Muclarabah Principle Point

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Muclarabah Principle Point

Transcript of Muclarabah Principle Point

Muclarabah principle point-wise analysis on different aspects of the .same is furnish below:

5.2.1.2 Meaning of Mudarabah:

The term 'Mudarabah' has been derived from one of the meanings of the Arabic word 'Zarbun' which means 'Travel', 'Beating', 'Example', etc'. Thus the word 'Mudarabah' means 'Travel' for undertaking business.

Muclarabah is a partnership in profit whereby one party provides capital & other provides skill and labor'. The provider of capital is called 'Sahibul Maal' while the provider of skill and labor is called 'Mudarib'.

So, Muclarabah may be defined as a contract of partnership where the Sahibul Maal provides capital to the Mudarib for investing it in a commercial enterprise by applying his labor & endeavor.

The practice of Mudarabah was very common in the early age of Islam when the Qura'nic message was being sent down. The holy Qur'an says "And another group of people conduct traveling on the earth in search of God's blessing".

5.2.1.3 Types of Mudarabah:Muclarabah contract may be bifurcated into two types:

(I)Restricted Mudarabah: A restricted Mudarabah is a contract in which the Sahibul Maal imposes any restrictions on the actions of the Mudarib but not in a manner that would unduly constrain the Mudarib in his operations. Restricted Mudarabah may further be divided into three types:-

(i)Restriction in respect of time period:In this type of Mudarabah, the Mudarabah contract includes a clause on duration of the business. After expiry of such period, the Mudarabah shall become void. , (ii) Restriction in respect of place or location:In this type of Mudarabah, the Mudarabah contract includes a clause on place or location of the business. The Mudarib shall be bound to do the business within the area of such place or location. (iii) Restriction in respect of business:In this type of Mudarabah, the Sahibul Maal restricts the actions of the Mudarib to a particular type of business, as he considers appropriate.

(2)Unrestricted Mudaraba: An unrestricted Mudaraba (Al Mudaraba Al Mutlaqah) is a contract in which Shahib al-maal permits the Mudarib to administer the Mudaraba capital without any restrictions4. In this case, the Mudarib his a wide range of trade or business freedom on the basis of trust and the business expertise he has acquired. Such unrestricted business freedom must be exercised only in accordance with the interests of the parties and the objectives of the Mudaraba contract.

But, if Muclarib wants to have an extraordinary work, which is beyond the normal course of business, lie cannot do so without express permission from Shahib al-maal.

5.2.1.4 Rules relating to Mudaraba Contract.There are two contracting parties in Mudaraba Contract: the provider of the capital i.e. 'Shahib al-maal' and the Muclarib. Both parties should possess the legal capacity to appoint agents and accept agency,

The general principle is that a Mudaraba contract is not binding, i.e. each of the contracting parties may terminate it unilaterally except in two cases:

When the Mudarib has already commenced the business, in A. Which case the Mudaraba contract becomes binding up to the date of actual or constructive liquidation. B. When the contracting parties agree to determine a duration for which the contract will remain in operation. In this case, the Contract cannot be terminated prior to the end of the specified duration, except by mutual consent of the contracting parties. A Mudaraba contract is one of the trust-based contracts. Therefore, the Muclarib invests Mudaraba capital on trust basis in which case the Mudarib is not liable for losses except in case of breach of trust, such as misconduct, negligence and breach of the terms of Mudaraba contract. In committing any of the above, Mudarib becomes liable for the Mudaraba capital.

5.2.1.5 Rules relating to Offer and Acceptance.The wording-"Offer and Acceptance" - by which both the contracting parties express their willingness to conclude a contract and must conform to the following: The wording should explicitly or implicitly indicate the purpose of the contract. Acceptance of the offer is contingent on its taking place during time which both the parties are negotiating agreement to contract. However, acceptance is not valid if one party refuses terms of the offer or leaves the place where the negotiation of contract is being made before the deal is concluded'. the the the the

Contract is permissible by verbal utterance or in writing and signing it. It is also permissible through correspondence or by the use of modern communication means, e.g., Telex, Fax, E-mail or Internet.

