Al Mudarabah
Understanding Islamic Investment & How It Can Impact You

"Al Mudarabah" is a special kind of partnership where one partner gives money to another for the purpose of investing it in a commercial enterprise.

The management or person who manages the finance is called the Mudarib.

The person who gives the money to the other is called RabbulMal.

The concept Mudarabah itself is classified into 2 types.

1) Restricted also known as Al-Muqayyadah in Arab.
In this instance, the RabbulMal may specify certain restrictions as to where, how and for what purpose his funds are to be invested.

2) Non Restricted also known as Al-Mutlaqah in Arab
In this instance, Mudarib is given the choice to undertake whatever business he wishes. The mudarib shall be authorized to invest the money in any business he deems fit.

Distribution of Profits

Parties will pre-agree their rightful entitlement to the actual profit right at the beginning of the contract.
As Shariah do not state the required distribution, thus mutual agreement applies.

Mudarib and RabbulMal/investors are allowed to share the profit in any proportion they wish but not allowed to allocate the share of the profit of any party tied with the capital.

They are also not allowed to allocate a lump sum amount of profit for any party.

Example
If the capital outlay is $ IOO, OOO, they cannot agree on a condition that 20% of the capital shall be given to RabbulMal/investors.

They also would not be allowed to say that $10,000 out of the profit shall be the share of the mudarib.
However, they can agree on that 40% of the actual profit shall go to the mudarib and 60% to the rabb-ul-mal or vice versa.

All the net profits shall be distributed between the parties according to the agreed ratio.

Termination of Mudarabah

Both the Mudarib and Rabbulmal have the autonomy to terminate the contract of mudarabah.

They only need to inform the other party of their decision.

In modern finance, as it will take time for a new venture to breakeven and earn profit, both the Mudarib and RabbulMal usually have an agreement at the beginning of the contract not to terminate it within a certain period of time.

At the point of termination, if all the asset of Mudarabah is in cash, it will be distributed according to the pre-agreed ratio.

If the asset of Murabahah is not in cash, the Mudarib is given the autonomy to liquidate the assets to determine the actual profit for distribution.