Chapter- 17 Contract of Mudarabah Mudarabah, qirdd, and mugdradah’ are different terms used to express special type of the business arrangement in which the capital is from one side while the labour or work is from the other side. The word mudarabah’ is derived from the phrase “al-darb fil ard” which means to make journey. It is called so because the worker strives and toils in course of business. Likewise, the words qirdd and muqdradah are derived from the word qarada’ that means to cut off. It is so called because the investor cuts off the disposition of his sum of money from himself and transfers its disposition to the agent. Various Definitions of Mudarabah The following are the definitions of muddrabah in different schools of law. Hanafi School “Tt is a partnership (sharikah) for participation in profit in which capital is from one side, whereas labour or skill (‘amal) is from the other side.”! Maliki School “Qirad is an agency for trading in delivered cash for a part of profits if their extent is known”? ‘Tn ‘Abidin, Radd al-Muhtar, 5: 645. ? Kharshi 6:2280 Contract of Mudarabah Shafi‘l School It is an agreement whereby an owner hands over the capital to a worker who trades with it and the profit is shared by the parties.° Hanbali School It is where a person gives his capital to another person for business in order to share the profit according to stipulation.* Modern Definitions of Mudarabah A renowned scholar ‘Ali al-Khafif has defined mudarbah as “contract for sharing the profit of a business in which one party contributes with capital and other with his labour.”* Dr. Rashad Khalil, another scholar, has defined that it is a contract whereby a legally competent person hands over a known and defined capital to a person possessed with reason and discretion to trade with it for a part of profit defined in proportion.° It is important to note here that Islamic Law, unlike English Law does not differentiate between a company and partnership firm. Therefore, muddrabah can be a partnership firm as well as a company. This difference has given rise to a controversy between State Bank of Pakistan (SBP), Corporate Law Authority (CLA), and the Finance Ministry as to which category of business organization a mudarabah will be referred to, and what rules of taxation, tariffs and revenue will be activated against it. The stance of CLA is that it is a financial institution like House Building Finance Corporation (HBFC), whereas SBP is arguing that it is a bank. Legitimacy of Mugarabah The legitimacy of mudarbah is established by the Qur’an, the Sunnah and ‘ijma’. 3 Shirbini, Mughni al-Muhtdj, vol. 2 p. 309. *Tbn Qudamah,, al-Mughni, vol. 15,p.134. SAli al-Khafif, al-Sharikat fi al-Figh al-Islami,Cairo:1941, p.65. ® Rashad Khalil, al-Sharikat fi al-Figh al-Islami, Maktabah Tawfigiyyah, Cario: 1399/1979, p.154.Islamic Law of Contract and Business Transactions 281 Qur’an The Qur’an says, “And others who journey through the earth seeking the bounty”.’ Abii Bakr Jassas explains that they seek bounty of Allah through trade and disposition.* Sunnah 1. The Holy Prophet (s.a.w.s.) is reported to have said: “There is great blessing in three things: The credit sale, the muddrabah and mixing wheat and barley for domestic consumption, not for sale”. 2. The Holy Prophet (s.a.w.s) gave his tacit approval to the conditions imposed by Ibn ‘Abbis (r.a.t.a.) who used to give money on the basis of mudarabah. 3. The aforesaid tacit approval has also been reported in the case of Ibn Hizdm (r.a.t.a). 4. The Holy Prophet (s.a.w.s.) himself acted as mudarib (agent/manager) for Khadijah (r.a.t.a.) prior to his marriage. Ijma‘ Many instances have been cited to prove that ‘Muddrabah’ was a lawful business and was frequently employed by companions of Holy Prophet (s.a.w.s.). Some of the examples are the following: Abii Miisa, the Governor of Kiifa wanted to remit public money to the Bayt-al-mal. He gave the amount to Abd Allah (r.a.t.a.) and ‘Ubayd Allah (r.a.t.a.) sons of caliph “Umar (r.a.t.a.). They traded with it. The Caliph’s assembly that comprised of many companions of the Holy Prophet (s.a.w.s.) treated it to be an ex- post facto mudarabah and took half of the profits earned by two brothers, in addition to the public money.” It is also reported that Caliph ‘Umar (r.a.t.a.) used to invest orphan’s property on the basis of mudarabah’. 