Fundamental Principles of Mudarabah

Before executing the Mudarabah form, the following principles must be observed to ensure that the arrangement complies with Shariah requirements:

1. Definition of Parties

In a Mudarabah arrangement, one party provides the capital while the other undertakes the business activity. The capital provider shall be referred to as the Rabb-ul-Maal, and the working partner shall be referred to as the Mudarib.

2. Determination of Profit

For a valid Mudarabah, it is essential that the respective shares of both parties in the profit are determined as percentages of the actual realized profit, and not as a percentage of the capital. Any stipulation guaranteeing a fixed return or linking profit to the capital amount is impermissible.

3. Compliance with Agreed Terms

The Mudarib acts as an agent in deploying the capital for business purposes and is therefore bound to comply strictly with the terms and conditions agreed upon with the Rabb-ul-Maal. Any violation of such terms shall render the Mudarabah fasid.

In the case of a fasid Mudarabah:

All profit and loss shall belong exclusively to the Rabb-ul-Maal.

The Mudarib shall be entitled only to ujrat al-mithl (customary market compensation), provided that such compensation does not exceed the agreed profit share.

If the ujrat al-mithl exceeds the agreed profit share, the Mudarib shall be entitled only to the agreed profit share.

In the event of loss, the Mudarib shall not be entitled to any compensation.

4. No Additional Remuneration

The Mudarib shall not be entitled to any remuneration, fee, or compensation for services other than the agreed share in the profit.

5. Performance of Work

The business activity shall be carried out exclusively by the Mudarib. It shall not be permissible to impose a condition requiring the Rabb-ul-Maal to participate in the business. However, the Rabb-ul-Maal may, with the consent of the Mudarib, assist voluntarily and without any entitlement to compensation.

6. Liability for Loss

The Mudarib shall not be liable for any loss of capital, whether total or partial, nor for any business loss, provided such loss does not result from negligence, misconduct, or breach of agreed terms. In the event of negligence or misconduct, the Mudarib shall be fully liable.

7. Capital as Trust (Amanah)

Prior to its investment, the capital shall be deemed an amanah (trust) in the hands of the Mudarib and must be utilized strictly for the agreed business.

If the Mudarib diverts the capital for any unauthorized purpose, including personal use or a different business, he shall be deemed a usurper (ghasib) and shall be liable for the capital. In such a case:

The transaction shall be treated as misappropriation.

Any profit generated shall be attributable to the Mudarib but shall be Haram for him.

The Mudarib shall be obligated to return both the original capital and all such profits to the Rabb-ul-Maal.

If the Mudarib fails to invest the capital and instead uses it to discharge personal debts, and subsequently makes periodic payments to the Rabb-ul-Maal under the pretense of profit, such payments shall not be lawful for the Rabb-ul-Maal. If received, they must be returned. However, if the Rabb-ul-Maal was unaware of such misconduct, he shall not be held liable.

8. Nature of Capital 

The capital in a Mudarabah must consist of ain (i.e., specific and identifiable assets). If all or any portion of the capital consists of mere usufruct (benefit), the Mudarabah shall not be valid.

For example, if one investor contributes cash while another contributes the usufruct of a shop, and both are given to a Mudarib for investment, such an arrangement shall be invalid.

9. Multiple Investors and Partnership (Shirkat-ul-Inan)

Where the Mudarib receives capital from multiple investors, a partnership (Shirkat-ul-Inan) shall arise among the investors themselves.

If, after commencement of the business:

a new investor wishes to join; or

an existing investor wishes to contribute additional capital,

then the existing investors’ shares—being represented in the form of goods or assets—shall be valued at their prevailing market value at the time of the new agreement, in order to determine their respective capital contributions.

10. Business Beyond Original Capital

If the Rabb-ul-Maal has not granted permission to the Mudarib to conduct business beyond the provided capital, and the Mudarib nonetheless does so, then all profit and loss arising from such excess business shall belong exclusively to the Mudarib.

If such permission is granted, a separate partnership (Shirkat al-Wujooh) shall arise in respect of the additional business.

In such a case:

Profit and loss shall be distributed according to the agreed liability ratio.

If no liability ratio is specified, both parties shall share liability and profit equally (50% each), irrespective of the profit ratio agreed in the original Mudarabah.

