Mudarabah - Appendix B (The Shariah Basis for the Standard)

Transcription

1. Shari ’ah Standard No. (13): Mudarabah Appendix (B) The Shari’ah Basis for the Standard Permissibility of Mudarabah and Its Rationale ■ Mudarabah, known also as Qirad, is a contract that arranges cooperation in business investment between capital on one hand and entrepreneurship on the other, whereby the contracting parties jointly and commonly own the realised profit as per the agreement. The party providing the capital is known Rab al-Mal and the investor is known as Mudarib or ’Amil (literally. worker) or Muqarid.(2) Mudarabah contract derives its permissibility from the following:(3) a) From the Qur`an is the Saying of Allah, the Almighty: {“Others travelling through the land, seeking of Allah’s bounty”}. bounty”} (4) This verse is interpreted to mean those who travel for the purpose of trading and seeking permissible income in order to provide for themselves and their family. b) From the Sunnah is the Hadith that says, “Al-’Abbas Ibn AbdulMuttalib used to pay money for Mudarabah and to stipulate to the Mudarib that he should not travel by sea, pass by valleys or trade in livestock, and that the Mudarib would be liable for any losses if he did so. These conditions were brought before the Prophet (peace be upon him) and he approved them”.(5) Among the Hadiths regarding the permissibility of Mudarabah is the case that states that “Umar Ibn (2) Al-Marghinani, “Al-Hidayah Sharh Bidayat Al-Mubtadi” [3: 202]; Al-Kasani, “Bada`i’ Al-Sana`i’” [6: 56 and 57]; Ibn Rushd, “Bidayat Al-Mujtahid” [2: 236]; and Ibn Qudamah, “Al-Mughni” [3: 26]. (3) “Takmilat Al-Majmu’” [14: 357-360]; “Subul Al-Salam” [3: 76]; “Bidayat Al-Mujtahid” [2: 236]; “Al-Hidayah” [2: 202]; “Al-Mughni” [5: 26]; and “Al-Muhadhdhab” Printed with “Al-Majmu’” [14: 357]. (4) [Al-Muzzammil (The One Wrapped in Garments): 20]. (5) The Hadith has been related by Al-Bayhaqi [6: 111]. 382
2. Shari ’ah Standard No. (13): Mudarabah Al-Khattab gave one man the funds belonging to an orphan for the purpose of Mudarabah and the man was trading with these funds in Iraq”.(6) c) Ibn Al-Mundhir mentioned that there is generally consensus among the scholars in respect to the permissibility of a Mudarabah contract.(7) ■ The rationale for making this contract permissible includes the following: a) Money cannot increase unless it is associated with work. It is also not permissible to provide money in return for a periodic pre-agreed payment (rent) to a person who is willing to invest it as this will constitute a debt with Riba. b) The Mudarabah contract is made permissible to facilitate investment cooperation between capital providers who are not prepared to invest and manage their money themselves, and competent business or investment experts who lack adequate capital. In other words, there are some individuals who are rich but lack business or investment know-how and others who have business or investment expertise but lack money. This situation thus calls for the permissibility of the Mudarabah contract so as to combine the interests of the two parties.(8) Moreover, a Mudarabah contract is an instrument that was commonly used in trade and which usage expanded in modern times to include business, services, and agricultural or horticultural and industrial activities. a) The business philosophy of conventional banks depends on the concept of renting out money and making profit in doing so, while Shari’ah prohibits this philosophy because of its being Riba. The Mudarabah financing instrument has been an essential instrument to develop Islamic financial Institutions (Institution/Institutions). This instrument is used by these institutions to attract unrestricted or restricted investment accounts and to reinvest these funds in various activities. (6) The Hadith has been related by Al-Bayhaqi in “Al-Ma’rifah” (see: Al-Zayla’i, “Nasb AlRayah”). Rayah” ). (7) “Al-Mughni” [7: 133-134]. (8) “Takmilat Al-Majmu’” [14: 371]. 383
3. Shari ’ah Standard No. (13): Mudarabah Contract of Mudarabah ■ The basis for the rule that both parties to a Mudarabah contract must be legally capable to appoint, or act as, an agent is because each party acts as an agent of the other party and appoints the other party to act on his behalf. The entitlement to appoint or act as an agent entitles one to conclude a Mudarabah contract. ■ The basis for regarding a Mudarabah contract initially as a non-binding contract is that the Mudarib is using the capital provider’s funds with his consent in a contractual relationship in which the Mudarib is just an agent, and an agency contract is not binding. ■ The basis for making a Mudarabah contract binding once the work has commenced is that a unilateral termination of the contract at this stage might frustrate the objective of the parties to make profit and might cause damage to the Mudarib since he might not receive any compensation for his work. ■ The basis for allowing a time limit for the operation of a Mudarabah contract is that a Mudarabah contract is, in essence, an agency contract, which is subject to a designated duration.