7 Quran 73:20. Ahkam al-Qur’an 3:45. ° Shawkini, Nayl al-Awrar 5:236; Kasini, Bada'i’ vol.6, p.79, Malik ibn Anas, al-Muwatta , vol.2, p.987.282 Qiyas As for as analogy is concerned, diverse views of scholars are found. This diversity is because some say that mudarabah defies analogy while others allow analogy. According to Imam Sarakhst_mudarabah is proved by way of juristic preference ( istihsan) and not by analogy. He writes: Analogy is not permissible, because it is hiring for unknown wages, in fact for non-existent wages. The work too is unknown. It is permissible on the basis of istihsan. He adds: Itis also allowed because people have a need for this contract. The owner of capital may not find his way to profitable trading activity, and the person who can find his way to such activity, may not have the capital. And profit cannot be attained except by means of both of these, that is capital and trading. By permitting this, the goal of both parties is attained.” Elements of Mudarabah According to the Hanafis, mudarabah consists of only one element, i.e. forms (offer and acceptance). This is provided in Majaliah, in the following words: The essence of a mudarabah is an offer and acceptance. For example: If the owner of capital says to the person who provides the labour “Take this capital and do the work and labour in return, on the terms that the profits are to be divided between us, half and half, or, as two to one,” or if he says anything else which represents the meaning of a mudarabah like, “Take this money and make it capital and let the profit be in common between us in this proportion,” and the mudarib (working partner) accepts, a contract of mudarabah ‘is concluded." Shafi‘is acknowledge five elements for a muddrabah contract namely: 0 (a) Parties to ‘mud@rabah contract (‘agidan) Sarakhst, al-Mabsif, vol.22,p.19. " Majallah, Article 1405. Contract of MudarabahIslamic Law of Contract and Business Transactions 283 (b) Work/labour. (‘amal) (c) Profit (d) Capital (e) The form (offer and acceptance) In the opinion of the majority or jamhir, mudarabah has three elements: (a) Parties to mudarabah contract. (‘Agidan) (b) Subject matter (ma ‘qiid ‘alayh) (c) The form (offer and acceptance)” Conditions Of Mudarabah Conditions relating to muddrabah are of three kinds: a) Conditions Concerning Partners: The partners must have legal capacity to enter into a contract of mudarabah. This legal capacity includes competence to develop a ‘Principal’-‘Agent’ relationship. This requires that none of the parties should be insane or minor or placed under interdiction because of insolvency or weakness of intellect (safah). The competency of a partner is codified in the Majallah as under: It is a condition that the owner of property should be competent to appoint an agent, and that the mudarib should be competent to be his agent."* b) Conditions relating to capital: The capital used in muddrabah must fulfill the following conditions; (1) Capital must be in absolute currency. It must be in absolute currency or in financial form or must contain money properties (as economists call it). Merchandised form’ or goods are prohibited. However, Hanafis and Hanbalis allow it in the case, financing partner first sells them out and then gives money for business to his working partner. Some details about it are given in the Majallah which are as "? See Kasant, Bada i‘ al-Sana'‘i*, vol. 6, p.87; Hashiyat al-Dusigi vol.3, 517. & Majallah , Article 1408.284 Contract of Mudarabah follows: “It is a condition that the capital be some kind of silver or gold money.”"““Brass coins which pass current are by custom considered to be like silver or gold”.'* Goods and commodities are not regarded eligible capital in mudarabah partnership, because they render the amount of profit uncertain which may lead to dispute and litigation among the parties. Kasant Says: The mudarabah in goods leads to uncertainty concerning the amount of the profit at the time of division. This is so because the value of the goods is known only by estimation, chance and conjecture and will differ with the difference of those who do the estimating. An uncertainty in turn leads to dispute and, consequently, to discord.' They may also lead to inequitable advantage and undue enrichment for one of the parties and converse disadvantage to the other, because of the fluctuation of price of goods between the date they are remitted to the agent-manager and the date of their conversion into ready money. Writes SarakhsT; Since the profit in muddrabah emerges only after the investment has been returned, in fact to the investor, any marked rise in the market value of goods serving as the basis for the mud@rabah would cancel out any profit for the agent. Any drop in the market value would put the investor at a disadvantage and provide the agent with unjustified and, in a sense, unearned profit.” 