THE JURISTIC FRAMEWORK OF MUDARABAH CONTRACTS AND ITS MODERN PRACTICES

Ibrahim Jamiu Otuyo1 & Jumah Habeeblai Abiodun2

1 Professor, Department of Islamic Studies, Al-Hikmah University, Ilorin, Nigeria. ibrahimotuyo@yahoo. com 2 (Corresponding author). PhD Candidate, Al-Hikmah University, Ilorin, Nigeria. jumahabiodun@gmail. com

Vol. 10. No. 1 Abstract April Issue Islamic financial institutions have come to stay while more prospects in the 2021 industry grow day by day. With the permeation of the Islamic financial institutions (IFIs) across the globe, there is need for emergence of new academic researches that will surf across the Islamic heritage where numerous components of investment tools are explored and presented to the modern economic understanding. Mudarabah is one of the most popular investment tools and applied instruments in Islamic financial institutions. Fraught with numerous benefits and prospects that are always secured in Mudarabah transactions if applied and practiced within the dictates and conditions laid down by as discussed and enunciated by Islamic jurists across the globe. The objective of this work is to disclose the juristic framework of this Islamic contract, conditions of its application and its modern usages and benefits in Islamic banking. The research is a library base through consultation of some original references in Islamic jurisprudence in order to make sure that submissions are worthwhile while in some cases citations are made to modern available literatures in the subject. Results and findings of this work revealed that the Mudarabah contract does not enjoy maximal preference in Islamic banks and other financial markets as compared to other models and thus it is recommended that Mudarabah contacts is not necessarily required to replicate its early structures as found in the books of but can rather be structured in a way that suits the modern requirements without necessarily bypassing its basic shariah requirements. Some modern innovative methods of investing in Mudarabah contracts are cited and as well recommended

Keywords: Financial, Mudarabah, Industry, Heritage, Investment.

INTRODUCTION activities of Islamic financial institutions Islamic finance is currently experiencing a (herein latter referred to as: IFIs) keep swift growth and development in the growing day by day. Discussion of modern world as the increasing growth of Mudarabah as a transactional contract is the Muslims population globally has made an offshoot of the discussion of Shirkah or halal earnings and consumptions not only Sharkah (Islamic partnership) in Islamic required but also necessary (Jumah fiqh (jurisprudence), since the former is a Habeeblai & Aminu Yakubu, 2019). branch phenomenon from the latter. Amongst the areas in which the In the modern practices of the Islamic finance tends to thrive is the IFIs, Mudarabah transactions take Mudarabah contracts, as the Mudarabah significant shares in the list of the IFIs

