BANK & FINANCE, ACTIVELYSHARE.COM — There are at least 2 contracts that are commonly present in the profit-seeking process. In the previous article, we have discussed the murabahah contract. This time, we will discuss the next contract, namely the mudharabah contract.
What is a mudharabah contract?
Mudharabah comes from the word dharb , which means hitting or walking. The definition of hitting or walking is more precisely the process of someone hitting his foot in running a business.
In a practical context , mudharabah is a business cooperation contract between 2 parties, namely the party managing the business/business owner, known as mudharib and the party having capital, known as shahibul maal. In the contract, the important point lies at the beginning, namely the agreement on the profit-sharing ratio.
When the mudharib and shahibul maal meet, they will enter into a mudharabah contract. Shahibul Maal will provide his capital investment to the mudharib ‘s business which then the mudharib will use the capital to manage his business.
On the day that the mudharib has returned to his investment and made a profit, he will return the principal capital obtained from the shahibul maal plus the profits distributed according to the profit-sharing ratio agreement at the beginning of the contract.
The concept of the mudharabah contract is contained in the Fatwa of the MUI DSN No: 07/DSN-MUI/IV/2000 concerning the financing of mudharabah (qiradh). In the context of the fatwa, it is mudharabah which is applied by Islamic Financial Institutions.
Foundations of the Qur’an and Hadith
The determination of the fatwa is based on several arguments from the Qur’an and Hadith. In QS Al-Maidah : 1 which means, “O you who believe! Fulfill those covenants. Lawful for you are cattle, except what will be recited to you. (That is) by not allowing hunting while you are on pilgrimage. Indeed, Allah establishes the laws according to what He wills “
The verse emphasizes the importance of the contract / agreement, especially for people who have faith in themselves. Then in QS Al-Baqarah 275 and 278, it emphasizes the prohibition of usury.
QS Al-Baqarah: 275, ” And Allah permits trading and forbids usury ” then in QS Al-Baqarah: 278, ” O you who believe ! Be pious to Allah and leave the rest of usury if you are believers “. The verse explains the solution to the prohibition of usury, namely buying and selling.
In addition, the Prophet SAW said, ” Muslims are bound by the conditions they make except the conditions that forbid halal or allow what is haram ” (Narrated by Muslim, Tirmizi, Nasa’i, Abu Daud and Ibn Majah).
The verse explains the solution to the prohibition of usury, namely buying and selling. In addition, the Prophet SAW said, ” Muslims are bound by the conditions they make except the conditions that forbid halal or allow what is haram ” (Narrated by Muslim, Tirmizi, Nasa’i, Abu Daud and Ibn Majah).
Fiqh Rules and Ijma Ulama
Then it is based on the rules of fiqh, namely that all forms of muamalah are basically permissible unless there is a proposition that forbids it. From these propositions and the rules of fiqh that apply, an ijma is formed which Wahbah Zuhaili explains , “Regarding Ijma, it is narrated that a number of companions handed over the property of orphans as mudharabah, and no one denied it.
Therefore, it is ijma ”. Thus the scholars argue that it is related to mudharabah which is taken from the sirah of the Prophet by Ibn Hisham, namely the Prophet SAW went to trade as a mudharib to Syria with the property of Khadijah bint Khuwailid before becoming a prophet; after becoming a prophet, he narrated the business emphatically ”.
This shows that the practice of mudharabah has occurred when the Prophet Muhammad became a trader. The practice was carried out by the Prophet Muhammad who at that time acted as mudharib and Khadijah who acted as shahibul maal.
Pillars and Conditions of Mudharabah
Basically, the existence of a contract cannot be separated from the pillars and conditions that apply. This is necessary so that the contract done is not fasid (damaged) and the blessing of the contract is not lost. Then, what are the pillars and conditions of the mudharabah contract?
Shahibul maal and mudharib must understand the law.
That is why this contract can only be done for those who have reached puberty and have knowledge of the law. Because if one of the parties or both parties are not competent with the law, then it is feared that the contract made is not in accordance with the applicable rules.
Sighat (ijab kabul)
Sighat (ijab kabul) also needs to be done so that there is clarity of the contract being carried out. As for this Sighat , there are things that must be considered, including:
- The offer and acceptance must explicitly indicate the purpose of the contract.
- Offers and acceptances are made at the time of the contract.
- The contract is made in writing, through correspondence or by using modern means of communication.
Regarding capital, it must be an amount of money or assets given by the Shahibul Maal to the Mudharib for business purposes on the following conditions:
- Must know the number and type.
