Transcript Slide 1
Some issues in the modern application of alMudharabah By Assoc. Prof Dr. Azman Mohd Noor MUDHARABAH Mudharabah is a contract where the owner of capital entrusts his funds to an entrepreneur who contributes skills is business and the profits generated is to be shared between them. The Prophet, Muhammad (p.b.u.h.) prior to his prophethood had acted as an agent in a mudharabah (or qirad or muqaradah) contract with an investment provided by his wife-to-be, Khadijah bint Khuwaylid who herself was a merchant woman of dignity and wealth. He traveled to Sham to trade and brought back profits that arose from the sale of the goods bought using the said investment. This form of commercial association was popularly practiced in preIslamic trade between the Quraysh and other tribes and continued to be practiced throughout the early centuries of the Islamic era as a mainstay of the caravan and long-distance trade. ESSENTIAL ELEMENTS OF MUDHARABAH There are six essential elements of Mudharabah Owner(s) of capital (rabb al mal) Entrepreneur (amil or mudharib ) Capital Business Profit sharing Contract Mudharabah – (1) Owner of Capital & (2) Entrepreneur Owner(s) of Capital and Entrepreneur must meet the following four necessary conditions: •capable of taking responsibility, i.e. - of sound mind - reached the age of puberty - reached majority (18 years old) •not prohibited from dealing with their properties: - not declared bankrupts or - not declared prodigals •no coercion is exerted on them •capable of appointing agents and be appointed as agents. Mudharabah – (3) Capital (3) Capital There are five conditions: (i) money (ii) not debt (iii) specific amount (iv) from owner(s) of capital only (v) paid to entrepreneur Mudharabah – (4) Business and (5) Profit Sharing 4. Business There are two necessary conditions. (i) halal (ii) managed by entrepreneur only 5. Profit Sharing The two necessary conditions are: (i) profit shared according to agreement in fraction, ratio or percentage, not in absolute amount. (ii) loss borne by owner(s) of capital only Mudharabah – (6) Contract (6) Contract There are three necessary conditions, i.e.: (i) in definite and decisive language. In the present or past tense, not future tense nor imperative (ii) acceptance must agree with offer and (iii) offer and acceptance made at the one and the same meeting ISSUES Profit Sharing Ratio vs Rate of Return Indicative Rate vs fixed rate of return ALCO? Mudharabah Expenses What constitutes direct expenses Early Withdarawal of the Deposits Mutual Tanazul (mubara’ah/musalahah) among the investors vs organized tanazul between the mudharib and the investors. When the mudarib’s money/capital mixed up with rabb al- mal. ISSUES Mudharib’s guarantee of capital and profit. Mudharib’s voluntary guarantee of some of the capital (not specified). Can contemporary mudharib guarantees because he is rich. When the mudarib appoints other mudharib. Protecting Deposits through third party’s guarantee. Protecting Deposits through third party’s guarantee with fee. Offering gifts for the depositors. CHARGING FEE FOR THE EXPENSES OF MUDHARABAH Most of the jurists do not allow the Mudharib to charge a fee for services. He or she is entitled to get a portion of the generated profit according to the agreed upon profit sharing ratios. Imam al-Shafie has not allowed for the Mudharib to spend his daily expenses from the mudharabah capital except with the mutual consent of the capital provider (rab al-mal). This is because since the mudharib was entitled with a particular proportion from the profits, he has no right to use the expenses from the mudarabah account. If he does so then it’s considered as taking additional profits in mudarabah businesses. However, the Hanafi jurists and Imam Malik restrict this right of the Mudharib to spend from mudharabah expenses only to a situation where he is on a business trip outside his own city or spending in course of the business. EXPENSES It is stated in the AAOFI standards that a combination between profit sharing and charging a fee for the Mudharib is against the principle of mudharabah. However it is allowable to charge fees for other services which are not part of mudharaba and are executed in an independent contract. In this case the mudharabah contract continues even though that particular service contract ceases. This is exactly what happens in takaful as the operator is already charging the management fee upfront, he is no longer entitled to charge a fee on the mudharabah fund for conducting business as he will get his reward from the profit. AAOFI standard no 8/2 ROR as Commonly practiced by Islamic Banking Industry Stage 1 Stage 2 Sources Investors’ share Financing Asset Common Pool of Profit Common Pool of investment Slide No 6 Profit Distribution Applications Investor’s investment SHF Stage 3 Investment Assets (managed by Treasury) Bank’s share