32 http://perdanajournal. com/ Perdana: International Journal of Academic Research (Social Sciences & Humanities) Vol. 10. No. 1 - April Issue 2021 eISSN: 2600-9463 investment instruments. Being a classical the capital provider (rabb al-mal) would financing tool from the Islamic economic cut off some of his money to be utilized by theories, the concept has enjoined a the Mudarib in business activities” plethora of discussions in the books of (Dasuki, A. W, 2016). Islamic jurists across ages. From the account given above, it is In this paper, the researchers have obvious that mudarabah from the lexical painstakingly surveyed this concept vis-a- point of view is being derived from vis its lexical formation, juristic “darbun fi al-ard”, which means conceptualization and rulings, legal journeying through the land seeking the framework and conditions, economic bounties of Allah. As a result of his work worthiness and practical operations. and travel, the mudarib (worker, risk- We will examine various taker, or entrepreneur) becomes entitled definitions cum rulings of Mudarabah as to part of the profits of the venture. given by different jurists within but not As established in the books of fiqh restrictedly to the four popular juristic (Islamic Jurisprudence), the jurists of schools and from the modern scholastic Madinah or Hijaz preferred the term writings in the field of Islamic economy in muqaradah or qirad. Some scholars also other to reach at a common concept of the preferred the term “mu‘amalah” in contract along with other necessary replacement of the duo (Ibnu ‘Abd Al-Barr, conditions and rulings. Yusuf ‘Abdullah, 2014), although the term Mudarabah is commonly used and is the DEFINITION OF MUDARABAH most popular of all the three related Lexical Definition Of Mudarabah terms. According to Az-zabidi, the word “daraba” Stating the reason (s) for being the root word of “daraba” suggests preferring the term mudarabah over numerous literary denotations among other related terms Al-Sarakhsi says “we which is to embark on a trade- journey: selected the first term (that is: “he roamed about in the land / or in the mudarabah) as it corresponds with what cause of Allah, if he travels or journeys on is in the (referring to Allah’s it trading. The word “darb” applies to all statement) “And others who journey actions except few” (Al-Zabidi Murtada, through the land (yadribuna fi al-ard) n.d). seeking the bounty of Allah” [Q. 73: 20] In his own contribution Ibnu (Al-Sarakhsi, 1993). Manzur writes: “He partners with him in wealth from the MUDARABAH word “Mudarabah” which is also called In practical operations, Mudarabah is a “Qirad” and it means that “you give a kind of partnership (business) on the person from your wealth to trade with it basis that capital comes from a part and with the agreement that the profit be venture and trading comes from the other shared accordingly or that he has a part and the capital giver is referred to as predetermined known portion (of the “rabb al-mal” the capitalist or financier profit). And it is taken from “Darbu fil -ard” while the risk-taker is referred to as which means travelling through the land in “mudarib” the industrious” (Majallat Al- the earth in search of provisions. Allah Ahkam Al-‘Adliyyah, n.d). It refers to a says” and others travelling through the contract whose subject matter is the land, seeking for Allah’s bounty” [Q. 73:20] profit where a party contributes money and it is on this basis that a worker is and the other party contributes skill” (Ibn referred to as “mudarib” because he is the ‘Abidin Muhammad Amin, 2003). one who travels through the land” (Ibn Ibn Juzayy defines qirad as a Manzur, 1994). concept where somebody gives out his Additionally, as cited in a work, Al- wealth to another to make a business Zamakshari notes that: the mudarabah whilethe accrued profits are shared on a contract may also be referred to as pro rata basis” (Ibn Juzayy, n.d). muqata‘. This simply refers to the fact that According to Al-Nawawi (2005)

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“it is a contract that consists of appointing the Muslims (scholars) that Qirad somebody (of carrying out a transactional (Mudarabah) is permissible” (Ibn Rushd, responsibility) by the soul-owner or to give n.d). The justification (s) and authority of him a wealth for trading on the agreement this ruling of legality and permissibility that the profit be shared”. are numerous among which are the Ibn Muflih (1418H) from the following: Hanbali school defines mudarabah saying: 1. From the Quran: Allah’s statement in “it is for someone to give out his money to Surah al-Muzzammil which reads another for business purpose while profit is thus: “and others who traveling shared in between them on a pro rata through the land, seeking of Allah’s basis”. bounty” (Q73: 20). The above definitions all clearly 2. Allah’s statement in the Quran which state that the main motive behind this reads thus: “but when the prayer is contract is to partner in the sharing of the ended, they disperse abroad in the land anticipated profit. and seek Allah’s grace” (Q62:10). According to al-Kharqi, there are Although the above verses do not different forms of mudarabah and these directly address the legality of definitions only suggest only a form, Mudarabah, but they have been although Nyazee has fortunately merged interpreted by the jurists to include all these forms together in his work when (in their meanings) those who travel he cited Al-Kharqi that mudarabah: “is the for the purpose of trading and seeking participation by two persons with the permissible income as cited by al- wealth of one, or two persons with their Kasani (1984). wealth, or the wealth of both and the body of one person” (Nyazee & Imran Ahsan, From the Sunnah there are also 2006). numerous incidents among which are: According to Rashad Hasan Khalil 1. The incidence of Mudarabah that had with his wife (ﷺ) the most sententious definition for the prophet (1981) mudarabah is to say that “it is an Khadija (May Allah be pleased with agreement which implies given out her) prior to their marriage as particular cash-or its equivalent- whose contained in books of sirah: quantity, quality and kind are known to a “Abu N ‘aim and others related that ventured to Syria for (ﷺ) sane and prudent person in order to trade the prophet with it in return of a known shared Khadija (may Allah be pleased with portion”. her) with her wealth prior to their In summary, mudarabah is a marriage for about a year and two contract based on a fiduciary relationship months and he was then in his (‘aqd al-amanah). Under this principle, a twenty-fifth year and she released mudarib manages the mudarabah asset in with him her slave-boy Maysarah trust and is not liable for the impairment and that was before the call to of the asset except for impairment which prophecy” (Shihab Al-Din Ramli, is a result of the mudarib’s misconduct, 1984; Al-Zahabi, 2014; Ibn Kathir, negligence or breach of specified terms” n.d; Al-Salabi A. M, 2001; Al- (Bank Negara Malaysia, 2016). Mubarakfuri, 2002). 2. Al-Zayla‘i records numerous cases LEGALITY AND PERMISSIBILITY OF (many of which are not authentic) of MUDARABAH IN ISLAMIC LAW the companions’ transactions of Scholars of all known fiqh schools are of Mudarabah such as the case of the view that the mudarabah is a valid cumar and his two sons (‘Abdullah legal contract” (Muhammad Marjan & and ‘Ubaydullah), the case of Ahmed Mezbah, 2016). The Jurists are Ya‘qubu Al-Juhani and ‘Uthman ibn unanimous on this ruling. Ibnu Rushd ‘Affan, the case of Hakim ibn Hizam, relates this consensus in his book when he the case of Jabir ibn ‘Abdullah, the says: “And there is no controversy among case of ‘A’ishah and other

