Types of Mudarabah

This is a kind of partnership where one partner gives money to another for investing in a commercial enterprise. The investment comes from the first partner who is called “Rab-ulMaal” while the management and work is an exclusive responsibility of the other, who is called “Mudarib” and the profits generated are shared in a predetermined ratio.

There are 2 types of Mudarabah namely:

  1. Al Mudarabah Al Muqayyadah: Rab-ul-Maal may specify a particular business or a particular place for the mudarib, in which case he shall invest the money in that particular business or place. This is called Al Mudarabah Al Muqayyadah (restricted Mudarabah).
  1. Al Mudarabah Al Mutlaqah: However if Rab-ul-maal gives full freedom to Mudarib to undertake whatever business he deems fit, this is called Al Mudarabah Al Mutlaqah (unrestricted Mudarabah). However Mudarib cannot, without the consent of Rab-ul-Maal, lend money to anyone. Mudarib is authorized to do anything, which is normally done in the course of business. However if they want to have an extraordinary work, which is beyond the normal routine of the traders, he cannot do so without express permission from Rab-ul-Maal. He is also not authorized to:
  2. a) keep another Mudarib or a partner
  3. b) mix his own investment in that particular Modarabah without the consent of Rab-ul Maal.

Conditions of Offer & Acceptance are applicable to both. A Rab-ul-Maal can contract Mudarabah with more than one person through a single transaction. It means that he can offer his money to ‘A’ and ‘B’ both so that each one of them can act for him as Mudarib and the capital of the Mudarabah shall be utilized by both of them jointly, and the share of the Mudarib.


In Mudarabah, Rab-ul-maal provides the investment and Mudarib the management therefore the Rab-ul-maal should hand over the agreed investment to Mudarib and leaves everything to Mudarib with no interference from his side but he has the authority to:

  1. a) Oversee the Mudarib’s activities and
  2. b) Work with Mudarib if the Mudarib consents.

In what form should the capital be? Should it be liquid or non-liquid assets like equipment, land etc. can these form a capital?

The basic principle is that the capital in Mudarabah is valid just the way as it is in Shirkah which according to Hanafi fiqh should be in liquid form but according to other scholars equipment, land etc can also be included as capital. However all agree on the following:

Assets other than cash can be used as an intermediate step.

However this is subject to the determination of exact amount of the assets before it is used for Mudarabah. If the assets are not correctly evaluated, the Mudarabah is not valid.

Mudarabah Expenses

The Mudarib shares profit of the Mudarabah as per agreed rate with the investor but his expenses like meals, clothing, conveyance and medical are not borne by Mudarabah. However, if he is traveling on business and is overstaying the night, then the above expenses shall be covered from capital. If Mudarib goes for a journey which constitutes Safar-e-Sharai (more than 48 miles) but does not overstay the night, his expenses will not be borne by Mudarabah.

All expenses which are incidental to the Mudarabah’s function like wages of employees/workers or Commission in buying/selling or stitching, dyeing expenses etc have to be paid by the Mudarabah. However all expenses will be included in the cost of commodities which Mudarib is selling for eg. if he is selling ready made garments then the stitching, dyeing, washing expenses etc. can be included by the Mudarib in the total cost of the garments.

If the Mudarib manages the Mudarabah within his city , he will not be allowed any expenses, only his profit share. Similarly, if he keeps an employee, this employee will not be allowed any expenses, just his salary.

If the Mudarabah agreement becomes Fasid due to any reason, the Mudarib’s status will be like an employee, meaning:

  1. a) whether he is traveling or doing business in his city, will not be entitled to any expense such as meals, conveyance, clothing, medicine etc.
  2. b) he will not be sharing any profit and will just get Ujrat-eMisl (ordinary pay) for his job.

Distribution of Profit & Loss

It is necessary for the validity of Mudarabah that the parties agree, right at the beginning, on a definite proportion of the actual profit to which each one of them is entitled. The Shariah has prescribed no particular proportion; rather it has been left to their mutual consent. They can share the profit in equal proportions and they can also allocate different proportions for Rab-ul-Maal and Mudarib. However in extreme case where the parties have not predetermined the ratio of profit, the profit will be calculated at 50:50.

