Query:
A general trading company had availed a Mudarabah facility for a Mudarabah term period of three years from an Islamic bank. The purpose of the facility was to finance the expansion plan of the company. As per the terms of the Mudarabah agreement, executed between the company (as Mudarib) and the Islamic bank (as Rab-ul-Maal), the company was required to liquidate the Mudarabah at the end of the Mudarabah term period and return the Mudarabah capital (then intact) and the pre-agreed percentage of the Mudarabah profit (if any) to the Islamic bank.
However, the company approached the Islamic bank in the middle of the agreed Mudarabah term period seeking possibility to return part of the Mudarabah capital invested by the Islamic bank under the Mudarabah agreement. From a commercial perspective the Islamic bank has no objection in accepting the company’s request provided there are no Shariah issues.
Shariah guidance is sought in this regard.
Pronouncement:
In principal, it is permissible for an Islamic bank (as Rab-ul-Maal) that has invested the Mudarabah capital in a business project under a Mudarabah agreement to allow for partial return (to the extent intact) of the Mudarabah capital during the Mudarabah term period.
The parties to the Mudarabah agreement may agree on the basis of the partial return (to the extent intact) of the Mudarabah capital either in the Mudarabah agreement or may mutually agree on the same at any time during the Mudarabah term period if such arrangement has not been covered in the relevant Mudarabah agreement. However, before return of the Mudarabah capital it is necessary to determine whether or not the Mudarabah capital is still intact. This step is required from a Shariah perspective since the Mudarabah capital invested by the Islamic bank through Mudarabah is not in the nature of a fixed receivable loan. The nature of the Mudarabah capital is that of an investment, which is subject to increase in case of profitability or decrease in case of loss.
The determination of the Mudarabah capital either with respect to the partial return (to the extent intact) during the Mudarabah term period or the total return (to the extent intact) at the end of the Mudarabah term period is achieved through liquidation of the entire subject project either on a constructive or actual basis.
In case of partial return during the Mudarabah term period, if upon the determination (for example by constructive liquidation) the Mudarabah capital is still intact then the company may be required to return part of the agreed Mudarabah capital along with the entire profit entitlement of the Islamic bank on the date of such determination. The balance of the Mudarabah capital may then be re-invested by the company on Mudarabah basis for the rest of the Mudarabah term period.
If upon the determination (for example by constructive liquidation) the Mudarabah capital has occasioned a loss due to market considerations without the negligence or misconduct of the company then the extent of the loss is to be borne by the Islamic bank and the Mudarabah capital will decrease accordingly. In such a situation, the basis for determination either for partial return (during the Mudarabah term period) or the total return (at the end of the Mudarabah term period) will be the actual remaining Mudarabah capital and not the original Mudarabah capital, which was invested at the time of creating the Mudarabah partial liquidation will be applied on the current Mudarabah capital amount and not the original Mudarabah capital amount.
Dr Hussain Hamed Hassan
Chairman of the DIB Shariah Board,
Managing director, Dar Al Sharia Legal & Financial Consultancy, Dubai, UAE