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prominent members of the contract, the owner of wealth may not have companions (may Allah be pleased the opportunity for a profitable with all of them) whose cases are investment, while the person who has such recorded in the books of history and an opportunity may not have wealth, and Fiqh (Al-Zayla‘i, 2010; Al-Sarakhsi, profit is acquired through both, that is, n.d). wealth and ability to transact. And in permitting this contract, the goals of both From the consensus (ijma‘): are achieved”. According to Ibn al-Mundhir and , the legality of Mudarabah can be TYPES OF MUDARABAH only proved through al-Ijma’ as there is no In Islamic jurisprudence, mudarabah is of expressed text in the Quran or the Sunnah two types namely: on the subject. Ibn Hazm said that: of all 1. Mudarabah Mutlaqah jurisprudential matters, there is any (Absolute/unrestricted): This is a kind of matter without having its prove (s) from Mudarabah in which the worker is not either the Quran or the Sunnah except restricted by any barrier, either place, qirad, we do not find any (expressed) time and\or other restrictions. He will be evidence that supports it, although there given freedom to his decision in the sales is a sound consensus on that (Ibn Hazm, and he has right to display his desired n.d; Ibn Mundhir, 2004). expertise and experience as possible as he In view of this, relation of scholars’ wishes, he can buy and sell whatever he consensus on the permissibility of thinks of as long as it is permissible and Mudarabah is maximally enunciated in does not contradict any of the general many of the books of Fiqh since there is no Sharicah provisions and maxims that any case of controversy on its govern transactions (Al-Maydani ‘Abd Al- permissibility. Ibn ‘Abidin from the Ghani, n.d; Rashad Hasan Khalil, 1981). , Ibn Rushd from the , Al- ‘Imrani from the Shafi‘is and 2. Mudarabah Muqayyadah IbnuQudamah from the Hanbalis relate (Conditional/Restricted): This is a kind of this consensus in their books (Ibn ‘Abidin, Mudarabah that is based on certain n.d; Ibn Rushd, n.d; Al-‘Imrani, n.d; Ibn restrictions is only acceptable and valid in Qudamah, n.d). the ’s and Hanbali’s jurisprudence From the analogy (): unlike the (Al-Zuhayli, n.d). In this kind, the worker Hanafis and the Malikis, the Shafi‘is and may be restricted from a particular the Hanbalis opine that mudarabah may business, person (s) and or a particular also get evidence of permissibility land. through qiyas (analogy). This analogy is In consequence, the mudarib is placed on musaqat (share-cropping). legally restricted not to act beyond the They rationalize that since musaqat is conditions but rather act and transact in permitted on the basis of necessity in the favor of the condition (Al-Kasani, n.d). sense that the owner of the tree may not Allah’s statement reads: {O you who have the knowledge or chance to share- believe! Fulfill (your) obligations} [Q5: 1]. also said: {Muslims are (ﷺ) crop while the one who has the The prophet knowledge or chance to do so may not (held) by their agreement except that have tree and this is the available which legalize the unlawful or that which circumstance in the mudarabah contract make unlawful the lawful} (Al-Tirmidhi, hence it is permitted just like musaqat n.d). (Nyazee & ‘Imran Ahsan, 2006). These and other related quotes affirm that there may be stipulated More so, economic necessity is conditions in transactions and that the one of the main justification (s) for the conditions are to be met as long as they legality of this contract as put by Al- are valid. Although, the Shafi‘i and the Sarakhsi (1993): Malikis resent the fact that mudarabah “Because the people have a need for this could be restricted and if it is, it is null and