Illustration:

If the Rabb-ul-Maal invests PKR 1,000,000 with a profit ratio of 30% (Rabb-ul-Maal) and 70% (Mudarib), and permits additional business of PKR 1,000,000 with liability shared 40% by the Rabb-ul-Maal and 60% by the Mudarib, then:

Profit from the original business shall be divided 30% / 70%.

Profit from the additional business shall be divided 40% / 60%.

Loss from the original business shall be borne solely by the Rabb-ul-Maal.

Loss from the additional business shall be shared 40% / 60%.

 

If the Rabb-ul-Maal assumes full liability for the additional business, then all profit and loss from such business shall belong exclusively to him.

If no liability ratio is determined, then:

Profit from the original Mudarabah shall be distributed as agreed;

Loss from the original Mudarabah shall be borne by the Rabb-ul-Maal;

Profit and loss from the additional business shall be shared equally.

Note: Proper record of capital proportions in both the Mudarabah and the additional partnership must be maintained to ensure accurate determination of profit and loss.

11. Lending and Borrowing

The Mudarib shall not, without the explicit consent of the Rabb-ul-Maal:

extend loans from the Mudarabah capital; nor

incur liabilities or borrow funds for the business.

With such consent:

The Mudarib may extend loans to third parties.

In case of borrowing, if the borrowed funds are transferred to the Rabb-ul-Maal, then repayment obligations and any resulting profit or loss shall rest with the Rabb-ul-Maal.

Otherwise, such obligations shall remain with the Mudarib.

If, after taking possession, the Rabb-ul-Maal reintroduces such funds into the Mudarabah, the rules outlined under Clause 9 shall apply.

Note

For the purposes of this agreement:

The Rabb-ul-Maal shall be referred to as the First Party; and

The Mudarib shall be referred to as the Second Party.

 

MUDARABAH FORM

Terms and Conditions

1. Execution of Agreement

 

This Mudarabah Agreement is executed on this day, dated ____________, between:

 

First Party (Rabb-ul-Maal):

Name: ___________________

S/O: ___________________

CNIC No.: ___________________

Address: ___________________

 

and

 

Second Party (Mudarib):

Name: ___________________

S/O: ___________________

CNIC No.: ___________________

Address: ___________________

 

The First Party has invested an amount of PKR ____________ with the Second Party under Mudarabah.

 

If the Second Party is also a partner, his capital contribution shall be PKR ____________, and the total capital of the business shall be PKR ____________.

 

Note: The increase or decrease in total business capital, as well as the determination of your share therein, shall be communicated to you on a monthly basis, duly certified by the administrator.

 

 

2. Profit Sharing Ratio

 

The profit shall be distributed as follows:

 

_______% to the Rabb-ul-Maal

_______% to the Mudarib

 

3. Treatment of Loss

 

Losses shall first be adjusted against profits. In the absence of profit, or where profit is insufficient, losses shall be borne from the original capital.

 

Furthermore, in accordance with Clause 10, any loss arising from credit transactions permitted by the First Party beyond the invested capital shall also be borne by the First Party to the extent of such permission.

 

4. Termination Restriction

 

Neither party shall have the right to terminate this Mudarabah Agreement prior to a period of ______ years without the mutual consent of the other party.

 

5. Settlement of Capital

 

Upon mutual consent prior to expiry, or upon completion of the agreed term, the capital shall be settled. The following modes of settlement may be adopted:

 

Until the settlement is actually executed, the Mudarabah shall remain in force, and the First Party shall continue to be entitled to profit.

 

(a) The First Party may sell his share to the Second Party.

 

(b) The First Party may sell his assets to a third party with mutual consent. In such case, the purchaser shall assume the position of Rabb-ul-Maal under the same terms and conditions.

 

(c) In case of multiple investors, the First Party may sell his share to another Rabb-ul-Maal.

 

(d) Where there is a single Rabb-ul-Maal, the following additional options shall apply:

 

(i) The First Party may grant time to the Second Party to liquidate all goods and assets, recover receivables and debts, convert them into cash, and thereafter settle the capital along with profit as per the agreed ratio.

 

(ii) The assets may be valued at prevailing market rates, and after determining profit, the Mudarib shall be paid his share, whereupon the Rabb-ul-Maal shall take over the business and assets.

