Mudharabah & Musharakah

sources: www.islamic-finance.com/item_musharakahmudarabah_f.htm
	Mudarabah Qard meaning 'surrender' is used to refer to the surrender of capital, hence the alternative name for mudarabah which is muqaradah. The term mudarib, a user of the capital of an investor (the investor being the rabb al-mal), gives rise to the alternative description of this form of finance, hence mudarabah. The mudarib, regarded as an entrepreneur, contributes management input, itself viewed as a form of capital. Widely agreed conditions applied to modern mudarabah contracts are that: a) the investor is an investor on a non-executive basis b) according to Imam Hanifa, the contribution of capital to the mudarabah is to be made in the form of cash. Imam Malik however argues that a non-cash contribution can be made provided that its cash value can be established prior to employment in the partnership. Thus material contributions must first be valued or sold for cash before establishing the contributor's share in the mudarabah. c) a profit share between mudarib(s) and investor(s) is agreed at the outset. Profits can be shared in any ratio agreed at the outset of the mudarabah. d) ownership of the invested assets remains with the investor at all times. e) losses should be shared according to the financing share of each financier. The financier's maximum loss is limited to his share of the financing and the mudarib must not bear any of loss attributable to invested capital. Any liability is limited to the extent of the total capital contribution made by the investors, except where such an investor has allowed the mudarib to incur debts on his behalf. f) with the permission of the investor, the mudarib may contribute some of his own capital to the project or raise fresh capital from others on the basis of mudarabah. g) the mudarib may only lend available funds with the permission of the investor. h) the mudarib is not allowed to draw remuneration in any other form than profit-share. In the absence of a guaranteed wage, the entrepreneur has no recompense for his efforts unless the project is profitable. i) mudarabah may be enacted as a  single-tier agreement in which the investor deals directly with the entrepreneur. In a two-tier mudarabah, investors pool their funds with an intermediary who subsequently deals with entrepreneurs. j) the mudarib may be required by investors to engage only in strictly defined activities in which case the mudarabah becomes one of mudarabah al-muqayadah. Where no restrictions apply, the mudarabah becomes one of mudarabah al-mutlaqah. k) Imams Hanifa and Hanbal argue that the term of a mudarabah can be restricted, whilst Shafi and Malik argue against any such restriction. Musharakah Shirkah, or sharing, can exist as shirkah al-milk, a sharing of ownership in a property, or asshirkah al-aqd, a sharing by contract in a given endeavour. Here, all partners to a business endeavour contribute funds and have the right but not the obligation to exercise executive powers in that project. Musharakah is a modern term that is synonymous with this form of shirkah. Musharakah displays some of the features of modern partnership structures and the holding of voting stock in a limited company. Generally agreed terms are that: a) all partners must contribute capital to the partnership. b) as for mudarabah part b) c) contributions must be subject to profit sharing in any ratio agreed between the partners. Therefore, as with mudarabah, a fixed amount of payment must not be agreed at the outset as the benefit to the investor in respect of his or her investment. The Shafi and Maliki schools recommend a profit share proportional to financing share. Imam Hanifa argues that where a partner chooses to exist as a sleeping partner, having no executive involvement in the business, that partner cannot claim a share of profits above the ratio of his contribution of capital. Other jurists argue that no restrictions be placed upon the ratio of profit share that may be agreed among partners. d) the partners' losses are to be shared according to the financing share of each partner and may not be limited to the value of their capital contributions. e) the partnership may be agreed for a set period of time or be indefinite. It can be established as  permanent musharakah in which invested funds are not subject to repayment in the short term, or as diminishing musharakah where invested funds are repaid over time as profitability allows. Such divestment terms are agreed at the outset. f) it may be agreed that the termination of the musharakah can only occur with the mutual agreement of all partners, though some jurists argue that one partner on his own may require the dissolution of the musharakah. Such a possibility seems to hold out rather dangerous implications for those partners wishing to continue with a business endeavour, especially in the early stages of the partnership and has therefore been rejected by many jurists as an unsound basis for partnership. g) partners must receive regular accounting and other information on business activity. h) permission from existing partners is required before raising capital from new partners. i) partners may negotiate fixed wages or salaries at the outset of the musharakah.