35 https://perdanajournal. com/ Perdana: International Journal of Academic Research (Social Sciences & Humanities) Vol. 10. No. 1 - April Issue 2021 eISSN: 2600-9463 void, and the most correct opinion is that hold it is not valid while the Hanafis there is no harm in that (Nyazee & ‘Imran and the Hanbalis permit that, and this Ahsan, 2006). is the most correct there is nothing wrong in that as it doesnot contradict CONDITIONS OF MUDARABAH any fiqhi Maxim nor does it negate Since mudarabah is a kind of contractual any known Shariah principle (Rashad partnerships (sharikat al-‘uqud), all Hasan Khalil, 1981). general conditions of contracts in Islamic iii. The amount of the capital must be law are also applicable among which are: known to the parties at the inception conditions of legal capacity to become a of agreement. If the amount is not principal in a contract agency as regards certain and known, the Mudarabah is to the money-giver; and that of legal not valid because this will also lead to capacity to be an agent as regards to the uncertainty in calculation of the profit entrepreneur (mudarib) (Nyazee & ‘Imran which is the main bone of contention Ahsan, 2006). in Mudarabah contract, thus this Notwithstanding, there are other certainty of profit is a necessary specific conditions stipulated for the condition in Mudarabah (Rashad capital invested in mudarabah and Hasan Khalil, 1981). likewise for the profit incurred in the transaction. Jurists of different juristic As for the conditions that govern schools have stated that the capital with the profit incurred from the business, which this partnership is inaugurated jurists also state that: must certify certain conditions among i. The profit must be expressed as a ratio which are: or as part of the total profit such as half, i. The capital must be an absolute one-third, one-fourth etcetera of the currency and must not be given in profit. The profit must not be tangible properties (‘urud), and in the expressed as a percentage of the case where capital is in the state of capital invested or by stating a tangible properties the capital would particular amount from the profit be derived from the sale of the because no one knows if that particular properties and then employed as amount would be got as a profit or not, capital of mudarabah and this and this kind of condition invalidates condition is wholly- agreed upon (Al- the contract (Al-Nawawi, 1991). Ibn al- Nawawi, 1991). Mundhir states that: “And they (the ii. The capital must be delivered to the jurists) are unanimous that any mudarib before the commencement Mudarabah in which either or both of of work as he cannot commence work the parties stipulate for each other a prior to this. So if the money-giver certain amount of money is invalid” decides the capital would be a debt (Salim, 2013). Likewise, any conditions owed to him by the worker (mudarib) that may lead to the uncertainty of the the mudarabah is invalid according to profit will render the contract invalid the majority of jurists including the (Salim, 2013). Hanbalis (Al-Kasani, n.d; Ibn Juzayy, ii. The general rule in the sharing of n,d; Al-Nawawi, 1991; Al-Hajawi, n.d profits is equality, thus if the ratio for while some jurists from the Hanbalis sharing profit is not mentioned in the among which is Ibn al-Qayyim agreement the profit will be shared (1423H) opine there is nothing wrong equally except if any part/ratio of the in that as itt contradicts any fiqhi profit is stipulated for a party thus the maxim nor does it negate any known other part/ratio becomes the other’s Shariah principle. But if the debt is automatically (Salim, 2013). owned by a third-party but the money-giver only delegates the SOME RULINGS THAT GOVERN THE worker to collect it on his behalf, CONTRACT OF MUDARABAH scholars from the Malikis and Shaficis There are a set of rulings that guide and