(9) The International Fiqh Academy has issued a resolution in this respect.(10) ■ The basis for considering the Mudarib as a trustee with respect to the Mudarabah funds is that the Mudarib is using another person’s money with his consent, and the Mudarib and the owner of the funds share the benefits from the use of the funds. In principle, a trustee should not be held liable for losses sustained by the funds. Rather, the risks of such losses must be borne by the Mudarabah funds. Guarantees in a Mudarabah Contract ■ The basis for allowing guarantees in a Mudarabah that would be used in case of misconduct and negligence of the Mudarib is that in such a case the Mudarib then becomes liable for losses and must bear the consequences of these actions.(11) (9) “Al-Mughni” [7: 133-134]. (10) Resolution No. 122 [5: 13]. (11) This is the opinion of the Shari’ah Board of Al Rajhi Company, see “Al-Mudhakkirah Al-Tafsiriyyah”.. It is also endorsed in the First Al Baraka Forum. Al-Tafsiriyyah” 384
4. Shari ’ah Standard No. (13): Mudarabah Requirements Relating to the Capital ■ The basis for it being permissible that the capital of Mudarabah may be constituted by the value of tangible assets contributed is that the objective of Mudarabah is to make profit. This objective can be realised whether the capital is contributed in the form of tangible assets or cash. This rule is based on the view of the Maliki and the Hanbali jurists.(12) ■ The basis for the requirement that the capital of Mudarabah should be clearly known and should be defined in terms of quality and quantity in a manner that eliminates any possibility of uncertainty or ambiguity is because recognition of profit is dependent on the recovery of the capital on the date of liquidation. However, recovery of the capital cannot be ascertained if its amount was not known earlier, and this lack of knowledge may potentially lead to a dispute. ■ The basis for not allowing a debt owed by the Mudarib to the capital provider be contributed as capital in a Mudarabah contract is because, as a principle, Mudarabah capital must be (at the conclusion of a Mudarabah contract) an asset that is available and cannot be used on the spot for the Mudarabah operations. A debt fails to meet this requirement, as it is a receivable that is not available for use when the contract is concluded. Moreover, considering a debt as capital of Mudarabah involves potential Riba. This is because the creditor may be suspected of having extended the debt tenure in order to get additional consideration (for the extension) from the debtor under the name of Mudarabah. ■ The basis for the requirement that the Mudarabah operation is valid only if the capital is presented to the Mudarib is because the Mudarib is the manager of the Mudarabah operation, and the trustworthy trustee for the Mudarabah capital and income. Therefore, it is necessary that the capital be fully released to the Mudarib so that he will be able to protect and invest the capital and achieve the objective of the Mudarabah contract.(13) (12) “Hashiyat Al-Dusuqi” [3: 517]; and “Al-Mughni” [5: 17]. (13) “Al-Hidayah” [3: 203]; and “Hashiyat Al-Dusuqi” [3: 517]. 385
5. Shari ’ah Standard No. (13): Mudarabah Rules and Requirements Relating to Profit ■ The basis for the requirement that the profit ratio is known is because profit is the subject matter of a Mudarabah contract and a lack of knowledge as to the subject matter renders a contract void. ■ The basis for the requirement that the profit share of each party be a percentage of the profit and not a lump sum is because a Mudarabah contract is a form of partnership for sharing profit. Any condition that allocates a lump sum to one party would not be consistent with the sharing of profit. This is because the Mudarabah operation may not realise a profit other than the lump sum which goes to one party, thus excluding the other party from partnership in profit. ■ The basis for the impermissibility of simultaneously receiving a share of profit and a fee for managing a Mudarabah is likewise that the fee is provided in the form of a lump sum and the Mudarabah operation may not realise a profit other than the lump sum, thus precluding the sharing of profit. ■ The basis for the permissibility of an agreement to change the ratio of profit distribution at any time is that the profit is a right belonging to the parties and an agreement in the manner described does not lead to a prohibited act, such as preclusion of sharing in profit. Rather, the agreement makes the parties partners in profit.(14) ■ The basis for nullifying a Mudarabah contract when the contract is silent on the ratio of profit distribution and there is no customary practice according to which the profit is to be distributed to each party is that the subject matter of a Mudarabah contract is profit. The lack of knowledge as to the subject matter nullifies contracts. ■ The basis for nullifying a Mudarabah contract when one party stipulates entitlement to a lump sum is because a Mudarabah is about sharing profit and this form of condition precludes sharing of profit and may potentially lead to one party being wrongfully deprived of his rights. (14) See: Al Baraka’s 11th Forum, Fatwa No. (8); Al Baraka’s 4th Forum, Fatwa No. (5). This is also seconded by the Fatwa of the Shari’ah Board of Faisal Islamic Bank, Sudan (P. 107), which was published in “Dalil Al-Fatawa Al-Shar’iyyah Fi Al-A’mal AlMasrafiyyah”,, Islamic Economic Centre, International Islamic Bank, (P. 53). Masrafiyyah” 386
