Mudarabah Definition

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What’s Mudarabah?

It is a kind of partnership where one partner gives money to another for investing in a commercial enterprise. The investment comes from the first partner who is called “”Rab-ul-Maal”” while the management and work is an exclusive responsibility of the other, who is called “”Mudarib”” and the profits generated are shared in a predetermined ratio (Aziz, 2012 pg 7).

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Types of Mudarabah

Restricted Mudarabah (Al Mudarabah Al Muqayyadah): It implies thatRab-ul-Maal is identifying particular business or a particular place for theMudarib, in the case that he shall invest the money in (Chowdhry, 2016 pg. 5)

Types of Mudarabah

Unrestricted Mudarabah (Al Mudarabah Al Mutlaqah):

It implies thatRab-ul-Maal provides full freedom toMudarib to undertake whatever business he considers, HoweverMudarib cannot lend money to anyone or do any extraordinary work without the approval ofRab-ul-Maal. He is also not authorized to:

Keep another Mudarib or a partner.

Mix his own investment in that particular Mudarabah without the consent ofRab-ul-Maal (Anwar, 2011 pg. 30).

Business case

Durrat Al Bahrain is considered as a hallmark resort island city, Located on the south coast of Bahrain. Offerings over 2000 beachfront villas, 3600 executive apartments and offices, luxury hotels and spa resorts, parks and entertainment (Ma, 2009 pg. 12).

On 2003 Development of Durrat Khaleej Al-Bahrain Project launched. Its a US$ 6 billion joint development project owned by the Government of Bahrain and Kuwait Finance House (Bahrain). Kuwait Finance House (Bahrain) owning equal shares (50%) with the Government of Kingdom of Bahrain (Manap, 2017 pg. 10)

Transaction Structure

1. Project

Feasible study

Collection capital

Sharing Profit/ Loss

Marketing project

CBB & Insurance

Approve project

  1. Risk management department evaluate proposed project, and draw scenario’s, backup plan.
  2. Presented project to CBB & insurance for approval, and risk assessment.
  3. CBB hold project forecasted capital as guarantee, to reduce risk of project failure and to protect investors.
  4. Collecting and marketing project, through adding expected profit from the project.
  5. Made will be shared between the capital provider and the entrepreneur according to an agreed ratio, where both parties share in profits and only capital provider bears all the losses if occurred (Nisar, 2007 pg. 31).

Why Mudarabah was successful?

Low Participation in Profit & Loss Sharing Arrangement:

They studied the market too well and they considered offering an affordable and realistic rate to the buyers. It is the most secure product based on the feasibility studies that they have done (Nuruzzaman, 2013 pg. 32)

The real state projects are always welcome and on high demand in the gulf.

Advantages of Mudarabah

Although this Quranic verse do not addresses straight forward the validity of mudaraba, it has been interpreted to include the intention of trading and seeking permissible income (Sadique, 2009 pg. 12)

Basically, the wordmudarabat/ is derived from the Arabic word Daraba/

Which meansto strike.

In Islamic Jurisprudence, mudarabat/ is such trade or business of partnership in which one party provides toanother party the capital and that other party carries on the business. Like all other trade and business the object of this business is also to earn profit by dong a business which isnot prohibited by the Shari`ah and in which no element of? Riba involves. When at the end the business earns profitthe same is distributed among the partners according to thealready agreed conditions. Thusmu darabat/ is akind of Partnership (Shir a kat) in which one partyinvests money and the other party puts his services.

Advantages of Mudarabah

Earn profit by doing a business which is not prohibited by the Shari`ah and in which no element of Riba involves. When at the end of the business earns profit the same is distributed among the partners according to the already agreed conditions (Khan, 2016 pg. 11)

It assists in financial inclusion.

Reducing the impact of harmful products and practices.

It promotes the principle of financial justice

Encouraging stability in investments.

Accelerating economic development.

Disadvantages (limitation) of Mudarabah

Due to greater complexities of Islamic bank transactions, they face a greater difficulties in recognizing and handling risks as compare with a conventional bank. It is difficult to expand a business financed through Mudarabah because of limited opportunities to re-invest retained earnings and/or raising additional funds. TheMudarib cannot become the sole owner of the project except through diminishing Musharakah, which may take a long time PLS (Khaled, 2011 pg. 9)

Reference List

Anwar, M., 2011. Development Of Mudarabah Instruments: Understanding Their Profitability, Securitization And Negotiability Aspects. International Journal of Economics, Management and Accounting, 9(2).

Aziz, F., Anjam, M., Fahim, S.M. and Saleem, F., 2012. Mudarabah in Islamic Finance: A Critical Analysis of Interpretation & Implications. International Journal of Asian Social Science, 3(5), pp.1236-1243.

Chowdhry, S., 2016. Creating an Islamic microfinance model: the missing dimension. Dinar Standard: Business Strategies for the Muslim World.

Khaled, M., 2011, June. Building a successful business model for Islamic microfinance. In Global Microcredit Summit Commissioned Workshop Paper.

Khan, M.A., 2012. Types of Business Organisation in an Islamic Economy. Quill Publishers.

Ma, I.Z.L., 2009. How Islamic Banking System work and operate in Malaysia/Isa Ma Zi Liang (Doctoral dissertation, Universiti Malaya).

Manap, A., Hanna, S. and Siththi, F., 2017. Poverty Alleviation via Microfinance using the Concept of Mudharabah.? International journal of management and applied research, 4(3), pp.188-178.

Nisar, S., 2007. Islamic Bonds (Sukuk): its introduction and application. Electronic Article at: www. financeinislam. com.

Nuruzzaman, M., 2013. Politics, economics and Saudi military intervention in Bahrain. Journal of Contemporary Asia, 43(2), pp.363-378.

Sadique M.A., 2009. Essentials of Musharakah and Mudarabah: Islamic texts on theory of partnership. IIUM Press.

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Mudarabah Definition. (2018, Dec 30). Retrieved February 7, 2023 , from

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