5.2.1.6 Rules relating to Capital.This is the amount of money given by the provider of funds i.e. Sahib al-maal to the Mudarib with the purpose of investing it in the Muclarabah activity. The following conditions, in this respect, should be satisfied; The capital of Muclarabah should be provided in the from of cash. However, it may be presented in the from of tangible assets, in which cash the value of the assets is the contribution to the mullarabdh capital. The valuation of the assets may be conducted by experts or as agreed upon by the contracting parties. The capital of Mudarabah should be clearly known to the contracting parties and defined in terms of quality and quantity in a manner that eliminates any possibility of uncertainty or ambiguity. It is not permissible to use a debt owed by the Muclarib or another party to Shahib al-maal as capital in a Mudarabah contract. The Mudarabah capital must be, either wholly or partially as per contract according to the nature of the business, put at the disposal of the Mudarib or the Muclarib must have free access to and control over the capital.

5.2.1.7 Rules relating to profit and Loss.Profit is the amount earned in excess of capital. It is the end objective of Mudarabah contract. The following conditions should be satisfied relating to profit: It should be for both the parties, and no party should have possession thereof without the other. The mechanism for distribution of profit must clearly be expressed To eliminate uncertainty and any possibility of dispute. The Distribution of profit must be on the basis of an agreed percentage of the profit and not on the basis of a lump sum or a percentage of the Capital. The parties should agree on the ratio of profit distribution when the contract is concluded. However, it is permissible to change the ratio of distribution of profit at any subsequent time.

5.2.1.8 Rules regarding Roles of Sahib al-maal.

In Mudarabah, Sahib al-rnaal provides the capital and Mudarib Undertake the management. Therefore, the Sahib al-maal should hand over the agreed capital to Mudarib and leaves everything to Mudarib with no interference from his side but he has the authority to: A) B) Oversee the Mudarib's activities and Work with Muclarib, if the Mudarib consents.

5.2.2 Musharaka Investment: 5.2.2.1 Definition of Musharaka.Musharaka may be defined as a contract of partnership between two or more individuals or bodies in which all the partners contribute capital, participate in the management, share the profit in proportion to their capital or is per pre-agreed ratio and bear the loss, if my, in proportion to their capital/equity ratio. As per this definition the Bank may take part in a business with its Client(s), where both the Client and Bank provide capital in fixed proportions, take part in the Management of business and share the profit in proportion to their Respective capital ratio or at pre-agreed ratio and bear the loss, if any, in proportion to their respective capital/equity ratio.

5.2.2.2 Basic Feature of Musharaka:Musharaka is the second basic investment mechanism of Islamic Banking. The Arabic term Musharaka has been derived from the word "Shirkat". The very word "Shirkat" means "partnership". Musharaka is a partnership concern wherein two or more persons/firms invest capital with a view to earning profit. In doing so they take part in the management activities & undertake to earn/sustain profit/loss. The profit so earned in the enterprise to be distributed between/among the partners as per pre-agreed ratio. In the case of sustaining any loss, the entire amount of the same to be borne by the partners as per their capital ratio, In the Musharaka investment mechanism the Bank as well as the client provide required capital. As stated above the term Musharaka has been derived from Arabic word 'Shirk" which means partnership. No specific rule is there regarding capital participation of the parties. The capital participation may be equal or unequal. Both the parties i.e., Bank as well as the client can take part in the management activities. Provision is also there to empower one party

to lake part in the management activities on behalf of another party is the trusty or agent thereof. The profit so earned in the enterprise to be distributed between/among the partners as per pre-agreed ratio. In the case of sustaining any loss, the entire amount of the same to be borne by the partners as per their capital ratio.

5.2.2.3 Types of Musharaka:Musharaka, in the context of Islamic modes of financing, may be of two types:

1. 2.

Permanent Musharaka Diminishing Musharaka.

(i) Permanent Musharaka: In this type of Musharaka, the Bank participates in the equity of a company either in equal or unequal ratio and shares the annual profit at a pre-agreed ratio or bear the loss, if any, in proportion to the ratio of equity where termination period of the contract is not specified. This is also called continued Musharaka. Though such type of Musharaka is originally intended to continue up to the dissolution of the enterprise/company, but one can sell his share of equity before dissolution. Islamic Banks can