier would possibly ensure forhimself not only the recovery of his debt but also an illegal return on his loan under thecover of his share in Mudarabah profits. 62 A financier cannot give the Mudarib two differentamounts of capital with the stipulation that profit earned from one should go to him and fromthe other to the Mudarib. Similarly, he cannot specify different periods to state that profitearned in a specific period will be his and that of another period, the Mudarib’s. It is alsonot allowed to stipulate that profit from a particular transaction should go to the financierand the profit from another transaction will belong to the Mudarib. 63Mixing of Capital by the MudaribA Mudarib is normally responsible for the management only and all the investment comesfrom the financier. But there may be situations where the Mudarib also wants to invest someof his money into the business of Mudarabah. In such cases, Musharakah and Mudarabahare combined. Jurists allow the Mudarib to add his own capital to the capital of Mudarabahwith the permission of the Rabbul-māl. If a Mudarib subscribes his portion of profit or aportion of capital in the Mudarabah business, he will become a partner to the extent of hissubscription, in addition to his remaining a worker. His rights and liabilities will be governedby Musharakah rules so long as his capital remains part of the business to the extent of hisshare of subscription. For example, A gives $100 000 to a Mudarib B, who also invests hisown funds amounting to $50 000. This is the situation where Mudarabah and Musharakahhave been combined. In this combined business, B (the Mudarib) can stipulate for himself acertain percentage of profit against his own investment and another percentage for his workas a Mudarib. In the above example, he has invested one-third of the capital. Therefore,according to normal business practice, he will get one-third of the actual profit on accountof his investment, while the remaining two-thirds will be distributed between them equally.However, they may agree on another ratio for distribution.Islamic banks normally mobilize deposits on Mudarabah principles and invest them inthe business. If a bank also provides funds, it is entitled to get a profit on its own capital inproportion to the total capital of the Mudarabah. In addition to such a share in the profit, thebank shall also be entitled to share the remaining profit as Mudarib in an agreed proportion.For example, depositors provide $2000 for Mudarabah and the bank contributes $1000 tothe business, and it was agreed to share the profit in the ratio 50:50. Let us assume that theprofit earned by the bank as Mudarib is $300. The bank will get $100 as profit on its own61 AAOIFI, 2004–5a, Standard on Mudarabah, clause 7/3; also see p. 242.62 AAOIFI, 2004–5a, Standard on Mudarabah, p. 242.63 AAOIFI, 2004–5a, clause 8/6.