Shariah Compliant Mudharabah

Muhtaram Mufti Anwar Ali MazahariHafizakallah,

We have reviewed the attached document.  The current document does not contain any elements that are against shariah. However, there are a few additions to be made

1) It should be stipulated on the contract that all goods purchased through the investment are Halal and shariah compliant.

2) The contract must stipulate whether the Mudharib will transact with an open mandate or a closed mandate.

In an open mandate, the Rabb-ul-māl gives full freedom to the Mudhārib to act according to what normal entrepreneurs do in their line of work. A closed mandate, restricts the Mudharib to a particular business or a particular place where the Mudharib will use the capital.[i]

3) The contract only has mention of the profit distribution. It should be stipulated that all losses will be borne by the Rabb-ul-māl, unless a breach of obligations is proven against the Mudharib. In which case, the Mudharib will be liable for the loss in the Mudharabah capital.[ii]

4) The contract should stipulate that any profit realised should first be used to cover any losses incurred by the Mudharabah account. For example, if in the first quarter there was a loss of $500, and in the second quarter, the company made a profit of $1000, $500 will first be allocated to cover the loss in the Mudharabah account. The remaining $500 will be divided between the Mudharib and Rabb-ul-māl.[iii]

5) It should be stipulated that the Mudharib is not entitled to a fixed renumeration for his work in the Mudharabah. However, business related expenses such as expenses incurred during business travels, such as meals, accommodation, shall be borne by the Mudharabah account. Furthermore, wages of employees or commissions in buying in selling will be paid through the Mudharabah account.[iv]

6) Provision#3 listed in the document is ambiguous. The investment payment that will be made upon contract completion should be as follows.

All assets of the company will be liquidated. Upon liquidation, if any profit has been realised, it will be divided between both parties. Thereafter, the capital will be returned to the Rabb-ul-māl. If there is any loss, all loss will be borne by the Rabb-ul-māl.

7) The contract should stipulate that the agreement will immediately terminate if any of the parties predecease the completion of the contract.[v]

Note: In ascertaining the Shariah compliancy of an investment product, there are three preconditions:

1) The concept itself must be accepted in Shariah, for example, it is Musharakah product or Mudharabah product etc.

2) The contract must reflect the actual reality of the concept, i.e. all the preconditions (شرائط), active conditions (اركان) of the concept must be properly reflected in the contract.

3) The implementation of the product claimed as Shariah Compliant according to the terms and conditions reflected in the contract. It is one thing to have a Shariah Compliant contract and it is another to enact the product according to the contract. If the product is not enacted according to the terms and conditions of the contract, the transaction cannot be claimed as Shariah Compliant.

Alhamdulillah, you have met the first two conditions. However, the third condition requires periodical auditing from the DarulIftaa. Unfortunately, due to logistics, the third condition cannot be fulfilled. As such, the DarulIftaa cannot issue a certificate of shariah compliancy.

By the Fadhl of Allah, you are also a qualified mufti. You should use your influence over the community to present the credibility of the investment scheme. You may however contact us as and when you wish for further assistance. It will be our good fortune to assist.