Mudaraba

Mudaraba may be defined as a contract between two parties under which one party (Bank) supply capital and another party (client) invest his efficiency, labor, experience and necessary business activities. In such a business Bank is called ‘Sahib-Al-Mall’ and the client is called ‘Mudarib’.

 In Mudaraba both the parties share the profit as per agreed upon ratio and the losses, if any, being borne by the provider of funds. But if the loss is due to breach of trust i.e. misconduct, negligence or violation of the conditions agreed upon by the Mudarib, then the loss is fully borne by the Mudarib.

Important features

01.

Bank supplies capital as ‘Sahib-Al-Maal’ and the client as the Mudarib invests in business using his/her skill, experience and expertise.

02.

Administration and Management is maintained by the Mudarib/Client.

03.

Profit is divided as per agreement.

04.

Bank bears the actual loss alone.

05.

Client can not take another investment for that specific business without the permission of the Bank.

Compensation

Mudaraba agreement may include a clause to the effect that if any partner violates any rules of Mudaraba or any terms & conditions of Mudaraba agreement, the other partner will have the right to impose compensation on the Mudarib as determined by the review Committee of the Bank.