Understanding Islamic Finance - Doha Academy of Tertiary Studies

Participatory Modes: Shirkah and its Variants 327be used to offset the loss at the first instance, then the remainder, if any, shall be distributedbetween the parties according to the agreed ratio.12.4.5 Termination of a Mudarabah ContractThe general principle is that Mudarabah is not a binding contract and each of the parties canterminate it unilaterally except in two cases: (i) when the Mudarib has already commenced thebusiness, in which case the contract becomes binding up to the date of actual or constructiveliquidation; and (ii) when the parties agree on a certain duration of the contract, in whichcase it cannot be terminated before expiry of that period except with mutual agreement.For termination, the Mudarib will be given time to sell the illiquid assets so that an actualamount of profit may be determined. 75The unlimited power to terminate the Mudarabah may create difficulties in the contextof the present circumstances, because most commercial enterprises today need time to bearfruit. Modern businesses also demand continuous and complex efforts. Therefore, if theparties agree, while entering into the Mudarabah, that no party shall terminate it during aspecified period, except in specified circumstances, it does not seem to violate any principleof Sharī´ah, particularly in the light of the famous Hadith which says: “All the conditionsagreed upon by the Muslims are upheld, except a condition which allows what is prohibitedor prohibits what is lawful in Sharī´ah.”If all assets of the Mudarabah are in cash form at the time of termination, and someprofit has been earned on the principal amount, it shall be distributed between the partiesaccording to the agreed ratio. However, if the assets of the Mudarabah are not in cash form,the Mudarib shall be given an opportunity to sell and liquidate them, so that the actual profitmay be determined.A restricted Mudarabah will automatically wind up after the object is achieved. If theMudarabah is general, it will be in the interests of both parties to wind up at will wheneverboth of them mutually agree to do so. The difficulty may arise if one of the parties wantsto continue business. Reconciliation on this point should be sought through a court or anyarbitration.12.5 MUDARABAH DISTINGUISHED FROM MUSHARAKAHMudarabah is distinguished from Musharakah briefly on the following grounds:1. The investment in Musharakah comes from all the partners, while in Mudarabah, investmentcomes from a person or a group of persons, but not from the Mudarib. 762. In Musharakah, all partners have a right to participate in the management of the businessand can work for it, while in Mudarabah, the Rabbul-māl has no right to participate inmanagement. With mutual consent, however, he can work for the venture. Further, thefinancier has the right to ensure that the Mudarib is doing his fiduciary duties in the truesense.3. In Musharakah, all the partners share the loss according to the ratio of their investment,while in Mudarabah, the loss, if any, is suffered by the Rabbul-māl only. However, if75 AAOIFI, 2004–5a, Standard on Mudarabah, clause 10.76 Usmani, 2000a, pp. 47–49.