MUDHARABAH

            After the collapse of Lehman Brother in late of 2007, most of the world were affected and experienced the state of recession. This phenomenon is worse than the Great Depression in 1930 which had influenced the world to change its perspective on conventional economic system and start to put a confidence in Islamic economy system. One of Islamic transactions which we can assure to fight the unemployment and boost up the economy health in a country is mudharaba.

LITERAL MEANING

            The word "al-mudarabah"is synonymous with two other Arabic terms which are used to designate this contract: al-qirad and al-muqaradah. These three terms are inter-changeable, there being no essential difference in meaning or connotation between them. The divergence in terminology was probably originally due to geographical factors. The terms al-qirad and al-muqaradah apparently originated in the Arabian peninsula, especially al-Hijaz , while the term al-muqarabah was of 'Iraqi provenance'.[1]

According to al-Sarakhsi, the term al-mudarabah is derived from the expression 'making a journey' (al-darb fi al-ard). This term is used because the agent-manager (al-mudarib) has the right to claim the profit by virtue of his effort and work. Indeed he is regarded as the investor's partner in matters relating to the profit and capital used on the journey and for arrangements or ancillary expenses.[2]

            According to Abu Saud (1976), linguistically, both words Mudarabah and Qirad are used to signify the same idea: “to give somebody out of your capital a part to trade in, provided that the profit is shared between both of you, or that an apportioned shared of profit is allocated to him accordingly, the active partner are called darib, because he is the one who travels and trades. It is also possible those both capitalist and active partners are called Mudarib or Muqarib as both share the profits with each other”.[3]

            The two main Arabic names given to this type of partnerships are mudarabah (in the language of Iraq), and qirad in the language of Hijaz. The first name emphasizes that both the capitalist and the entrepreneur share in profits, while the second name emphasizes the fact that the capitalist gives part of his capital and part of his profit to the entrepneur, Al-Zuhaily (2007), He describes, in a silent partnership contract, the owner of capital gives it to a worker to trade on their behalf, and profits are shared according to an agreed-upon formula. All financial losses are borne by the provider of capital (the silent partner, or the capitalist), while the entrepreneur can only lose his effort if no profits are made.[4]

            Doi (1984), explains, mudarabah is a contract in which certain property or stock (Ras al-Mal) is offered by the owner or proprietor (Rabb al-Mal) to the other party to form a joint partnership in which both parties will participate in profit. The other party is entitled to a profit in lieu of his labour since he is giving to manage the property (Mudarib). It is a contract of co-partnership.[5]

LEGAL MEANING

            In spite of the different terminologies, the classical jurists were unanimous in their legal definition of the contract. They referred mudharaba or al-qirad as a contract between two parties, one (called the investor) entrusts money to the other party (called the agent-manager) to commence a business venture. Any realised profit will be shared between the two parties based on the profit ratio decided at the beginning of the contract.[6]

HISTORY OF MUDHARABA

            The mudharaba contract was developed in the context of pre-Islamic Arabian caravan trade. The contract was practised largely by those who were not capable of engaging directly in trading activities – these included women, orphans and the elderly. They would entrust money to skilful and reliable traders to transport merchandise from Mecca and trade with them in Syria, Yemen and other places in the Arab peninsular.[7]

            It seems very likely that al-mudarabah (al-qirad or al-muqaradah) was an institution indigenous to the Arabian peninsula and other Arab countries. With the Muslim conquests, it spread to other countries in the East and the West. Although not mentioned in the Qur'an, numerous Traditions attribute its practice to the Prophet, before his prophethood.  According to Ibn Ishaq, in Mecca, Khadijah bint Khuwaylid was a merchant woman of dignity and wealth. She used to hire men to carry merchandise outside the country on a profit-sharing basis (al-mudarabah, al-qirad or al-muqaradah).  According to him, when Khadijah heard about the Prophet's truthfulness, trustworthiness and honourable character, she sent for him and proposed that he should take her goods to Syria and trade with them. When he brought Khadijah her goods she sold and it amounted to double or thereabouts.  The Prophet, prior to his early prophethood, had acted as an agent in a mudarabah contract with an investment provided by Khadijah, his wife-to-be. From this evidence it appears that this form of commercial association was popularly practised in pre-Islamic trade between the Quraysh and other tribes, and continued to be practised throughout the early centuries of the Islamic era as the mainstay of caravan and long-distance trade.[8]

            According to Gaiani, it may be suggested that some of the historical and political reasons might have enabled this oriental institution of al-qirad or al-mudarabah to have certain influence on the new Mediterranean or Western contract of accomendacio of the jus commune. Udovitch added that it is most likely that the contract of al-qirad or al-mudarabah, i.e. the commenda in the West, was introduced into Europe, especially Southern Europe through the Italian seaports of the late 10^th and early 11^th centuries of the Christian era.  It seems that the contract of commenda was an institution indigenous to the Arabian peninsula. This contract developed in the context of, the pre-Islamic Arabian caravan, trade. Its practice spread to the Near East, North Africa and subsequently to Southern Europe during the times of the Muslim conquests.  The two contracts or institutions have the similar main outlines of the structural features and the parallelism of the juridical nature.  To support the above propositions, such similarities and parallelisms may indicate that al-mudarabah had certain influence on accomendacio or commenda, or the latter came from the same root, i.e. the oriental mudarabah.[9]

CRITICISM FROM DIFFERENT MADZHAHIB

LIABILITY FOR LOSS

Loss can be understood as a condition where unwanted situation happens because of the negligence, environment, economic variables and other factors which lead to decrease in an asset or investment. Thus, it will give a liability for an owner to hold the responsible for that situation whether he wants it or not.

