Assume that you are the Mudarib and have received the capital from a Rab Al Maal which you have deployed in the activity of procuring the building material from wholesalers and supplying to contractors. You were appointed as the Mudarib by the investor owing to your over-a-decade’s involvement in this line as the sales and marketing manager of a large group where you learned the ropes of the building material market.
This is your first encounter with an investor who possesses a fair amount of wealth by way of inheritance which is lying in various Islamic bank accounts earning a not-very-exciting profit. The gentleman was introduced to you by a common friend since you wanted to quit the fixed-pay job and do something on your own and the investor wanted to make his money work. So, both of you proved to be the ideal candidates for a Mudarabah marriage.
The Mudarabah agreement signed by you with the investor is for one year with a clause that you will submit the financial statement to him upon the completion of six months — so far so good in the first 1.5 months.
You are operating from a small office since you wanted to keep the cost at a minimum in order to impress the investor so that he takes you as the Mudarib on a perpetual basis. You get a call from the investor asking if you are available in the office as he was passing by and wanted to have coffee with you. Although you are pretty tied up in concluding a couple of deals, but you pretend that you have all the time in the world. So there he drops in. A purchase order is lying at your desk which the investor picks up. As soon as he sees the purchaser’s name, he shouts: “No, you cannot supply to this contractor on credit. I do not like the owner. He had a dispute with my uncle over a multistorey building.”
You really get panicky since you had secured this order after much persuasion and were confident that with this top buyer, you can produce a very impressive performance. You try to convince your Rab Al Maal of the potential and credibility of the contractor but he puts his foot down that you will not fulfill the order because it is his investment supporting your activity so you have to be careful. Before leaving, he sets a condition that you seek his approval for any supply that you will make to a buyer.
There are two impairments that the investor is causing by his action: first, ruining your plans to produce a result and getting a benefit out of sharing the profit which should have been more than the fixed salary you used to get; and second, harming his own interest by putting obstacles in your way to perform as the Mudarib.
One does not have to be an Einstein to know what must have happened to that Mudarabah and worst still, to the poor Mudarib.
Shariah requires the person possessing means to either carry out the trade and investment activities by himself/herself or appoint an entrepreneur as the Mudarib who should be given a free hand to actively pursue his or her expertise and instinct toward generating a profit for both. The third option is to keep the money in the bank and do nothing.
The foregoing story I described is to simply elaborate that Mudarabah is not for the faint-hearted, or is it? No doubt, it is a high-risk proposition since you hand over money to the Mudarib and forget about it until the maturity date of the Mudarabah. But then you also have the likelihood of earning a high return.
The only protection, and believe me it is a fairly sound shield, is that the Mudarib will only be entitled to share the profit generated by the Mudarabah, and you all know well by now, in a Mudarabah transaction the profit is that amount which exceeds the amount of the originally invested capital.
As such, the protection to the Mudarabah capital emanates from within the Mudarabah structure, and hence the capital provider should be relaxed and let the Mudarib shed his sweat to eke out his own living by producing the profit which shall guarantee that the capital is intact. In other words, the risk of losing the capital gets mitigated from within the parameters of the Mudarabah contract. Isn’t it amazing? Are the risk management gurus taking notice of Mudarabah?
It is very important that we pause and discuss the last point of the last article before moving on to the other parameters of Mudarabah. To wrap up this point, in Shariah, the capital provider is not given the right to work with the Mudarib, or to get involved in acts relating to the Mudarabah operation because such a provision would curtail the freedom of the Mudarib, limit the investment scope and hinder the Mudarib in achieving the objectives of the Mudarabah contract.
Also, the Rab Al Maal enters into a Mudarabah contract since he or she lacks the business acumen and expertise and by interference, it may jeopardize the very purpose of signing the Mudarabah contract with an entrepreneur.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the senior advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
Next week: Mudarabah explanation shall continue.