36 https://perdanajournal. com/ Perdana: International Journal of Academic Research (Social Sciences & Humanities) Vol. 10. No. 1 - April Issue 2021 eISSN: 2600-9463 govern the permissibility and application becomes binding up to the date of of mudarabah among which are the actual or constructive liquidation. following; 2. When the contracting parties agree to determine a duration for which Mudarabah Is Not A Lazim (Binding) the contract will remain in operation. Contract In this case, the contract cannot be One of the features of partnership terminated prior to the end of the business in Islamic law is that it is an designated duration, except by annullable, terminable and cancellable mutual agreement of the contracting contract, that is, either of the partners has parties (Accounting and Auditing the right to discontinue the contract Organization for Islamic Financial without prior consent from the other institutions, 2015). party (Ibn Hazm, n.d). Consequently mudarabah is a The Mudarib Is Amin And Wakil (A kind of partnership in which the Reliable And An Agent) contractor is not legally compelled not to The mudarib is legally a trustworthy, quit, but rather it is a ja’iz (annullable) faithful and secure. He becomes a trustee contract which means either the worker for the capital entrusted to him. Thus, if or the capital-giver has the right to the capital entrusted to him is destroyed discontinue the contract agreement. in his possession without any negligence There is a unanimous opinion that from his end, he is not liable and legally this right of discontinuity is guaranteed responsible for the repayment as long as before the take-off of the business he has not engaged the capital to a although there are controversies in some different cause for which it was remitted. areas like the propriety of informing This ruling implies that any claim either of the party before the quit and of disaster in respect of the capital which whether the capital must remain capital is proved beyond any reasonable doubt as at the time of quitting or not and some will not be refunded. This is because the other related issues. reliability nature of the mudarib prevails However there is juristic and he would not be legally reliable of the controversy on whether the worker or the damage in as much as he has not walked financier can discontinue the contract out of the agreed condition of service such after the commencement? while the as traveling through a land which the majority of jurists among the Hanafis, the agreement prohibits or trading in a Shafi‘is and the Hanbalis hold that as business that is not authorized. permissible since the status quo is that At this juncture, it is noteworthy mudarabah can be discontinue. the that the power of the mudarib to decide on Malikis hold it is not permissible after the the nature of the mudarabah varies commencement because that will according to the kind of mudarabah constitute harm to one of the contracting concluded between the parties, that is, parties and this is the most correct view whether the mudarabah is mutlaqah (Al-Zuhayli, n.d). (absolute) or muqayyadah (restricted) Accounting and Auditing and the nature of his responsibility or Organization for Islamic Financial otherwise is directly related to the kind of institutions (AAIOFI) Shariah Standard Mudarabah agreed upon (Al-Zuhayli, n.d). No. (13) 4/3 explains this thus: The general principle is that a Mudarabah The Mudarib Is A Partner When Profit contract is not binding, i. e. each of the Emerges contracting parties may terminate it The worker becomes a partner to the unilaterally except in two cases: money-giver when profit surfaces 1. When the mudarib has already because as stated earlier, the main commenced the business, in which concern of this contract is partnership in case the mudarabah contract profit. Here, the wealth or the profit incurred from the mudarabah becomes a

