Origin of the Term Mudharaba

Al Kasani in Bada'i al-Sana'i Vol 8 (May Allah have mercy on him) states that the term mudharabah is derived from darb fil al-ard which means journeying through the land seeking the bounty of Allah. Kasani also mentions that the jurists of Medina called it muqaradah or qirad. Muqaradah being derived from qard, which means refraining or abstaining from something. In this case the rab al mal (owner of the capital) refrained from the right of disposal in his own wealth and delivered it to the mudharib(worker).

Al-Sarkhasi (May Allah have mercy on him) (al-Mabsut Vol 22) choosing between the terms says: We selected the first term i.e. Mudharaba) as it corresponds with what is in the Quran,

''And others who journey through the land seeking the bounty of Allah'' [73:20] i.e. journeying for trade.

Definition

Shaikh Taqiuddin an-Nabhani (May Allah have mercy on him) states in The Economic System in Islam that it is the partnership of a body with property. It means that one pays his property to another person so as to trade with it for him and the resulting profit is divided amongst them according to what they stipulated.

Legal Justification

Al-Sarkhasi (May Allah have mercy on him) in al-Mabsut mentions that the proof for this type of partnership is the verse;
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''And others who journey through the earth seeking the bounty of Allah.'' [ 73:20].

Shaikh Taqiuddin an-Nabhani (May Allah have mercy on him) states in The Economic System in Islam that Mudharaba is allowed by Shar'a due to the narration that ''Al-'Abbas ibn 'Abdul-Muttalib used to pay the property of the Mudharaba and put certain conditions on the Mudharib.'' This (information) reached the Messenger of Allah (salAllahu alaihi wasallam) and he consented to it.

Shaikh Taqiuddin an-Nabhani also mentioned that the Ijma'a of the Sahabah was established that the Mudharaba is allowed. Ibn Abu Sheeba narrated from 'Abdullah ibn Hameed from his father from his grandfather ''that 'Umar ibn Al-Khattab gave him the property of an orphan as a Mudharaba so he worked with it and gained a profit, and 'Umar divided the surplus with him.'' Ibn Qudamah narrated in Al-Mughni from Malik ibn al-'Alaa ibn 'Abdurrahman from his father from his grandfather that '''Uthman loaned him property as a Mudharib (Qaradh).'' It was also narrated from ibn Mas'oud and Hakeem ibn Hizam that 'the two of them entered into loan (Qaridha).' All of this occurred with the knowledge of the Sahaba and none was reported to disagree with the proceedings or deny their validity, confirming their Ijma'a on the Mudharaba.

The Mudharib – The Worker

The Mudharib is a trustee (amin) for the capital entrusted to him by way of Mudharaba. He takes possession of the capital with the permission of the owner (by entering into a contract after an offer and acceptance has occurred). If the capital is destroyed in his possession without any negligence on his part, then there is no liability for him. Also mentioned by Ibn Abidin in his Hashiyah.

The Mudharib is also an agent of the rabb-al-mal in whatever transactions he undertakes with the wealth of the Mudharaba. He is the one who buys and takes delivery of stocks, and he is the one who is able to return faulty goods and the one whom any legal action will be directed towards.

If he is grossly negligent or he violates the conditions of the contract, such as when the Muwakkil restricts him in the way he can dispose of his property, then the Mudharaba maybe annulled and the Mudharib becomes liable.

The Muwakkil - The Owner of the Property

The owner of the property has no right to dispose of the property that belongs to the company, for or on behalf of the company. Thus it is invalid for the owner of the property to work with the Mudharib, even if the owner stipulated to do so. Rather it is the mudharib who disposes and works, and he has full control over the property.

Shaikh Taqiuddin an-Nabhani states that this is because the contract of the company was concluded on the body of the Mudharib, and the property of the other partner. It is not concluded on the body of the owner of the property, who is like a foreigner to the company and who does not have the right to dispose of anything which belongs to the company.

However the Muwakkil is permitted to restrict the Mudharib in his disposal and the Mudharib must restrict himself in his disposal in accordance with these stipulations. The Mudharib is not allowed to disagree with him because he disposes by the permission of the owner. If the owner permitted the Mudharib to trade with wool only or he prevented him from shipping the goods by sea, the owner has this right to restrict him in these matters. However, this does not mean that the owner of the property disposes in the company. Rather it means that the Mudharib is restricted within the limits defined by the owner of the property. Despite this, the disposal in the company is confined to the worker (Mudharib) only, and the owner of property has no right of disposal.

Furthermore Mudharaba would not be valid until the property is given to the worker by the Muwakkil and the Mudharib is given a free hand over it, because Mudharaba requires handing over the property to the Mudharib.

In Mudharaba, the share of the worker must be defined and the property used in the Mudharaba contract must be of a defined amount. Al Kasani in Bada'i al-Sana'i Vol 8 mentions that if the amount is uncertain or unknown the mudharabah is not valid, as this will lead to an uncertainty of proft.

Profit & Loss

The loss in the Mudharaba is not subject to the agreement of the partners but rather to that which is stipulated in the Shar'a.

Shaikh Taqiuddin an-Nabhani (May Allah have mercy on him) states in The Economic System in Islam ''This loss is defined by Shar'a to be only on the property, none of it is upon the body (Mudharib). Even if the capital partner and the mudharib were to agree that the profit and loss is divided among them, the profit would be between them while the loss is only on the property. This is because the company is similar to representation (Wikala) and the agent (Wakeel) does not guarantee. The loss is upon the principal (Muwakkil) only.''

Abdurraziq narrated in Al-Jam'i from 'Ali (ra): ''The loss (Al-Wadhi'a) is on the property and the profit is according to what they stipulated.'' The body however does not lose property, it loses what it spent of effort only and the loss remains on the property.

Forms of Mudharaba

Shaikh Taqiuddin an-Nabhani describes other forms of Mudharaba, such as where two people enter into a partnership with their properties with one of them also acting as the body. So if two persons had between them three thousand dirhams, one of them having two thousand and the other one thousand, and the owner of the two thousand permitted the other to dispose of the capital with the profit divided fifty/fifty, the company would be valid. The worker would be the owner of the one thousand dirhams as a Mudharib to the owner of the two thousand, and would also be his partner. Similarly, Mudharaba could be through the partnership of the capital of two persons and the body of a third person. All these are forms of the Mudharaba.

Furthermore Mudharaba is permitted with non-Muslims. Al-Sarkhasi states in al-Mabsut Vol 22) that ''There is no harm if a Muslim accepts money from a Christian by way of Mudharaba because it is a type of trade and mu’amalah. It is therefore an agency granted by the rabb al-mal for transactions in the wealth. Further there is no harm if a Muslim undertakes sale and purchase for the Christian by virtue of the agency.''

However al-Sarkhasi does mention that it is disliked (makruh) for a Muslim to give wealth to a non-Muslim. The reason being that the non Muslim may undertake transactions such as dealing in riba, wine or pork. Although the contract of Mudharaba is permitted.