Mudarabah

[Sapphire Capital]

Qard meaning 'surrender' is used to refer to the surrender of capital, hence the alternative name for mudarabah which is muqaradah. The term mudarib, a user of the capital of an investor (the investor being the rabb al-mal), gives rise to the alternative description of this form of finance, hence mudarabah. The mudarib, regarded as an entrepreneur, contributes management input, itself viewed as a form of capital. Widely agreed conditions applied to modern mudarabah contracts are that:
a) the investor is an investor on a non-executive basis
b) according to Imam Hanifa, the contribution of capital to the mudarabah is to be made in the form of cash. Imam Malik however argues that a non-cash contribution can be made provided that its cash value can be established prior to employment in the partnership. Thus material contributions must first be valued or sold for cash before establishing the contributor's share in the mudarabah.
c) a profit share between mudarib(s) and investor(s) is agreed at the outset. Profits can be shared in any ratio agreed at the outset of the mudarabah.
d) ownership of the invested assets remains with the investor at all times.
e) losses should be shared according to the financing share of each financier. The financier's maximum loss is limited to his share of the financing and the mudarib must not bear any of loss attributable to invested capital. Any liability is limited to the extent of the total capital contribution made by the investors, except where such an investor has allowed the mudarib to incur debts on his behalf.
f) with the permission of the investor, the mudarib may contribute some of his own capital to the project or raise fresh capital from others on the basis of mudarabah.
g) the mudarib may only lend available funds with the permission of the investor.
h) the mudarib is not allowed to draw remuneration in any other form than profit-share. In the absence of a guaranteed wage, the entrepreneur has no recompense for his efforts unless the project is profitable.
i) mudarabah may be enacted as a single-tier agreement in which the investor deals directly with the entrepreneur. In a two-tier mudarabah, investors pool their funds with an intermediary who subsequently deals with entrepreneurs.
j) the mudarib may be required by investors to engage only in strictly defined activities in which case the mudarabah becomes one of mudarabah al-muqayadah. Where no restrictions apply, the mudarabah becomes one of mudarabah al-mutlaqah.
k) Imams Hanifa and Hanbal argue that the term of a mudarabah can be restricted, whilst Shafi and Malik argue against any such restriction.

for further reading:

www.darululoomkhi.edu.pk/fiqh/islamicfinance/mudarabah.html
cief.wordpress.com/2006/04/02/mudarabah/