37 https://perdanajournal. com/ Perdana: International Journal of Academic Research (Social Sciences & Humanities) Vol. 10. No. 1 - April Issue 2021 eISSN: 2600-9463 joint ownership (sharikatul-milk) this case, if any profit emerges it belongs between the worker and the financier. only to the mudarib since he is liable for It is also to be noted that the profit compensating whatever he was given by must not be shared unless its emergence the money-giver” (Ibn Hazm, n.d). is secured, Ibn ‘Abidin writes: “His (the worker’s) right to any amount (from the Only The Mudarib Has The Right Of profit) depends on whether the profit is Administration sure and present” (Ibn ‘Abidin, 1992). So The basic law of this contract stipulates the worker must not single-handedly take that only the mudarib has right to his own portion of the profit in the administer sales and other transactional absence of the other party (money-giver). activities because he is only the one who It was agreed unanimously by the carries out such activities, hence the jurists that profit in mudarabah should be money-giver does not share from this distributed on pro rata basis. The right and must not specify that in the proportion must be decided at the agreement draft. Although he may seek to beginning of the contract by both have the right to the business contracting parties. The division of administration provided the worker mudarabah profit in the form of fixed consents to his request, and if he does not amount is not accepted and will invalidate he is not entitled to have it (Nyazee & the contract. The fixed amount of profit is ‘Imran Ahsan, 2006). prohibited because it leads to the inequitable situation of sharing the The Mudarib’s Financial Up-Keeps proceeds of the business (Nyazee, ‘Imran In many cases, activities of mudarabah Ahsan, 2006). may necessitate that the worker be given right to a particular financial spending out The Vitiated Mudarabah Becomes A of the capital slated for the mudarabah in Vitiated Ijarah order to have good-running of the If the mudarabah becomes vitiated the business. Jurists have consequently contract becomes null and void and the discussed whose responsibility for these capital must be returned to the owner and necessary financial needs and the the mudarib would not be responsible for summary of their discourse is that; the any damages on the capital provided he is mudarib has any right to financial not careless; and if profit emerges therein, upkeeps either when he is a traveler or a scholars differ on the basis of its sharing city dweller and this the view of the Shafi’s into five opinions – the most correct of and the hanbalis although the hanbalis these opinion is that the mudarib will be makes that conditional to their agreement given his adequate share from the profit before the take of of the contractual either half, one-third or two-third and this activities. opinion is upheld by Ibn Taymiyyah (Al- Some jurists the likes of Alhasan Zuhayli, n.d). Al-Bisri allow that either he is a traveller or city-dweller. the majority of the jurits The Mudarib Becomes A Usurper If He among the Hanafis and the Malikis permit Violates Stipulated Conditions that only if the mudarib is journeying and If the worker for any reason seeks to provided he is reimbursed for this from violate the agreed-upon conditions in the the accrued profits or even from the inception of mudarabah he becomes a capital in the absence of any profit. usurper and will be reliable for any The most corrects is that the damage caused in the process. Alhaskafi mudarib must be sure whether he can says: “and it (Mudarabah) is usurpation if take any of his financial up-keeps during he violates” (Ibn ‘Abidin, 1992). and in related to mudarabah exercise Ibn ‘Abidin (1992) comments on from the mudarabah pool or not based on this by saying: “because he has the kind of mudarabah agreement he transgressed on another person’s wealth holds (Al-Zuhayli, n.d). thus he becomes a usurper and liable”. In

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Permissibility Of Having Multi- suitable Islamic alternatives for legalizing Investors And/Or Multi-Workers many of the modern interest–related It is permissible to have, in mudarabah transactions. contracts, a number of investors and/or It has had vivid roles of converting workers, so there is no harm in getting investments of the riba-based banks, two parties to the contract; an investor insurance and bonds through halal and a worker or more than one party on instrument in order to align with the either side, that is, a number of investor sharicah dictates and rulings whereas and a number of a workers, such as having modern investments would be Shariah three investors giving their money to a compliant contracts. worker or to more than a worker and the This mode of contract can as well sharing of the profit would be according be allowed to thrive in any micro to their agreement (Nyazee & ‘Imran investment industries that are aimed at Ahsan, 2006). earning reasonable profits and returns through legitimate means. Mudarabah as Termination Of Mudarabah Contract a financing tool benefits individuals and As noted earlier, mudarabah is a the society at large and plays vital roles in terminable and annullable contract and it restoring the socio-economic and is terminated by all acts that terminate religious lives of people. partnership businesses generally among Among the benefits of Mudarabah which are; are; i. Agreement of both the investor(s) i. Increment of societal cohesion: and the worker(s) to terminate it. mudarabah contracts strengthen the ii. If either of the party seeks for its well-being of the financier with the termination with the condition that financed. The only way the financier he makes it known to the other party. will do well is if the financed is doing iii. It is also terminable by the death of well. As such, the financed cannot either of the party except that the cause the financier to do poorly jurists opine that the without affecting himself. This Mudarabah agreement is inheritable dynamism is absent in the interest- (Ministry of Endowments and eating loans; often lenders will wish Islamic Affairs, 1427H). default on borrowers in order to iv. Termination of the period, if it is for foreclose on the collateral of the a particular period. borrowers who may also v. Destruction of the capital of purposefully default on their mudarabah after its possession and obligations if the asset they gave as before commencement of collateral becomes worthless than transactions. what they took and vice versa. vi. Absence of legal capacity to transact ii. Financing the most productive from either or both the parties, this members of society: In mudarabah, may occur through Insanity of either financing will only be provided to the or both of the party or through legal most productive members of the restriction (al-hajr). society. vii. Through constructive termination, iii. Reduction of societal stress: The that is, if a court orders that a burden of financial stress harms particular mudarabah agreement is people’s health, relationships and terminated due to any legal and/or destroys families. Substituting debt judicial reasons (Nyazee & ‘Imran with a product that is designed to Ahsan, 2006). provide affordable payments will reduce the burden of financial stress ROLE OF MUDARABAH CONTRACT IN on the society. THE MODERN BANKING AND iv. Profit and loss sharing criteria: one FINANCIAL ACTIVITIES of the significant features of this Mudarabah contract is one of the most product is that it is a PLS (profit and

