ISLAMIC REPUBLIC OF AFGHANISTAN

1. ISLAMIC REPUBLIC OF AFGHANISTAN Ministry of Rural Rehabilitation and Development Afghanistan Rural Enterprise Development Program Islamic Finance Product DevelopmentThe Mudhārabahcontractprepared by Alberto G Brugnoni – ASSAIFJune 2013

2. CONTENTS • DEFINITION • QUR’ANIC EVIDENCE • FEATURES • MUDHĀRABAH MUTLAQAH • MUDHĀRABAH MUQAYYADAH • MUDHĀRABAH V MUSHĀRAKAH • CURRENT APPLICATIONS

3. DEFINITION • Derived from the expression “dharaba fi ‘l-ard” meaning to make a journey: • it is so called because the agent (entrepreneur) gets profit by virtue of his hard work and efforts in performing long journeys • The transaction of mudhārabah is known in the classical literature as qiradh or muqāradhah. Both terms derived from the word qaradhawhich means to cut off (al-qat’): • this is simply because the capital provider (rabb al-mal) need to cuts off some of his money to be utilized by the mudhāribin business activities

4. QUR’ANIC EVIDENCE عَلِمَ أَن سَيَكُونُ مِنكُم مَّرۡضَىٰ‌ۙ وَءَاخَرُونَ يَضۡرِبُونَ فِى ٱلۡأَرۡضِ يَبۡتَغُونَ مِن فَضۡلِ ٱللَّهِ‌ۙ He knoweth that there are sick folk among you, while others travel in the land in search of Allah's bounty (73:20) فَإِذَا قُضِيَتِ ٱلصَّلَوٰةُ فَٱنتَشِرُواْ فِى ٱلۡأَرۡضِ وَٱبۡتَغُواْ مِن فَضۡلِ ٱللَّهِ وَٱذۡكُرُواْ ٱللَّهَ كَثِيرً۬ا لَّعَلَّكُمۡ تُفۡلِحُونَ And when the prayer is ended, then disperse in the land and seek of Allah's bounty, and remember Allah much, that ye may be successful (62:10).

5. FEATURES • It is a contract or a partnership where one party (rabb al-mal) provides the capital and the other party (mudhārib) the entrepreneurship/labor: • the profit is shared between the two parties according to the terms of their predetermined conditions • the losses will be borne by the capital provider alone who is the financier • the entrepreneur suffers the frustration of a fruitless effort • Roles of the entrepreneur (mudhārib): • ameen (trustee): the money given by the rabbal-mal and the assets required therewith are held by him/her as a trust • wakeel (agent): in purchasing goods for trade, he is an agent of rabb al-mal • sharik (partner): in case the enterprise earns a profit, he/she is a partner of rabb al-mal who shares the profit in agreed ratio • dhamin(liable): if the enterprise suffers a loss due to his/her negligence or misconduct, he/she is liable to compensate the loss • ajeer(employee): if the mudharabah becomes void due to any reason, the mudhāribis entitled to get a fee for his services

6. FEATURES • SUBJECT MATTER • The work or business venture under the mudhārabahmust be conducted solely by the entrepreneur (mudhārib). It is not legal if the capital provider (rabb al-mal) it is also required to conduct the daily operations • The project must be legal and permissible (halal) • CAPITAL • Must be in the form of money and not commodities, since commodities fluctuate in price and cause uncertainty and ignorance • The capital must be clearly specified, determined and known at the time of the contract • Must be available cash - present at the conclusion of the contract • Must be delivered to the possession of the mudhārib entirely • TERMINATION • Unilateral termination • On the date of maturity, if the two parties had earlier agreed to set the time limit • When the fund of mudhārabahhas been exhausted or have suffered losses • The death of the mudhāribor liquidation of institution that acts as mudhārib • Insanity of any parties to the mudhārabahcontract

7. FEATURES • PROFITS • The distribution of profit must be determined proportionally between the capital provider and the entrepreneur • The pre-determined profit must be in ratio form or percentage and not in fixed amount • Allowed to be different ratios at different situations • There cannot be a distribution of profits until the losses have been written off and the equity of rabbal-mal has been fully restored • Any distribution of profits before the conclusion of the contract will be considered as an advance • All losses incurred in the ordinary course of business must be charged against profits before they can be charged against the equity of rabb al-mal • If it has been agreed that the entire profit will be taken by the rabbal-mal – the mudhāribwill be entitled to the customary remuneration (‘ujral-mithly) • If it has been agreed that the entire profit will be taken by the mudhārib– the rabbal-mal is a creditor and mudhāribis a debtor • The mudhāribcannot claim any periodical salary /fee or remuneration for the work done by him/her for the mudhārabah

8. MUDHĀRABAH MUTLAQAH • The entrepreneur (mudhārib) may buy and/or sell all types of merchandise as he sees fit, hire helpers as needed, rent equipment and travel with the equipment etc. • The business is run according to the entrepreneur (mudhārib) expertise and experience based on his/her discretion • The capital provider (rabb al-mal) authorizes the entrepreneur (mudhārib) to act completely at the latter’s discretion in all business matter • The mudhārib’s liberty to transact the capital: • all matters which are commonly practiced in business - the authorization to transact with the capital is unlimited • all matters which are not commonly practiced in business - free to transact with the capital provided with permission from rabb al-mal. Eg: giving the capital as donations or loans

9. MUDHĀRABAH MUQAYYADAH • The capital provider (rabb al-mal) makes certain limitations to the activities to be conducted by the entrepreneur (mudhārib) with regards to the capital given • The business is subject to capital provider’s (rabb al-mal) instruction in term of type, location, time etc. • Themudhārib’s liberty to transact the capital: • the mudhāribis subjected to certain limitations in the form of territorial limits, or time limitation and limitation in terms of kind of goods or person with whom trade may be conducted

10. MUDHĀRABAH V MUSHĀRAKAH

11. CURRENT APPLICATIONS • Project financing • Import/export financing • Working capital financing • Saving/Current/Investment account • Interbank lending/borrowing • Sukuk