Guide to the parameters of a Mudarabah contract

In-Depth Analysis

There are three essential strictures based on which a Mudarabah contract is made: the objective or purpose of the Mudarabah must not be repugnant to Shariah permissibility, the invitation or the offer to enter the Mudarabah from either party must be unambiguous, and the acceptance by the counterparty should be to the same offer made to it. The author now delves deeper into the parameters that differentiate investment-based contracts from sale-based contracts. A time-bound contract: A Mudarabah contract cannot be for an indefinite period. In essence, a Mudarabah contract is the trusteeship arrangement since the Mudarib uses someone else's capital and shares the ensuing profit with the permission from the capital provider which must be subject to a designated duration. However, once the Mudarabah contract is terminated upon completion of its period and pursuant to settlement whereby the Rab Al Maal receives the capital back and the Mudarib gets his share of the profit, both may agree to enter into a totally new Mudarabah contract for a different period, purpose, and terms. Making a Mudarabah contract limited by time actually protects the interest of both parties: for the capital provider, his investment does not become 'hardcore' since it is returned to him; for the Mudarib, the rule also introduces discipline and ethics on how to protect other people's money. A binding contract: The Mudarabah contract is binding on both parties once the capital has been delivered by the Rab Al Maal to the Mudarib in order to commence the work on the Mudarabah business plan. Termination by the Rab Al Maal pursuant to deployment of capital by the Mudarib shall defeat the objective of the Mudarabah and cause damage to the Mudarib's interest since it might not be able to receive any compensation for the work carried out by it until that time. Certainty of Mudarabah capital: The precise amount of the Mudarabah capital in cash must be clearly known, appropriately documented in the Mudarabah contract, and handed over to the Mudarib upon signing the Mudarabah contract. If the Mudarabah capital is in the shape of land, inventory, gold, silver, or precious metals, it should be well-defined in terms of quality, quantity, and current value acceptable to both parties or professionally valued by a third party, in a manner that eliminates any possibility of uncertainty or ambiguity. This is important since the determination of profit subsequently is dependent upon the amount of the original capital remaining intact by the date of the Mudarabah liquidation. Sharing of actual profit: Both parties must agree to share the resultant Mudarabah profit, and not a predetermined amount or a fixed rate which has no connection to the actual Mudarabah profit or loss. A businessperson will never categorize an amount as profit unless he is sure that the capital he had invested is secured. Distribution of an amount as profit prior to the recovery of the capital in full is impermissible in Shariah. Non-interference by the Rab Al Maal: This is the extremely important condition that the Rab Al Maal must not interfere in the day-to-day running of a Mudarabah entity which is solely carried out by the Mudarib. The basis for allowing the Mudarib freedom is that the Mudarib has the responsibility of achieving the objective of a Mudarabah investment, which is to make profit for both parties.