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loss) System of business; that is, prefix of Mudarabah or other permissible Profit is shared in accordance with transactions based on the general maxims the terms of the mudarabah and principles of these contracts in agreement and losses are to be borne Islamic jurisprudence . only by the financier unless the As put by Nyazee: losses are due to the Mudarib's “If the forms designed by the earlier jurists misconduct, negligence, or breach of are not considered important (for the the terms and conditions of the modern age), we cannot throw out the contract (Rakaan Kayali, 2015). baby with the water, the legal principles that they sought to implement must be MUDARABAH AS PRACTICED IN taken to account. Some of these vital legal MODERN ISLAMIC BANKS AND principles governed the forms of business TAKAFUL INSURANCE organizations (Musharakah) and they As the world changes it is logically should govern the modern forms too if impossible that the change would not these are to be deemed Islamic” (Nyazee & touch on all aspects of human live, rather ‘Imran Ahsan, 2006). it is a multi-dimensional change which covers all the nooks and crannies of The principles referred to here, human development. are those that are either stated explicitly As a result of that, applications of in the texts or are implied by the texts. Mudarabah in the modern Islamic banks These principles have been unanimously may not necessarily rely on the classical accepted by the jurists. They may be applications of this contract some of interpreted in different ways, but they which have been discussed hitherto; or cannot be done away with altogether must it rely on a particular mode (Nyazee & ‘Imran Ahsan, 2006). practiced in any part of the world neither In the world today and due to must it be carried out in compliance to the proliferation of Islamic banks across the practice of any Islamic banks in the globe globe there have emerged different kinds because these banks may be governed by of Mudarabah contracts tailored under certain environmental or customary different hybrid contractual modules such dictations which are bound to change as arrangement of mudarabah with from one place to another or one set of wadi‘ah, wakalah or musharakah In people to another. Islamic banks, takaful insurance and Iqbal has written that: sukuk managements. “When academic work on Islamic banking Under these transactional units, as an alternative to Interest-based banking the contracting parties will agree to an first started, discussion essentially focused arrangement whereby a certain amount on the traditional forms of Islamic modes of of fund is assigned as a Mudarabah and finance such as mudarabah and another portion of the fund is assigned musharakah. But subsequent writings, as under wadi‘ah, wakalah or musharakah well as the practice of Islamic banking, contracts. Under these hybrid have Made important contributions both to agreements, the contracting party shall the evolution of new forms of Islamic observe the shariah requirements on each Business enterprises” (M. Iqbal & P. portion/units of contract it is assigned to Molyneux, 2005) (Bank Negara Malaysia, 2016). Also in the practical operations of So, different modes of the modern IFIs is its feature of financial investments have been devised many of regulatory boards whose main activities which were tapped from the western is to regulate their financial activities and world. As a researcher in the fields of adjudge the propriety and /or otherwise Islamic Jurisprudence, Economics and of their market activities. “While Finance, the most requiring is to appraise conventional institutions have been any newly-structured modes of established and governed by secular, investments in Islamic banks under the man-made laws and regulations, the IFIs