- Can be in the form of money or goods that are valued. If it is in the form of an asset, it must be valued at the time of the contract.
- Not in the form of receivables and must be paid to the Mudharib, either gradually or not, in accordance with the contract agreement.
Mudharabah profit is the amount obtained as an excess of capital, with the following conditions:
- Should be allocated to both parties and should not be signaled to one party.
- The proportionate profit share for each party must be known and stated at the time the contract is agreed and must be in the form of a percentage (ratio) of the profits as agreed. Changes in the ratio must be based on agreement.
- Shahibul Maal bears all losses resulting from the Mudharabah, and the manager must not bear any loss unless it results from a willful mistake, negligence, or breach of agreement.
Business Activities by Mudarib
Business activities by mudharib , as a balance of capital provided by Shahibul Maal basically must pay attention to:
- The mudharib has the exclusive right to run his business without the intervention of the Shahibul Maal, but he has the right to supervise.
- Shahibul Maal must not narrow the manager’s actions in such a way that it can hinder the achievement of the Mudharabah objective, namely profit.
- Mudharib must not violate Islamic sharia law in his actions related to Mudharabah, and must comply with the customs that apply in that activity.
Types of Mudharabah Contracts
Mudharabah contracts have different characteristics depending on the type. Generally, there are two types of mudharabah contracts , including:
This Mudharabah contract has the characteristics that the owner of the funds/capital (Shahibul Maal) has the authority to do anything or intervene in the running business to be successful and in accordance with the business objectives that have been agreed between the two parties.
So, suppose you have a fish farming business, then you enter into a Mudharabah contract with one of the investors. Well, the investor has the right to intervene in your business so that he can change the system in your business such as sales methods, HR recruitment, financial management and so on.
But you still have the right to manage your business. However, what you are going to do needs to be discussed with your investors.
It is different with Mudharabah Muqayyadah where the Shahibul Maal has the right to intervene in the business, in Mudharabah Mutlaqah, the Shahibul Maal does not have the right to regulate the business of the entrepreneur.
So when there is a Mudharabah contract agreement between the Shahibul Maal and the Mudharib (entrepreneur) then the authority to regulate the business is 100% the right of the entrepreneur. The owner of capital does not have the right to regulate the business for which he provides capital.
Mudharabah Scheme in Banking Transactions
The following is a picture related to the mudharabah scheme in practice in banking:
Seen in the picture above, the mudharabah scheme is explained in the following details:
- The customer applies for financing to the bank to obtain business capital.
- The bank provides 100% of capital to be managed by customers who have certain expertise.
- When the contract takes place, the profit sharing proportion has been determined.
- If a loss occurs when running a business that is not the customer’s negligence, the loss is borne by the bank.
- After the business process is running, then the profits are divided according to the provisions of the ratio. In addition, customers also return the principal capital to the bank.
Illustration of Mudharabah Scheme in Banking
For example, Adzkia is a devout Muslim woman who understands religion. She wants to save her money in one of the Islamic banks, namely Bank A. Because she wants to feel the investment returns, Adzkia opens a savings account with a Mudharabah contract.
Adzkia saved 10 million of her money to Bank A with a profit sharing ratio of 20% for Adzkia and 80% for the bank. On the other hand, Santos is a cattle businessman. To develop his business, he needed additional capital. He came to one of the Islamic banks (let’s call it Bank A) to get additional capital.
When Santos explains his need for capital for his business to Bank A, Bank A will conduct a screening to ensure that Santos is a suitable Mudharib for Mudharabah financing .
At the beginning of the contract, they will determine the profit-sharing ratio of Santos’ profits. For example, the agreed profit-sharing ratio is 60% for Santos and 40% for Bank A. So, when Santos starts to reap the benefits from his business, for example, the profit is 10 million. So, 6 million (60% x 10 million) for Santos and 4 million (40% x 10 million) for Bank A.
Impact on Adzkia Mudharabah Savings
The proceeds of 6 million received by Bank A will also have an impact on increasing income from Adzkia’s Mudharabah savings. In general, the calculation for profit sharing to customers also includes the average balance per month across Bank A. Let’s say the average balance in Bank A for Mudharabah savings is 1 billion.
The formula used is (Adzkia’s balance x Bank A’s Profit x 20%)/Average balance of Mudharabah savings in Bank A. When entered, the calculation becomes (10,000,000 x 4,000,000×20%)/1,000,000,000 = 8,000. So that the income received by Adzkia which will immediately be added to his Mudharabah savings balance is IDR 8,000.