6. Shari ’ah Standard No. (13): Mudarabah ■ The basis for not allowing an agreement that the Mudarib be entitled to the profit earned on one of two capital funds, while the profit earned on the other capital fund belongs to the capital provider, is that such an agreement may preclude the sharing of profit and may potentially lead to one party being wrongfully deprived of his rights. ■ The basis for stating that profit is not realised unless the capital is recovered or maintained intact is the Hadith in which the Prophet (peace be upon him) said: “The instance of a Musali (a person who performs prayer) is that of a businessperson who will not secure profit unless the capital is secured. Likewise, a supererogatory prayer is not acceptable unless the obligatory prayer is performed” performed”.(15) This Hadith shows that distribution of profit prior to recovery of the capital, or unless the capital is maintained intact, is invalid. Moreover, profit is an addition to the capital and such an addition cannot be recognised or realised unless the capital that is the source of the profit is maintained. ■ The basis for the requirement that the Mudarib is preliminarily entitled to a profit when realised, i.e. prior to distribution (an encumbrance right), and that the net profit earned will be known absolutely only after allocation through actual or constructive valuation, is analogous to the contract of sharecropping. The Mecca based Islamic Fiqh Academy has issued a resolution in support of constructive valuation.(16) Duties and Powers of the Mudarib ■ The basis for allowing the Mudarib freedom of action in an unrestricted Mudarabah is that the Mudarib has the aim of achieving the objective of the capital provider, which is making profit, and this is not possible unless the capital is vigorously put into operation. ■ The basis for not allowing the capital provider to stipulate a right to work with the entrepreneur (Mudarib) or to be involved in acts relating to Mudarabah operations is because such a stipulation would curtail (15) The Hadith has been related by Al-Bayhaqi in his “Sunan” “Sunan”,, and was narrated by Ali Ibn Abu Talib. Al-Bayhaqi stated that there is a weak narrator in the chain of transmission of this Hadith, “Al-Mawsu’ah Al-Fiqhiyyah” [38: 74]. (16) Resolution No. (4) of the Islamic Fiqh Academy under the auspices of Muslim World League issued in the sixth session that was held in Mecca. This is also the view that was endorsed by Al Baraka’s 8th Forum, Fatwa No. (2). 387
7. Shari ’ah Standard No. (13): Mudarabah the freedom of the Mudarib, limit the investment scope and hinder the Mudarib in achieving the objective of the Mudarabah contract, i.e. making profit. ■ The basis for not allowing the Mudarib to make a loan, gift or charitable donation from the Mudarabah fund is because these actions do not benefit the Mudarabah operation, rather, they involve potential loss to the capital provider. ■ The basis for allowing the Mudarib, when acting in the interest of the Mudarabah and in the event that the parties did not specify an amount of money for expenses, to obtain personal expenses from the Mudarabah funds as per customary practice is because what is known by custom is deemed to apply as a condition even if the parties did not clearly stipulate it. Again, the permission for the Mudarib to obtain common personal expenses in these cases is granted by custom. Liquidation of Mudarabah Contract ■ The basis for allowing liquidation of a Mudarabah contract unilaterally or by agreement of the parties or at the maturity date is because a Mudarabah contract is non-binding if the parties did not stipulate a term for its maturity. ■ The basis for allowing constructive valuation is because Shari’ah has endorsed the concept of valuation. In addition, this is allowed because it is a valid tool that passes rights to owners appropriately. The actual valuation of assets for distribution is based on a common sense because this is the principle. ■ The basis for allowing a Mudarabah contract be terminated on the grounds of loss of capital is that when the capital has been lost, the Mudarib is not able to put it to work in a business, and that the fund that was assigned for the Mudarabah is no longer in existence, thus entailing the termination of the Mudarabah contract. ■ The basis for allowing termination of a Mudarabah contract due to the death of the Mudarib is that a Mudarabah contract is similar to contract of agency or, at least, it includes agency and an agency contract is terminable by the death of the agent. 388