40 https://perdanajournal. com/ Perdana: International Journal of Academic Research (Social Sciences & Humanities) Vol. 10. No. 1 - April Issue 2021 eISSN: 2600-9463 must also adhere to the divine rules and companions to the propriety of principles of shariah” (Muhammad Mudarabah contract while scholar’s Marjan & Ahmed Mezbah, 2016). consensus also supports its permissibility. These main parts of roles are that Conditions to its permissibility which the shariah scholars and Islamic are discussed in clear terms while jurisprudential experts seek to play in opinions of the jurists on its regulations their modern regulatory roles on the IFIs and principles are enunciated. The and this is one of the major different modern practices and operations of features of Murabaha contracts as widely Mudarabah and other forms through operated in its modern practices. which it is tailored are also cited in precise Mudarabah is commonly utilized as the and brevity. underlying contracts for the restricted The research also discusses the Mudarabah investment account, major regulatory role played by scholars unrestricted Mudarabah investment and experts. For further researches, the account, corporate financing, and researchers proposes that an appraisal working capital financing and and assessment is made on the available securitization-based product such as Islamic financial institutions (IFIs) in mudarabah sukuk. different sampled countries or regions It is also used in interbank money especially in their applications, practices market products. Some takaful operators and mudarabah transaction activities in have also developed their business model order to adjudge how consistent and based on Mudarabah principle of compliant their mudarabah practices are investing the participants’ investment as compared to the laid down shariah fund (Muhammad Marjan & Ahmed principles and conditions. Mezbah, 2016). In the modern day practices of REFERENCES Mudarabah, the customer places an Accounting and Auditing Organization For investment of his desired currency in a Islamic Financial Institutions Mudarabah unrestricted investment AAIOFI. 2015. Shari‘ah account. The customer and the bank Standards. . Bahrain mutually agree on the profit-sharing ratio Committee Of Ottoman Hanafi Jurists. n.d. while the bank invests the fund in - Majallah Al-Ahkam Al-‘Adliyyah. compliant investment activities without Karachi: Matba‘ah ‘Uthmaniyyah. any restriction(s) from the customer on Dasuki, A. W. 2016. Islamic Financial management of the fund. System: Principles And Should the investment generate Requirements. Kuala Lumpur: profit, both parties share the profit based ISRA. on the predetermined profit-sharing Al-Hajawi Musa Ibn Ahmad. n.d. Al- ratio. In the case of a loss, the customer Iqna‘ Fi Fiqh Al-Imam Ahmad Ibn shall solely bear the financial loss. The Hanbal. n.d. Lubnan: Dar Al- bank shall only be financially liable if the Ma‘rifah. loss is due to its misconduct or negligence Ibn ‘Abd Al-Barr Yusuf ‘Abdullah. 2014. Al- (Muhammad Marjan & Ahmed Mezbah, Kafi Fi Fiqh Ahl Al-Madinah. Cairo: 2016). Dar Al-Gadili Al-Jadid. Ibn ‘Abidin, Muhammad Amin. 1992. Radd CONCLUSION al-Muhtar ‘Ala Al-Durr Al- In conclusion, the research findings are Mukhtar. Bayrut: Dar Al-Fikr. that Mudarabah is one of the main Ibn Hazm, ‘Ali Sa‘id. n.d. Al-Muhalla. contracts fraught with numerous Bayrut: Dar Al-Fikr. business opportunities. It is one of the Ibn Hazm ‘Ali. n.d. Maratib Al-Ijma‘. permissible contracts as evident in the Bayrut: Dar Al-Kutub al-‘Ilmiyyah. many texts legalizing trading in generality. Ibn Juzayy Muhammad Ibn Ahmad. n.d. Al- There are instances from the life Qawanin Al-Fiqhiyyah. N.pl: N.pb. -and his Ibn Kathir Isma‘il. n.d. Al-Bidayah Wa Al (ﷺ) experience of the prophet

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