Saturday, March 20, 2010

The Concept of Mudharabah

Before we move on further to the concept of two-tier mudharabah, let’s briefly define what actually mudharabah is. Historically, different scholars had put their own interpretations which the differences were only about the depth and breadth of the definitions.

The above diagram shows a traditional flow of mudharabah practice which implies ‘rabbul mal’ as a capital provider and investor to the ‘mudharib’ which the latter acts as an entrepreneur to establish and manage the mudharabah venture with pre-agreed ratio of profits upon the completion of the venture. It seems more emphasized to the relationship between the investor and entrepreneur rather than the creditor and debtor in the conventional practice.

In case of losses which caused by the natural impacts of business cycle’, investor will absorb fully 100% and the entrepreneur only loses in term of his opportunity cost. That means he receives nothing for his entrepreneurship in the venture. However, if the losses incurred due to the negligence or mismanagement by the entrepreneur, he should also be liable to a certain portion of the losses.

Amongst the definitions of mudharabah which were prescribed by the prominent Muslim scholars as per below:

(1) Malikis – “A trading agency in delivered cash for a portion of profits”

(2) Shafie – “An agreement between an owner of capital and a worker which the former hands on the capital to the latter to establish trading. Upon the completion of the trading, the arising profits will be shared between them”

(3) Hanbali – “A contract which a person hands on his capital to another for the purpose of trading and the profits arose from the trading will be shared according to their stipulation”

(4) Hanafi – “A partnership which associates with profit sharing whereby capital is provided by one side and workmanship by the other side”

(5) Majallah – “A partnership which one party acts as supplier of the capital and another party contributes his works. The former is called ‘owner of capital and the latter is workman”

(6) Ibn Rusyd – “It happens when a party gives his property to another with trading motive and if the ventures generate profits, mudharib will share the profits as per agreement, one third or one-forth or one-fifth”

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