London, UK -- (SBWire) -- 12/23/2020 --Mudarbah is among the famous Islamic financial instrument, and it is gaining popularity around the globe. The word Mudarbah is derived from the word Al-Dhar'b, which means "To Travel". This is related to trade, because trade usually involves travelling. Mudarabah is a contract between 2 or more persons, in which one provides capital, and other conducts business with that capital. And, the profit is shared by parties in accordance with their agreed ratio. `Rab-ul-mal' is an Investor, who invests capital in the business. And, 'Mudarib' is a Working Partner, who adds his labor to the capital of the financier.

Following forms of Mudaraba are lawful:

- More than one Investor and more than one Working Partner;
- One Investor and more than one Working Partner;
- More than one investor and one Working Partner.

There are many benefits of Mudarabah, over conventional banking. Conventional banking system is based on interest, so Muslims may work under Shariah compliant Mudarabah contract, as an alternate. It has following benefits:

- Curse of interest can be eliminated from the society;
- Individual investors can generate Halal income;
- Big companies can build up their capital resources; and;
- Government can raise funds for development plans.

Several rules are associated with the Mudarabah contract. Some of them are discussed here, such as: If Mudarib does not invest the capital received in business and it remains with him, he is responsible to safeguard the trust. Mudarib is responsible to return the capital to be Rab-ul-mal on demand. If the capital is lost or wasted, he is not liable for fine. In the case of the business yielding a profit, the Mudarib shares the profit according to an agreed ratio. In-case the contract is dissolved, it will turn into an employment contract. Mudarib will become an employee of Rab-ul-mal, and profit or loss will belong to the Rab-ul-mal, and Mudarib shall receive only the salary. If Mudarib does not accept any term of contract, he shall be held liable to return the capital.

If parties agree that whole profit will go to the Mudarib, it will be a contract of Debt, not Mudarabah. In this case: Mudarib will become a debtor. He will take the profit, and bear the loss. And, if capital is lost, the debtor is liable to pay it.

Mudarabah is used by Islamic Banks for several purposes, such as: Letter of Credit without margin; Import and Inland bills drawn under respective letters of credit; and; Large Enterprise financing.

This is how it works: Depositors tender their money as Rab-ul-mal to Islamic Banks. The Banks invested it as Mudarib, on profit and loss sharing basis. Then, Islamic banks provide the adequate finance to those who are capable to work, in exchange of agreed share in the profit.

Finally, let us discuss Mudarabah for Joint Stock Companies. Bank as Mudarib can receive capital for business from several financers. There are two valid modes of procuring capital. First one is the Capital for investment is procured, before commencement of business. According to this mode, investors give their capital to a company or institution for investment. The company raising the capital can either invest it directly or indirectly through another company. In the Second mode, Money in hand is invested in business, and capital is procured later. This mode is the continuation of a running Mudarabah business.

However, in both above cases, it is an essential duty of Mudarib that money is invested in the joint business, with the consent of all financiers. And, money is invested in a proper manner. To learn more on Mudaraba, AIMS offers several programs and they include MBA Islamic finance and Islamic banking courses. They are highly interactive learning programs offered 100% online learning system.

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