Understanding Islamic Finance - Doha Academy of Tertiary Studies

Participatory Modes: Shirkah and its Variants 32512.4.3 Work for the Mudarabah BusinessAccording to the majority of the traditional jurists, a financier in Mudarabah is not allowedto work for the joint business. He is not permitted to stipulate that he has a right to work witha Mudarib and to be involved in selling and buying activities, or supplying and ordering.However, he has the right to oversee and ensure that the Mudarib is doing his fiduciaryduties honestly and efficiently.It is only according to Hanbali jurists and, to some extent, Hanafi jurists that the owner isallowed to work for the business with the Mudarib. The reason for disapproval by the majorityis that it jeopardizes the freedom of the worker to act according to his discretion. 68 Thisclassical position is understandable if the basic idea that a person enters into a Mudarabahcontract because he lacks business skill is presumed to exist. But if the financier also has skilland has contracted Mudarabah simply because he cannot do the entire work single-handedly,the rationale behind prohibiting him to work is not understandable. Moreover, it now seemsmore reasonable to allow the owner to ensure honesty and efficiency of the worker by takinga personal interest in the affairs of the business. Even some Hanafi jurists have allowed thefinancier’s sale of Mudarabah goods if it is profitable. 69In present circumstances, it can be left to the parties, who may agree on any role by theinvestor keeping in mind its impact on profitability of the joint business. After transfer ofthe capital by the financier, the Mudarib needs to be given independence for the normalconduct of business. However, the financier can impose restrictions on the Mudarib in termsof place, object and method of trade. He may also want to have quick and direct accessto his capital and may, for instance, stipulate that the Mudarib may trade within a certainmarketing zone.12.4.4 Treatment of Profit/LossBoth parties in Mudarabah are at liberty to agree on the proportion or ratio of profit-sharingbetween them with mutual consent. This ratio has to be decided at the time the contract isconcluded. They can agree on equal sharing or allocate different proportions. A lump sumamount as a profit/return on investment for any of the parties cannot be allowed or agreedupon. In other words, they can agree on, for example, 50, 40 or 60 % of the profit goingto the Rabbul-māl and the remaining 50, 60 or 40 %, respectively, going to the Mudarib.Different proportions can be agreed upon for different situations. For example, the financiercan say to the Mudarib: “If you deal in wheat, you will get 50 %, but if you deal in cloth,you will be given 40 % of the profit. Or if you do business in your town, you will get 40 %and if in another town, your share in the profit will be 50 %.” Loss, if any, has to be borne bythe financier. Loss means erosion of capital; no profit can be recognized or claimed unlessthe capital of Mudarabah is maintained intact. 70The distribution of profit depends on the final result of the operations at the time ofphysical or constructive liquidation of the Mudarabah. Reserves can be created with mutualconsent and if a Mudarabah incurs a loss, the loss can be compensated by the profit of thefuture operation of the joint business or the reserves created in the past. At the time of profit68 The same is the view taken by the AAOIFI, as per its Standard on Mudarabah (clause 9/3; also see p. 244).69 See Hasanuz Zaman, 1990, pp. 69–88.70 See, for its basis, AAOIFI, 2004–5a, p. 243.