            In the mudharaba transaction, the loss of the capital that was entrusted for an entrepreneur to invest is solely borne by the owner of the capital (rab al-mal) if there is no prove the loss occurred because of negligence of the entrepreneur. This opinion is agreed by the majority schools of Fiqh and we will provide a statement from various schools of Fiqh namely Hanafi’is, Maliki’s, Shafi’is and Hanbali.

Hanafi’s view: “ Under mudharabah, the party working with the capital acquired under a mudharaba agreement, cannot be legally made liable for any part of the loss”[10]

Maliki’s view: “The principle that under mudharabah a working party who is not investing his capital in business is not liable to any loss”[11]

Shafi’is view: “it is made clear in the discussion of mudharaba that is a contract made by the capital-owner with the person doing business to share the profit of enterprise according to predetermined proportion, and the party doing business has no responsibility for any loss”[12]

Hanbali’s view: “under mudharaba loss would occur in the capital specifically and will not be borne by the party engaged in business because loss means a reduction in capital which is owned by the capitalist and is not at all shared by the party doing business. Loss will therefore accrue only to the party investing capital and not to the other party.”[13]

To sum up this point, we know that majority of schools of Fiqh agree that only the owner is liable for the loss. Their opinion is crucial to think for, from our perspective; their decision has an element of justice where the entrepreneur has losses his valuable time spending on investing the capital and the owner who does not run the business loss his capital only. These two parties have experienced a loss equally.

SHARING OF PROFIT

            As we know, the intention of someone whom involved themselves in the business is aiming for a profit. Profit is in some extent has become an attraction or motivator for a entrepreneur to do well in their business and as well there might be a problem arise is the profit is not distributed in justice manner. To further on the analysis of profit, it is wise enough for us to ponder the statement of previous scholars on distribution of profit in mudharaba.

            Scholars are unanimous on the decision that profit can be distributed according to proportions but with the mutual consent from the owner and entrepreneur in this mudharaba transaction. Here are some evidences to support the above statement:

Hanafi: “it is also obligatory that the share of profit both for the one who acquires capital under mudharaba and for the capital-owner, is settled as a simple proportion of profit, i.e. one –half, one third, or one-fourth. If a certain sum is settled, i.e. for one of the parties, 100 dirhams out of profit or less than it or more than it and the rest for the other party, this is illegal and the mudharaba agreement will stand nullified.[14]

Maliki: “it is obligatory under mudharabah that the proportion of profit, settled for the working party, be: a common and fixed proportion of total profit, i.e. one-fourth or one –half and not left uncertain: be a part of the profit of the same capital supplied by the capital-owner and not the profit from any other capital; that no fixed amount be settled, for example, that the share of the working partner will be 10 dirhams, irrespective of the fact that the amount of profit is great or small.”[15]

Shafiie: “it is necessary that the profit be reserved for them alone and that they share i…….the share of every party is fixed as a given proportion of the whole…..if ten dirhams have been settled for one party or, if the profit is settled for him out of the gains from some particular merchandise, the agreement shall become void”[16]

Hanbali: “profit would be distributed between (the partner) according to the conditions settled by them, in all forms of partnership. As far as the simple mudharaba is concerned, there is no difference of opinion about the matter. And for one party in particular to add a number of dirhams more to it, cannot be settled. If any of the two parties settles for a fixed sum of dirhams under sharikah or mudharabah ……it shall not be legitimate”[17]

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[1] Retrieved at 4.34 pm on 19.10.2010 from http://www.financeinislam.com/article/14/1/17

[2] Ibid

[3] retrieved on 19.10.2010 at 4.44 pm from http://www.wbiconpro.com/4--Zainab-Malay.pdf

[4] Ibid

[5] retrieved on 19.10.2010 at 4.44 pm from http://www.wbiconpro.com/4--Zainab-Malay.pdf

[6] retrieved at 4.50 pm on 12.10.2010 from http://eric.exeter.ac.uk/exeter/bitstream/10036/107900/1/ShaharuddinA.pdf

[7] Ibid

[8] Retrieved at 4.34 pm on 19.10.2010 from http://www.financeinislam.com/article/14/1/17

[9] Ibid

[10] Partnership and Profit-Sharing in Islamic Law by Muhammad Nejatullah Siddiqi, published by The Islamic Foundation (page 20)

[11] Ibid

[12] Partnership and Profit-Sharing in Islamic Law by Muhammad Nejatullah Siddiqi, published by The Islamic Foundation (page 20 and 21)

[13] Ibid (page 21)

[14] Partnership and Profit-Sharing in Islamic Law by Muhammad Nejatullah Siddiqi, published by The Islamic Foundation (page 22 and 23)

[15] Ibid (page 23)

[16] Ibid

[17] Partnership and Profit-Sharing in Islamic Law by Muhammad Nejatullah Siddiqi, published by The Islamic Foundation (page 24)

this is not a complete commentary on mudharabah since this is a group assignment and this is my part.... for those who would like to take some of the ideas, i hope u keep the originality. meaning that please cite the URL address, time, date and anything that related for references....thanks...