2. It should be known and defined in terms of quality and quantity. An uncertainty and indeterminacy concerning the amount of capital renders the contract invalid. 3. It should be ready cash, and not absent money in the form of debt, or money usurped by someone. But it is permissible to authorise a person to collect the debt and make it a capital of mudarabah. It is also lawful to the majority of jurists to start “Tbid., Article 1338. 'S Ibid. Article 1339. '© Kasant, Bada ’‘i‘ al-Sand’i', vol..6,p.82. ”” Sarakhsi, al-Mabstit, Vol. 22 P. 23.286 Contract of Mudarabah Hanafi and Hanbali jurists.” According to the Shafi'i fugaha the contract of muddrabah will become invalid because mudarabah requires proportional division of profit, which is non-existent in this case. It cannot be called loan contract also, because the contract was not concluded for that purpose.” If all the profit is stipulated for investor, then the contract is no longer a contract of mudarabah, rather it will become an ibdd‘ activity.” It is necessary that profit should not be stipulated for one party, as also it is necessary that it should be proportional. Any violation of proportional division rule renders the mud@rabah invalid and in such case it is treated as a regular hire (‘ijarah) with the agent entitled to an equitable remuneration (ajr mithl) for his work, but thereby disqualified from any share in the profit. On the other hand, case of loss, the agent is free of responsibility because in this matter he is a trusted person.”> ‘Types of Mudarabah Mudarabah is of two types: absolute or unrestricted mudarabah and restricted mudarabah. The absolute type is the one in which the capital is handed over without determination of the type of work that is to be done, the location, the time, the quality of work and the person with whom the muddrib has to trade. Unrestricted Mudarabah It is also called unlimited mandate or perpetual or absolute muddrabah. The Majallah defines it in the following words: Unrestricted mudarabah is a mudarabah, which is not restricted in terms of time, place, kind of trade, or person from whom he is to buy and to whom he is to sell. But if it is restricted with one of these, it is a restricted mudarabah. For example: If one says, “Buy and sell at such a time or in such a place, or sell such a kind of property, or, trade with such » Kasant, Badd ’i‘ al-Sana'i, Vol. 6, P 86., Ibn Qudimah, al-Sharh al-Kabir vol.5,p.131 2! Shirbini, Mughni al-Muhtdj, vol. 2,p.313. ® Kasini, Bada ‘i al-Sana'i', Vol. 6, P. 86. 3 Udovitch, Parmership and profit in Medieval Islam, p.191.Islamic Law of Contract and Business Transactions 287 person or with the inhabitants of such a town,” It is a restricted mudarabah.* The above mentioned definition imparts that if a muddrabah free from restrictions regarding time, place, trade policy, and person with whom business is to be done, it is called absolute or unrestricted mudarabah. The working partner in all such cases is left exclusively on his own prudence and discretion. His authority may extend from very minor issue to major issues in investing the capital money for earning profit. Thus, the working partner has every right to use money in the manner he deems fit. In such case he is permitted to undertake all such transactions, which are allowed in commercial usage. Permissible Dispositions in absolute Mudarabah The Following are transactions and dispositions, which are 1. To buy and sell all types of merchandise as he sees fit. 2. To buy and sell for cash and credit. 3. To give goods as bida‘ah. 4. To keep them as deposit or pledge. 5. To hire helpers as needed 6. Torent or buy animals and equipments. 7. To travel with the capital. 8. To mingle it with his own resources 9. To give it as mudarabah to a third party. 