Can the Mudarabah profit be restricted to one party?

In-Depth Analysis

Hello readers. The author is back after a short break. We were almost done with the discussion on the subject of risk management in Mudarabah but an interesting question has been raised by a reader. The reader wants to know if it will be allowable in a Mudarabah transaction if the investor and entrepreneur agree that both will enter into a Mudarabah agreement with an understanding that the Mudarabah shall be for a period of three years divided into six half-yearly sub-periods with the objective to purchase and sell the Shariah-compliant listed shares. Instead of distributing the profit emanating from trading in stocks between the two parties for each sub-period, the parties would like to adopt the mechanism whereby in one sub-period, the entire profit shall be paid to the Rab Al Maal and in the next sub-period it will be the turn of the Mudarib to snap up the total profit. The reader said that since there is equality for the entitlement of the Mudarabah profit between both parties as the Rab Al Maal shall take away the total profit earned by the Mudarabah in three sub-periods and the Mudarib shall also recover the full profit for the same number of sub-periods, there should be no Shariah issue in this type of Mudarabah. Based on our learning of the Mudarabah contract so far, let us try to analyze the situation. The first box we tick is that a Mudarabah contract must have two sane and adult parties — ticked. The second box ticked is for the Mudarabah capital — ticked. The third one is for the period, which is also fine since the Mudarabah capital shall be applied to trade in Shariah-compliant listed stocks. The fourth check is for the objective or activity of the Mudarabah, which is also fine. What remains to be checked? It is the condition for the distribution of the Mudarabah profit and the absorption of loss. We know that the genuine loss of the Mudarabah shall, by default, be borne by the Rab Al Maal. In the 19 articles on Mudarabah starting from the 22nd January 2020, the mention of the profit distribution principle was quoted six times in clear terms: the parties will agree at the time of entering into the Mudarabah agreement as to what shall be the ratio of the distribution of profit earned between them. This is to be noted that the stipulation is for the ratio of any amount of the actual profit earned by the Mudarabah in a given period, and not the amount. In addition, in AAOIFI Shariah Standard No 13 on Mudarabah, Clause 8/3 requires that the parties shall agree on the ratio of profit distribution when the Mudarabah contract is concluded. In Shariah, there is a principle that you cannot prevent a party from the right of sharing the profit. The Mudarabah where only one party is taking away the entire profit, even if it is for one period, is thus prohibited. Moreover, such practice borders on speculation or gambling since no party can make out whether during its turn to share the profit, the Mudarabah shall actually result in a profit or loss. Also, if in one sub-period the profit earned by the Mudarabah is greater than expected, the party that is deprived could develop jealousy which may lead him to commit a harmful act on the other party.