Mudarabah Case Study

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There are a number of features or principles which are attributable to the Mudarabah contract. These include nature of contract, capital, profit sharing right and treatment of losses.
In general the contract of Mudarabah allows anyone of the contracting parties to terminate the contract unilaterally. The contract shall not be terminated unilaterally if the manager has commenced the work or when both parties have agreed not to terminate the contract during a specified time.
Capital is the principal feature of Mudarabah forming the substance of the contract. The capital shall be contributed by the capital provider only. The capital shall be managed by the manager to generate income. The capital of Mudarabah may be in the form of monetary or non-monetary …show more content…

Alternatively, when expenses exceed revenue for a defined period, an operating loss shall be recorded. Mudarabah operating loss which is measured during the operating period may be offset against prior or future profits. Loss shall be solely borne by the capital provider except in the event of misconduct, negligence or breach of contract by the manager. The manager may not undertake to bear the loss. The manager may bear the loss at the time the loss is realized without any prior condition or undertaking. A third party may undertake to bear the loss of capital due to misconduct or negligence on the part of the manager. The capital provider may take collateral from the mudarib, provided that the collateral could only be liquidated in the event of negligence or misconduct or violation of term of contract by the Mudarib. Capital loss shall be recognized when the loss occurs prior to the commencement of the business or due to extenuating circumstances beyond the control of the manager and not due to the negligence or misconduct of the manager. The Mudarabah agreement may be mutually reviewed to ascertain whether the capital loss impairs the future performance of the business activity and the partners may decide to restructure the agreement accordingly. Operating loss shall be recognized when the loss occurs during the course of ordinary business. The losses may be carried forward to the next period and subsequently, be set-off against prior or future

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