Mudaraba (capital-management partnership)

The ruling of mudaraba

Mudaraba (or qirad): an owner hands capital to a worker who trades with it, against an agreed share of the profit. No hadith from the Prophet is soundly established on it, yet the scholars agree on its lawfulness (Ibn al-Mundir, an-Nawawi, al-Juwayni, Ibn Hazm): it existed in the Jahiliyya, Quraysh living on trade, and the Prophet himself traveled on a trade journey with Khadija's capital (reported by ad-Daraqutni 3081, isnad debated). Companions such as Umar, Uthman, Ali, Ibn Mas'ud, Ibn Umar and Aisha placed orphans' capital in mudaraba without anyone objecting (al-Kasani sees a consensus in it).

The conditions of mudaraba

• A present, defined capital: a known sum of coin, handed to the worker; mudaraba on a debt, a pledge or a deposit is not valid (jumhur, consensus reported by Ibn al-Mundir). If the contract bears on a debt owed by the worker, the debt remains owed (Abu Hanifa, Malikis, Hanbalis); Abu Yusuf and Muhammad give the owner the purchases made with it.
• A fractional profit: the worker's share is stipulated in fractions (half, third), never as a fixed sum, nor as a share of one good's profit, nor as a monthly wage combined with a percentage: invalid forms by reported consensus (Ibn al-Mundir) and by gharar; the jurists note that many modern arrangements combining a fixed wage and a profit percentage fall under this rule.
• All profit to the worker: stipulating the whole profit for the worker turns the contract into a loan (Hanafis, Hanbalis, one Shafi'i view); on the soundest Shafi'i view it is void and the worker earns only the equivalent wage; the Malikis accept it as a gift, the worker then guaranteeing the capital unless stipulated otherwise.

The manager's powers in mudaraba

He works within the limits of authorization: selling on credit without the owner's permission exposes him to guaranteeing the capital (consensus reported by Ibn al-Mundir when the owner forbids it; Malikis, Shafi'is, Abu Yusuf and Muhammad: credit sale requires explicit permission); credit sales require witnesses; he does not deliver the goods before collecting the price; he does not buy salam without authorization (al-Mawardi). The contract is revocable by both parties (jumhur); it ends by the manager's death, madness or interdiction (Hanbalis). The manager never guarantees the capital for loss without fault: stipulating this guarantee is invalid by the agreement of the four schools; the contract stands and the clause falls (Hanafis, Hanbalis) or the contract is void (Malikis, Shafi'is).

Sharing the profit in mudaraba

The manager's share is apportioned at the division of the profit (Hanafis) or from its mere appearance (Shafi'is against the soundest view, the Hanbali madhhab), the manager being unable to take it alone before division (Hanbali text). Every loss strikes the capital, never the manager's pocket: he loses only his work.

Practical note on mudaraba

Mudaraba organizes sharing: the capital is not guaranteed, the profit is divided into known fractions, management remains a revocable mandate. Any structure promising a fixed return to the capital falls outside it.