Islamic finance : Mudaraba contract - Research Paper Example

is is provided that the losses under consideration did not occur because of the misconduct (ta’addi) or negligence (taqsir) of the mudarib (Davis, 2008). The Mudaraba is an example of a fiduciary relationship, and these assets are normally held in trust. The parties to this association are allowed to terminate their agreement or contract, the mudarib has started working, or the two parties agreed to terminate their contract after a specified period of time. There are two major types of the Mudaraba.

These types are, the restricted, and the unrestricted Mudaraba (Hassan & Lewis, 2007). The unrestricted Mudaraba is also referred to as Mudaraba Mutlaqah, and it is a contract, whereby the Rabbul Mal, has not initiated conditions, in which the Mudarib, could follow, for purposes of investing his money. The restricted Mudaraba is also referred to as Mudaraba Muqayyadah. Under this type of a contract, the Rabbul Mal has initiated a series of conditions, or projects that the Mudarib can engage in, for purposes of investing the money of the Rabbul Mal (Davis, 2008).

Restricted Mudaraba can occur in two major ways, restrictions, under the terms of the Mudaraba, and restriction of location. Restriction under terms, is a concept where the Rabbul Mal, is able to impose specific terms, in regard to the manner which the Mudarib should invest or use his money. Restriction under location is where the Rabbul Mal, restricts the Mudarib, to operate in only some specific locations (Suwaidi, 1994). A concept under Sharia law that is closely related to Mudaraba is Musharakah.

Musharakah is a joint venture, whereby both parties to the business, are able to contribute capital for purposes of running the organization (Davis, 2008). Under this concept, the profits are shared by the partners, as per the agreed ratios, and the losses are also shared, as per the level of capital that an individual invested. Both parties in Musharakah can manage the organization, even though it is not