Understanding Islamic Finance - Doha Academy of Tertiary Studies

326 Understanding Islamic Financeallocation, one partner can donate a part of his profit to the other partner(s). A financier canalso award a good management bonus to a Mudarib. If losses are greater than profits at thetime of liquidation, the balance (net loss) has to be deducted from the capital.Profits are shared when they accrue, but this accrual does not mean a transaction-wisecalculation of the profits; it means the overall adjustment of profits and losses over a particularperiod of time, which will be treated as the closing of the accounts but not necessarily thewinding up of the business. However, the partners can provisionally draw the profit that willbe subject to adjustment at the time of finalization of the accounts.The Mudarib is entitled to a share of profit as soon as it is clear that the operations of theMudarabah have led to the realization of a profit. However, this entitlement is not absolute,as it is subject to the retention of interim profits for the protection of the capital. It willbe an absolute right only after distribution takes place. For valuation, receivables shouldbe measured at the cash equivalent, or net realizable, value, i.e. after the deduction of aprovision for doubtful debts. In measuring receivables, neither time value nor discount oncurrent value for an extension of the period of payment shall be taken into consideration. 71Parties can change the ratio for profit distribution at any time, but that ratio will remaineffective for the period for which it has been mutually fixed. If the parties did not stipulatethe ratio, they should refer to the customary practice, if any, to determine the shares of profit.If there is no customary practice, the contract will be regarded void ab intio and the Mudaribwill get the common market wage for the kind and amount of service he has rendered. 72Although one party in Mudarabah cannot stipulate for himself a lump sum amount ofmoney, the parties can agree with mutual consent that if the profit is over a particular ceiling,one of the parties can take the greater share of the profit and if the profit is below or equalto the stipulated ceiling, the distribution will be according to the agreed ratio. The profitsrealized from Mudarabah cannot be finally distributed until all expenses have been paid,in accordance with custom and the original agreement. Final accounting will be undertakenagainst the net profits of the Mudarabah operations. The part of profit of the Mudaribbecomes secure after the liquidation of the Mudarabah and the capital owner recovers itscapital and part of profit.The Mudarib cannot claim any periodical salary or a fee or remuneration for the workdone by him for the Mudarabah business over and above his share as agreed in the contract.However, Imam Ahmad has allowed the Mudarib to draw his daily expenses of food onlyfrom the Mudarabah account. Hanafi jurists have also restricted the right of the Mudarib toclaim expenses incurred during business journies. The financier and the manager can enterinto a separate agreement, independent of the Mudarabah agreement, for assigning any jobthat is not by custom a part of the Mudarabah business against a fee. This means that theMudarabah contract will not be affected if the Mudarib is terminated from the service. 73As a principle, in Mudarabah it is only the financier who bears the loss. However, if aMudarib has also contributed capital, which he can do with mutual consent, he will bear thepro rata loss. If profit has been distributed upon constructive or actual liquidation of business,it cannot be withdrawn in order to make up for a later loss or for any other purpose. 74 If losshas occurred in some transactions and profit has been realized in some others, the profit can71 AAOIFI, 2004–5a, Standard on Mudarabah, clause 8/8.72 AAOIFI, 2004–5a Standard on Mudarabah, clause 8/4.73 AAOIFI, 2004–5a, Standard on Mudarabah, clause 8/2.74 Al Jaziri, 1973, 2, pp. 862–865.