Mudaraba is a partnership between two or more persons for investment and business purposes.

One party contributes the capital while the other contributes financial management expertise.

The money contributor is called ‘rab al-mal’, or financier, (plural arbab al-mal) contributes the capital, while the mudarib – or investment manager, monitors and manages the invested 

capital while securing profitable investment portfolios. 

The Arabic term for ‘investment capital’ is ‘ras al-mal’. 

Mudaraba is also known as ‘qirad’ or ‘muqarada’. Mudarabas belong to the 

same family of musharaka partnerships.

Scope of the Mudaraba:

Mudaraba can be restricted or unrestricted in terms of the scope of business. 

Mudaraba Muqayyada (Restricted Mudaraba) 

In this, the rab al-mal restricts the mudarib’s investment management role to particular economic areas and financial dealings. The mudarib’s role may even 

be restricted by  geographical location. 

Mudaraba Mutlaqa (Unrestricted Mudaraba)

Here, the mudarib is permitted to invest in any Shariah compliant business.

kapitalgrow adopts an unrestricted Mudaraba.

Mudaraba Duration:

Permanent Mudaraba: This is the most common form of mudaraba. It is also 

referred to as an ‘ongoing’ or ‘open-end’ mudaraba. 

Permanent mudaraba refers to a partnership where there is no intention of terminating the joint venture at any time in the future. A partner may exit the 

venture at any point provided sufficient notice is given to the other partners. 

Temporary Mudaraba: This a partnership formed with the intention of 

termination at some point in the future. The partnership is dissolved and the 

assets realized in cash, which are then distributed along with any other cash

reserves on a pro-rata basis.

Mudaraba Profit and Loss Sharing (PLS)

According to Shariah, profits cannot be fixed, whether as a stipulated number, a percentage of the invested capital, or any other fixed amount. 

All profit-sharing ratios and mechanisms must be clearly specified by all partners before execution of a mudaraba partnership. 

Any partner can voluntarily surrender all or part of execution share to another 

partner on condition that this was not a pre-condition of the partnership 

agreement.

Partners in a mudaraba portfolio may agree on various fixed profit ratios. For 

example, Zaid, the rab al-mal, and Yusuf, the mudarib enter into a partnership 

to sell agricultural produce. They agree on the following profit-sharing ratio:

Commodity                                          Zaid         Yusuf

Wheat                                                    34% – 66% 

Rice                                                       50% – 50% 

Beans                                                    25% – 75% 

Cabbages                                              65% – 35% 

Similarly, the partners can agree on profit mechanisms based on geographic 

location. For example, Mark, the rab al-mal, and John, the mudarib, enter into a 

mudaraba partnership to trade in luxury apartment suites. They agree on the 

following profit-sharing mechanism:

Location                                                    Mark – John 

Cape Town                                                50% – 50% 

Dubai                                                         60% – 40% 

Nigeria                                                       30% – 70% 

New York                                                   40% – 60% 

Riyadh                                                       38% – 62% 

The rab al-mal can pay the mudarib a performance bonus from time to time. 

This bonus is termed ‘hiba’ (gift). Performance bonuses are non-obligatory and 

cannot be pre-agreed in the mudaraba partnership agreement. 

If the Shariah board declares the mudaraba partnership ‘fasid’ – or not viable – 

then the mudarib: 

The mudarib does not bear any loss except if it is proven that he was grossly 

negligent. 

If the mudaraba business has incurred losses in one portfolio, the profits from 

the other portfolios will be used to offset the loss, after which profits shall be 

distributed according to pre-agreed profit-sharing ratios.

Mudaraba Termination :

Partners may unilaterally terminate their partnership participation at any time 

provided that suitable prior notice is given.

 However, a ‘lock-in’ clause may be drafted into the Master Mudaraba Agreement (MMA) stating that the mudaraba shall remain operational for either a fixed or unlimited tenure except in the case of force majeure or natural unexpected events such as death. If the mudaraba is terminated, assets in the form of cash are distributed to the  on the basis of capital contribution ratios. Profits are distributed on pre-agreed profit-sharing ratios. Illiquidassets are realized as cash and then the actual profits and cash are distributedaccording to capital contribution ratios and profit-sharing ratios.

By: Mufti Ismail Desai

Open chat