Mudarabah – Partnership between an Investor and an Entrepreneur
Almighty Allah, in His wisdom and justice, has distributed talents and wealth among people. In society there are many numerous experts in their respective fields — people of intelligence, experience, and knowledge — and there are also people of means (capital owners) who, due to lack of experience, time, lack of specialization in a particular field, or other reasons, are unable to implement a particular business project. It is precisely in such situations that the interests of capital owners and talented specialists converge (i.e., coincide). Then, for the sake of their goals, one party contributes their capital, while the other contributes their knowledge and experience, and they both become participants in a business project.
Islamic teaching supports the partnership between a capital owner and an expert, provided it is based on a fair and sound agreement.
Such a partnership in Sharia law is called Mudarabah. If the project (business activity) generates a profit, it is distributed among the partners according to their agreement. Conversely, if a loss is incurred, the investor bears the financial loss, while the partner who contributed their talent/labor loses the time and effort spent on the project (business activity). Furthermore, if the loss is incurred due to the mudarib's fault, his professional reputation is damaged. If the loss results from the mudarib's negligence or failure to comply with the signed agreement and/or the approved project terms, then the loss must be compensated by the mudarib.
At the same time, there are several important conditions of Mudarabah that must be mentioned (we will present a separate article on the Mudarabah contract later). These include:
- The investor may not pre-determine a fixed return on the capital invested in the business project — that is, the return must be dependent on the outcome of the project (whether it results in profit or loss);
- The mudarib, i.e., the party providing talent/labor, may not demand a salary for his work during the joint venture (whether out of prospective profit or otherwise). As mentioned above, the mudarib is only entitled to a share of the profit that the project may generate.
One party's insistence on a predetermined fixed income or salary for itself before the outcome of the activity is known constitutes an outright injustice to the other party (since project outcomes may vary). Such injustice inevitably leads to hatred and animosity between people and disrupts social harmony.
Source: islommoliyasi.uz