Simple Mudharabah Scheme
Judging from the mudharabah contract scheme in a simple form, the details of the system are as follows:
- Shahibul Maal (the owner of the fund) submits the money he has as capital and the Mudharib (entrepreneur) receives the money so that a Mudharabah contract is formed.
- From the funds that have been received by the Mudharib, it is carried out in the form of a business project.
- When the business is running, the profits from the business must be distributed to both parties, namely Shahibul Maal and Mudharib. If the project generates a profit, the profit must be distributed according to the agreed ratio. However, if there is a loss, the loss is fully borne by the Shahibul Maal.
- Distribution of profit/loss to both parties.
Simple Mudharabah Schematic Illustration
Sound complicated? Not all Mudharabah schemes are that serious. There is a very simple Mudharabah scheme, namely the Mudharabah which is enough to bring together two parties directly, namely Shahibul Maal and Mudharib.
Back to the story of Santos and Adzkia. Santos, who has a business but is having trouble getting capital, meets Adzkia, who has capital for Santos’ business. They also do the Mudharabah contract.
Adzkia deposited 10 million to Santos as capital. They agreed on a profit-sharing ratio of 60% for Santos and 40% for Adzkia. The portion is large for Santos because ideally the mudharabah scheme provides a large portion of the entrepreneur (Mudharib).
Over time, in the span of a year, Santos’ business has returned to its capital, earning a profit of 1 million rupiah. So at that time Santos had to return the capital he used to Adzkia plus the distribution of the results of his business, namely 400 thousand for Adzkia (40% x 1 million) and 600 thousand for Santos (60% x 1 million).
What if you lose?
Then, what if Santos’ business loses? In the banking system, Adzkia will not experience any impact on the losses suffered by Santos. Because basically the Bank will not provide losses to customers.
It ‘s a different story when using a simple Mudharabah concept , Adzkia as an investor will bear a 100% loss on the capital provided. For example, after managing his business, Santos suffered a loss of 2 million rupiah.
So, Adzkia had to be tolerant to get back her incomplete capital. For example, Adzkia provides a capital of 10 million at the beginning. So, he will receive his money back as much as 8 million.
Justice in the Mudharabah Covenant
Does that mean Santos is delicious? Adzkia is the only one who loses. Islam is famous for its concept of justice. Even in this contract, there is still justice. Because basically both of them bear the loss.
Adzkia bears financial losses while Santos bears non-financial losses. Non-financial losses include energy, thought and time. Santos may not have lost financially, but he has lost non-financially because he has put his energy, thought and time into managing his business.
As long as Santos manages his business seriously without creating negligence or cheating, then Santos does not have the right to fully return Adzkia’s capital. It would be different if Santos deliberately manipulated his business or cheated. So, Santos must return Adzkia’s capital.
Mudharabah in Contemporary Conditions
The development of mudharabah transactions to date has led to modifications of the mudharabah contract in Islamic financial institutions (LKS). The contract is called the mudharabah musytarakah contract. Unlike the two previous contracts, mudharabah musytarakah is a combination of mudharabah and musyarakah contracts .
In simple terms, in this contract the entrepreneur ( mudharib ) includes his capital into the business he is running. This is different from the previous two mudharabah contracts in which the entrepreneur did not include the capital at all. When viewed from the definition, the mudharabah musytarakah contract looks the same as the musyarakah contract. However, what distinguishes the two contracts is that there are two stages of profit sharing. Here’s the division:
- The first stage is profit sharing from the LKS musharaka contract. At this stage, LKS benefit as investors ( musytarik ). The capital portion ratio determines the amount of profit that will be obtained by LKS.
- The second stage is profit sharing from the mudharabah contract. At this stage the profits that have been deducted from the results of the musharaka contract are then redistributed by dividing the LKS as the manager (mudharib) and the customer as the owner of capital (shahibul maal).
How to Invest with Mudharabah Contract
If you want to start investing using the mudharabah scheme. You can choose investment paths, including:
- Islamic banking, in general, Islamic banks have 2 forms of contracts as their products offered to customers, namely mudharabah and wadiah. You can choose mudharabah so you can feel the investment returns from the money you save in the Islamic bank.
- Non-Bank Islamic Financial Institutions, in this case you can choose to invest in sharia insurance, BPRS, BMT and so on which generally also use mudharabah contracts .
- Financial Technology, there are several fintechs that offer investment products with mudharabah contracts.