Guide to situations for the termination of a Mudarabah agreement

In-Depth Analysis

So far we have learned that the Mudarabah is a fixed-term investment contract whereby the Rab Al Maal (capital provider) hands over 100% of the capital to the Mudarib (the entrepreneur or the expert) to enable it to carry out the agreed investment activity by using its expertise for a certain fixed period of time upon the completion of which the Mudarib is required to return the original capital along with the share of the Rab Al Maal's profit to it. Well, this is a normal situation and every day thousands of Mudarabah transactions must be getting completed successfully between the parties. One glaring example is the Mudarabah-based time deposit accounts with Islamic banks all around the world which are paid out on maturity and the agreed share of the actual profit is distributed to them upon the completion of the Islamic bank's profit cycle. How is a Mudarabah transaction treated in an abnormal situation? This article covers the adverse circumstances. If the Rab Al Maal in a Mudarabah transaction has become aware that its Mudarabah investment is suffering a loss, it can unilaterally terminate the Mudarabah contract regardless of the fact that the Mudarabah maturity date has arrived or not. This is on the Shariah ground that when part of the capital has been lost, the Mudarib is not in a position to continue to put it to work effectively and achieve the result projected by it in the business plan due to the absence of complete funds that were originally assigned to it. If the Rab Al Maal does not act decisively, it will suffer the loss of the entire Mudarabah capital and the Mudarib shall not be liable to bear any part of the loss since it did not contribute to the Mudarabah capital. However, this Shariah position is subject to the condition that the Mudarib has not been negligent in managing the Mudarabah investment and that it was beyond the Mudarib's control to avoid the loss situation. If a certain circumstance arises where the entire Mudarabah capital is lost due to a genuine reason (such as a global business meltdown in the current coronavirus situation), and that the loss is beyond the Mudarabah capital, the Shariah principle is that the Rab Al Maal shall not be responsible for the loss beyond the original capital invested by it since the Mudarabah is a limited liability entity. Another adverse situation where the Mudarabah gets terminated is upon the death of the Mudarib (if it is an individual) or the liquidation of the Mudarib (if it is an entity). This is because the Mudarabah contract is similar to a contract of agency. If the Mudarabah suffered a loss owing to the Mudarib's negligence, the Shariah principles require it to return the entire amount of the capital to the Rab Al Maal. Some Shariah scholars go to the extent of seeking the Mudarib to also pay the Rab Al Maal's share of profit projected by the Mudarib in the business plan based on which the Rab Al Maal had made a decision to spare the requested Mudarabah capital. The Mudarabah capital and the projected profit gets transformed into a debt on the Mudarib. What precautionary measure can be taken by a Rab Al Maal? Shariah principles allow a Rab Al Maal to seek a guarantee or collateral from the Mudarib equal to the Mudarabah capital in order to ensure the Mudarib's proper performance. However, such security can only be enforced in the case of misconduct or negligence by the Mudarib.