FAQ on Mudarabah

Is it permitted for the investors to mutually agree upon a formula of division of investment yield that is not commensurate with the capital invested?

This returns to whether there is profit or loss on the investment. In case of profit, it is permissible to divide it according to any mutually agreed ratio. The investors are not bound to divide profits in proportion to their capital investment. This entails, for example, that two investors may have a 1:1 ratio of capital investment, and 2:3 ratio of division of profits.

What are the different types of Mudarabah?

There are two types of Mudarabah: restrictive and unrestrictive. Restrictive Mudarabah means that the investor has specified investment details in the Mudarabah contract and has restricted the working partner within the scope of such specifications. Due care and precaution must be taken by the working partner to honour the restrictions imposed by the investor. Unrestrictive Mudarabahs mean that the investor has granted the working partner the right to undertake any lawful investment. The working partner has the right to invest in any suitable investment that is reasonably expected to yield profits. It is the responsibility of the working partner to avoid unlawful and high-risk investments, and the working partner is liable for any losses suffered from such investments.

Is it permissible to pool the profits of working partners?

It is forbidden to pool the profits of working partners, though it is acceptable for individual working partners to share their profits after distribution.

In case of long-term Mudarabah contracts, is it permissible to periodically distribute profits among investors instead of a bulk distribution at the conclusion of the Mudarabah contract?

It is permissible, with mutual agreement among investors, to periodically distribute profits instead of a bulk distribution at the conclusion of the contract.

In case of termination of a Mudarabah through the investor buying all the assets of the partnership, is it permissible for that investor to sell such assets under a Murabaha?

In the case described above, the Mudarabah operation has ceased to exist and all assets belonging to the Mudarabah operation are now in the custody of the investor. It is permissible for the investor to dispose of the assets in any manner he deems suitable, including Murabaha. However, care must be taken to comply with all the requirements of a valid Murabaha sale, including disclosure of the exact purchase price of goods from the partnership, as well as any ancillary expenses.

Is it permissible for the investor to demand from the working partner a certain percentage of each investment to be made, in addition to his share of proceeds of investment?

It is not permissible for the investor to demand such money from the working partner. The role of the working partner is that of a trustee, and a trustee cannot be required to pay any amount to the investor except in case of the trustee’s negligence.

Is it permissible for an investor to withdraw his contribution in a Mudarabah before the due date of distribution of profits? What right does he have to profits earned up to that date?

It is permissible for an investor to withdraw his contribution before the due date of distribution of profits. The investor will be entitled to the profit earned on his investment up to the date of his withdrawal. It is not permissible to distribute profits before the allocation and net-off of expenses. The amount that remains subsequently will be termed net profit and will be distributed among the investors.

Is it permissible for an investor to place restrictions on the working partner of Mudarabah regarding investments?

It is not permissible for the investor to demand such a fixed payment in addition to his entitlement to profit. This would entail making the working partner financially liable, which is impermissible.