10. To invest it in a partnership with a third party.”* Summarizing the permissible dispositions of mudarabah SarakhsT Writes: If the investor says to the agent, “act with it as you see fit”, then he may practice all of these things except the loan. For the investor has consigned the control of his capital to the agent’s discretion in a comprehensive way; and we know that his intention is the inclusion of all that is the customary practice of merchants. The agent, thereby, has the right to engage in mudarabah, a partnership and to mingle the capital * Majallah, Article 1407, * Uduvitch, Partnership and profit in Medieval Islam, p.204.288 Contract of Mudarabah with his own capital because thi is a practice of the merchants.”° From this we may conclude that the validity of agent’s action will be determined by comparing his questioned action with the customary practice of the merchants. If such action conforms to the practice, then it is legitimate and binding upon the investor. He, however, is not allowed to commit mudarabah partnership to any sum greater than the capital in hand without the investor’s specific authorization. Similarly, he is not permitted to borrow money on behalf of muddrabah unless he is specifically authorized to do so. Restricted Mudarabah Mudarabah is restricted when the liberty of action of agent (mud4rib) is restricted in terms of kind of trade, time, and place. The restrictions allowed to be imposed by the investor are not a matter of agreement among the jurists. For example, the restriction to purchase from a particular person is permissible to Hanfis and Hanbalis but not permissible to according to Shafi‘is and Malikis.”” The restriction to purchase goods from a particular place is valid according to the Hanafi, Hanbali jurists but not valid to Malikis and Shafi‘is. The condition to trade in particular merchandise such as books, gold and silver is valid to all the jurists. The Maliki and Shafi ists, however, suggest additional condition that such merchandise should be habitually available in the market2* As regards restricting muddrabah with a predetermined duration, the Malikis and Shafi'is refuse to recognize the validity of such condition whereas Hanbalis and Hanafis regard it to be valid. © Sarakhsi, al-Mabsiit vol.22,p.39. *7 Sarakhsi, al-Mabsiit vol. 22, P. 42; Ibn Qudama, al-Muhgni Vol.5, P.69, Ibn Rushd, Bid@yah al-Mujtahid, Vol. 2 P.213, Shirazi, al-Muhadhdab Vol.1 P. 392. 8 Dustiqi, Hashiyat al-Dusiig? Vol.3 P.53, Shirbini, Mughni al- Muhtéj, Vol. 2, P.311.Islamic Law of Contract and Business Transactions 289 It is worth noting that when a mudarabah is of predetermined duration, this does not mean that the investor and the agent- manager are precluded from making use of their basic right, that of withdrawing from muddrabah at will. It only means that the agent- manager is not entitled, after the elapse of the pre-agreed duration to continue performing act of commerce on behalf of mudarabah, if we accept the liquidation.” From preceding discussion we may conclude that imposing restriction on the activity of agent is permissible, provided these do not grossly hamper and frustrate the purpose of mudarabah, which is to get profit. Dissolution of Mudarabah The mudarabah contract is dissolved under the following circumstances: 1. Unilateral termination: Since the contract of muddarabah is a non-binding contract, any partner can terminate it unilaterally provided the other partner is made known of this decision and the capital is in the cash form. However, if the capital is in the form of goods, the termination of contract and the disengagement of agent by investor is not allowed. In such case the agent has right to sell the goods in order to reconvert them to cash. 2. By expiry of fixed time: If the mudarabah was for a fixed time, it will be terminated on the expiry of that period. This is provided in Majallah in the following words: “When the owner of the capital has fixed the duration of mudarabah, the mudarabah is dissolved when the prescribed time elapses”” 3. By death of any of the partners: If any of the partners in a muddrabah dies, muddrabah comes to an end. Majalla puts it in the following words: “If the owner of the 2° Nabil Sal pp. 140-141 Majallah, Article 1423. . Unlawful gain and Legitimate Profit in Islamic Law,