Instruments of Islamic Banking & Finance: (1) Mudaraba

Mudaraba is a mode of financing for profit sharing and trust financing where 100% capital is from one party and 100% management of the project is done by another party. 

Mudaraba (مضاربہ) is a contract between two parties where one party, who is the owner of capital entrusts the other party who is an entrepreneur (Mudarib). Mudarib performs the whole management of the capital and the investor can’t interfere in the business but can monitor the overall progress. This mode contract was between the prophet (s) and Khadeeja (r) as the prophet (s) was doing the business with a capital of Khadeeja (r).

Features of Mudaraba

• Mudarib is with the dual role of manager and partner.
• The profit is shared as per the pre-agreed ratio.
• In the case of loss, the capital provider will bear the loss of capital and Mudarib loses the effort, time.
• Capital Provider is not accountable for the amount out of the capital.

The practice of Mudaraba is going on in Islamic banks in a way where those people willing to start the business should submit the project along with sufficient proofs and evidence of expertise and the bank will provide Mudaraba fund upon the clarity of confidence. Here the bank will be ‘Capital provider’ and the applicant will be ‘Mudarib’.

Unlike a  conventional business loan which his solely based on repayment of interest and capital; the Mudaraba is based on profit and loss sharing where the bank is also a business partner.

Elements of Mudarabah:

1. Capital provider = investor = Rabbul Maal
2. Entrepreneur = Mudharib
3. Ijab – Qabool = offer and acceptance
4. Project / business venture = Amal
5. Capital = Ra’sul Maal
6. Profit/loss = Nisbah