 

Note:

 

If receivables are within the city, recovery expenses shall be borne by the Second Party.

If outside the city, such expenses shall be borne from Mudarabah funds.

If recovery expenses exceed the receivables, the excess shall be borne by the Second Party.

 

 

6. Continuity with Other Investors

 

Where the Second Party is managing funds from multiple investors, termination of this agreement by the First Party shall not affect the Mudarabah agreements of other investors who wish to continue.

 

7. Different Profit Ratios

 

In case of multiple investors, the Second Party shall have the discretion to assign different profit-sharing ratios to different investors.

 

8. Nature of Mudarabah

 

The capital is being provided on the basis of:

“Mudarabah Mutlaqah” / “Mudarabah Muqayyadah” (as applicable).

 

9. Fair Dealing Obligation

 

The Second Party shall conduct business without ghaban fahish (gross negligence or excessive unfair pricing). Any transaction involving ghaban fahish shall not be binding upon the First Party, and any resulting loss shall be borne solely by the Second Party.

 

10. Authority of the Mudarib

 

The First Party hereby grants full possession and authority over the capital to the Second Party, including the authority to:

 

Conduct cash and credit transactions;

Borrow up to PKR ____________;

Extend loans up to PKR ____________;

Conduct credit purchases and sales up to PKR ____________;

Enter into further Mudarabah or partnership arrangements with third parties using the capital.

 

 

11. Freedom of Trade

 

The Second Party is authorized to transact business with any person, including himself and his adult or minor children.

 

12. Expenses

 

Direct business expenses (e.g., travel expenses) shall be borne by the Mudarabah funds.

Indirect personal expenses (e.g., medical expenses) shall be the responsibility of the Second Party.

 

13. Monthly Drawings

 

Each month:

 

The First Party may withdraw PKR ____________;

The Second Party may withdraw PKR ____________;

 

as provisional amounts under the head of profit for personal expenses.

 

Final profit and loss shall be determined upon completion or termination of the agreement.

 

 

14. Termination upon Death

 

This Mudarabah Agreement shall terminate upon the death of either party.

 

Each party hereby appoints a nominee (details provided below), whose responsibilities are outlined in Clauses 15 and 16.

 

 

15. Nominee of First Party

 

The nominee of the First Party shall be authorized to settle the assets in accordance with Clause 5.

 

However, the legal heirs of the First Party may, if they so wish, enter into a new Mudarabah Agreement with the Second Party.

 

 

16. Nominee of Second Party

 

In the event of the death of the Second Party, his nominee shall act on his behalf and settle all matters with the First Party through mutual agreement.

 

Declaration

 

This document has been executed to serve as a formal and binding record for future reference.

 

SIGNATURES

 

First Party (Rabb-ul-Maal)

 

Name: ___________________

S/O: ___________________

Signature: ___________________

 

Nominee of First Party

 

Name: ___________________

S/O: ___________________

CNIC No.: ___________________

Relationship: ___________________

Signature: ___________________

 

Witness 1

 

Name: ___________________

S/O: ___________________

CNIC No.: ___________________

Signature: ___________________

 

Second Party (Mudarib)

 

Name: ___________________

S/O: ___________________

Signature: ___________________

 

Nominee of Second Party

 

Name: ___________________

S/O: ___________________

CNIC No.: ___________________

Relationship: ___________________

Signature: ___________________

 

Witness 2

 

Name: ___________________

S/O: ___________________

CNIC No.: ___________________

Signature: ___________________

 

DECLARATION STATEMENT

 

I, ___________________, S/O / W/O ___________________, CNIC No. ___________________, resident of ___________________, hereby declare that:

 

The capital invested by me in this Mudarabah has not been acquired through any unlawful or non-Shariah-compliant means.

The bank account used for transactions with the Mudarib has never been, and will not be, used for any illegal purposes.

 

I further confirm that the above statement is true and correct. In the event of any discrepancy, I shall bear full legal responsibility, and the Mudarib shall not be held liable in any manner.

 

Declarant Signature: ___________________

Contact Number: ___________________

 

 

Witness 1

 

Name: ___________________

S/O: ___________________

CNIC No.: ___________________

Signature: ___________________

 

Witness 2

 

Name: ___________________

S/O: ___________________

CNIC No.: ___________________

Signature: ___________________