The Mudarib & Rab-ul-Maal cannot allocate a lump sum amount of profit for any party nor can they determine the share of any party at a specific rate tied up with the capital. For example, if the capital is Rs.100,000/-, they cannot agree on a condition that Rs.10,000 out of the profit shall be the share of the Mudarib nor can they say that 20% of the capital shall be given to Rab-ul-Maal. However they can agree that 40% of the actual profit shall go to the Mudarib and 60% to the Rab-ul-Maal or vice versa

It is also allowed that different proportions are agreed in different situations. For example, the Rab-ul-Maal can say to Mudarib “If you trade in wheat, you will get 50% of the profit and if you trade in flour, you will have 33% of the profit”. Similarly, he can say “If you do the business in your town, you will be entitled to 30% of the profit and if you do it in another town, your share will be 50% of the profit”.

Apart from the agreed proportion of the profit, as determined in the above manner, the Mudarib cannot claim any periodical salary or a fee or remuneration for the work done by him for the Mudarabah.

All schools of Islamic Fiqh are unanimous on this point. However, Imam Ahmad has allowed for the Mudarib to draw his daily expenses of food only from the Mudarabah Account. The Hanafi jurists restrict this right of the Mudarib only to a situation when he is on a business trip outside his own city. In this case he can claim his personal expenses, accommodation, food, etc. but he is not entitled to get anything as daily allowances when he is in his own city.

If the business has incurred loss in some transactions and has gained profit in some others, the profit shall be used to offset the loss at the first instance, then the remainder, if any, shall be distributed between the parties according to the agreed ratio.

The Mudarabah becomes void (Fasid) if the profit is fixed in any way. In this case, the entire amount (Profit + Capital) will be the Rab-ul-Maal’s. The Mudarib will just be an employee earning Ujrat-e-Misl.

The remaining amount will be called (Profit).

This profit will be shared in the agreed (pre-agreed) ratio.

Roles of the Mudarib:

Ameen (Trustee): To look after the investment responsibly, except in case of natural calamities

Wakeel (Agent) : To purchase from the funds provided by Rab-ul-Maal

Shareek (Partner): Sharing in any profit

Zamin (Liable): To provide for the loss suffered by the Mudarabah due to any act on his part.

Ajeer (Employee): When the Mudarabah gets Fasid due to any reason, the Mudarib is entitled to only the salary, Ujrat-e-Misl.

In case there is a loss, the Mudarib will not even get the Ujrate-Misl.

Termination of Mudarabah

The Mudarabah will stand terminated when the period specified in the contract expires. It can also be terminated any time by either of the two parties by giving notice. In case Rab-ul-Maal has terminated services of Mudarib, he will continue to act as Mudarib until he is informed of the same and all his acts will form part of Mudarabah.

If all assets of the Mudarabah are in cash form at the time of termination, and some profit has been earned on the principal amount, it shall be distributed between the parties according to the agreed ratio. However, if the assets of Mudarabah are not in cash form, it will be sold and liquidated so that the actual profit may be determined. All loans and payables of Mudarabah will be recovered. The provisional profit earned by Mudarib and Rab-ul-Maal will also be taken into account and when total capital is drawn, the principal amount invested by Rab-ul-Maal will be given to him, balance will be called profit which will be distributed between Mudarib and Rab-ul-Maal at the agreed ratio. If no balance is left, Mudarib will not get anything. If the principal amount is not recovered fully, then the profit shared by Mudarib and Rab-ulMaal during the term of Mudarabah will be withdrawn to pay the principal amount to Rab-ul-Maal. The balance will be profit, which will be distributed between Mudarib and Rab-ulMaal. In this case too if no balance is left, Mudarib will not get anything

Uses Of Musharakah / Mudarabah :

These modes can be used in the following areas (or can replace them according to Shariah rules).

Asset Side Financing

  • Short/medium/long - term financing
  • Project financing
  • Small & medium enterprises setup financing
  • Large enterprise financing
  • Import financing
  • Import bills drawn under import letters of credit
  • Inland bills drawn under inland letters of credit
  • Bridge financing • LC without margin (for Mudarba)
  • LC with margin (for Musharakah)
  • Export financing (Pre-shipment financing)
  • Working capital financing
  • Running accounts financing / short term advances

Liability Side Financing

  • For current /saving/mahana amdani/investment accounts (deposit giving Profit based on Musharkah / Mudarabah – with predetermined ratio )
  • Inter- Bank lending / borrowing
  • Term Finance Certificates & Certificate of Investment
  • T-Bill and Federal Investment Bonds / Debenture.
  • Securitization for large projects (based on Musharkah)
  • Certificate of Investment based on Murabahah (Eg: Al Meezan Riba Free )
  • Islamic Musharakah bonds (based on projects requiring large amounts – profit based on the return from the project)

Source: Dr. Muhammad Imran Ashraf Usmani, Meezan Bank’s Guide to Islamic Banking.

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