Al-Mudharabah: Principles in the Capital Market PDF

Muamalat Principles In The Capital Market A L- M U D H A R A B A H  ∙Al-Mudharabah, also known as profit-sharing, is a form of investment partnership under Islamic finance where one party provides the cap...

Muamalat Principles In The Capital Market A L- M U D H A R A B A H  ∙Al-Mudharabah, also known as profit-sharing, is a form of investment partnership under Islamic finance where one party provides the capital (the investor or Rab-ul-Mal) while the other party provides expertise and management Definition (the entrepreneur or Mudarib). ∙The profit from the venture is split according to a pre-agreed ratio, while loss is borne solely by the investor, provided that the loss is not due to the negligence or misconduct of the Mudarib. Legal Basis of Al-Mudharabah Quranic Verses “….others traveling the land seeking of Allah’s bounty” (Surah Al-Muzzammil, 73:20) According to Al-Kasani (Bada’i Al-sana’i, 6/79) although the above verses do not directly address the legitimacy of al-mudharabah, they have been interpreted to include those who travel for the purpose of trading and seeking permissible income. Legal Basis of Al-Mudharabah Hadith Reported By Hakim Bin Hizam that he had stipulated to a man that if he gave him certain asset to be utilized for Muqaradah (Mudharabah, Qiradh), he must not use it to purchase livestock, or carries it (travel) through the sea, or drop by at the oasis, if the man committed any of the above, he is considered to be the guarantor of my property  Capital Provider (Ras-ul-Mal) Provided by the investor, it must be clear and specified at the outset. Labor/Management (Mudarib’s Effort) Elements Exerted by the entrepreneur, who must manage the project with due diligence. of Al- Profit Sharing Ratio Mudharaba Agreed upon at the beginning and must be based on the proportion of the profit, not a fixed amount. h Contract (Aqd) The mutual agreement that defines the terms and conditions of the Mudharabah.  Consent of Parties - All parties must enter the contract voluntarily and without coercion. Capability of Mudarib – The entrepreneur must be capable of Conditio performing the management tasks effectively. ns Clarity of Terms - The amount of capital, nature of the investment, profit ratio, and other terms must be clearly defined and understood. Compliance with Shariah - The business venture must not involve prohibited (Haram) activities. Applicati ons in 1 2 3 the Islamic Funds Sukuk Al- Project Financing - Islamic Mudharabah is commonly used in mutual funds where Mudharabah Investment certificates Financing of projects in a manner that shares the profit and Capital investors pool their money to be managed by a structured to generate returns in compliance with risk between the partners. Market professional. Islamic principles.  Risk Management: As losses are borne by the investor, there can be a high risk, particularly in ventures with uncertain outcomes. Dispute on Profit Allocation: Disagreements may arise over the calculation and distribution of profits, especially if the terms were not clearly agreed upon. Performance of the Mudarib: Ensuring that the entrepreneur acts in the best interest of the venture Issues of can be challenging. Application in Regulatory Compliance: Adhering Islamic Capital to varying interpretations of Shariah Market law in different jurisdictions can complicate the use of Mudharabah. Question Discuss the two primary types of Al- Mudharabah agreements in Islamic finance and explain how they differ in terms of profit distribution and risk allocation.