Mudarabah is a partnership in business whereby one party provides capital and the other provides labour.  That is the Mudarib (Manager) who does the work and the Rabb-ul-Maal who provides the capital. Mudarabah is a profit sharing and loss sharing.  It is under the AAOIFI Shariah Standard 13 of 2017.     

A Mudarabah contract is one of the trust-based contracts like silent-partnership in common law.    

The essential elements of Mudarabah contract are both parties should possess the legal capacity to appoint agents and accept agency.  The Mudarabah venture must be Shariah compliant.    

Types of Mudarabah Contracts

• Restricted Mudarabah, a restricted Mudarabah contract is a contract in which the capital provider restricts the actions of the manager to location or to investment.   
• Unrestricted Mudarabah, here the manager is given the discretion to invest the money in business as he deems fit most common Islamic funds.  In this case, the manager has a wide range of trade or business freedom based on trust and the business expertise he has acquired.  

Mudarabah Principles

1. The capital of Mudarabah must be provided in the form of cash. 
2. For a Mudarabah contract to be valid, the capital must be put at the disposal of the manager. 
3. Manager can do anything that falls within the course of the business in line with the contract.     
4. Profit-sharing ratio and duration must be pre-agreed at the beginning of the contract. 
5. The profits generated should be shared in a predetermined ratio (%) but not a lump sum or % of capital  
6. Mechanism for distributing profit must be clearly known to avoid uncertainty an any possibility of dispute.   
7. No profit can be recognized unless the capital is maintained intact.   
8. Whenever possible a Mudarabah operation incurs losses, such losses stand to be compensated by the profits of future operations of the Mudarabah 
9. In the case of loss in the Mudarabah business, the manager being a Trustee is not liable, unless if there is breach of contract, negligence, or misconduct on his part. 
10. Only the provider of capital will suffer the monetary loss while the manager suffers the loss of his efforts/labour.     
11. Profit equalization reserve from realized profit is allowed 
12. Manager cannot give guarantee of profit/capital, unless on breach of contract, negligence, or misconduct on his part. AAOIFI 13/6 
13. Direct expenses of the Mudarabah venture to be charged to the Mudarabah pool. 
14. On maturity or liquidation stage of a Mudarabah venture, the assets should be liquidated based on actual/fair value. 
15. Mudarabah financial instruments are tradable at market price.  

Classical Mudarabah Structure     

• Capital Provider: Capital, Loss Share 100% 
• Manager; Management, Profit Share    

Mudarabah Deposit Share

• Depositors; capital. Loss shares 100%, profit share 
• Non-interest Banks or noninterest fund managers; Management, Profit share.  

Mudarabah Sukuk are certificates that represent projects or activities managed on the basis of Mudaraba by appointing one of the partners or another person as the Mudarib for the management of the operation. An instance is TajBank additional Tier 1 capital through Mudarabah Sukuk, approval from FRACE of CBN, approval from SEC and offer for subscription.  Another instance is an NGX listed Cement Company seeking to expand its business in Nigeria, mobilizing capital through Sukuk with JV features.  

Mudarabah Sukuk Structure

• Sukuk Holders 
• Declaration of Trust
• Proceeds/Certificate 
• Proceed
• Capital 
• Management 
• Profit   
• Profit/Capital 

Mudarabah In Islamic Insurance (Takaful)

Takaful is an Islamic insurance, where members contribute/donate money into a pool (Participants Risk Fund) to guarantee each other against loss or damage.  The participants risk fund is managed on behalf of the members by a Takaful Operator. 

The National Insurance Commission (NAICOM) has identified 3 models of Takaful to be used in Nigeria These models are: 

• Wakalah (Agency) Model 
• Mudarabah Model 
• Hybrid Wakalah- Mudarabah Model      

In Takaful Mudarabah Contract, the Takaful Operator functions as a manager and the participants are the capital providers. The operator manages underwriting and investment activities for a pre-agreed percentage share in investment gains and operating surplus. Direct expenses of the Takaful would be paid from the Takaful Fund. Financial losses (if any) are borne by the participants only.   

Partnership in a form of Mudarabah has been a cornerstone of business dealings in our traditional life.  Modern non-interest finance standardizes the partnership through a bank-customer relationship in a form of Mudarabah investment Account Holders and Mudarabah Financing Clients (Two-Tier Mudarabah). 

A Mudarabah contract is part of the globally acceptable Islamic Insurance (Takaful) models for risk management.