Mudarabah — practice questions

Correct answer: C. Clause 4/3: As a general principle a Mudarabah is not binding, so either party may terminate it unilaterally, except in two cases: (1) where the Mudarib has already commenced the business, in which case it becomes binding until actual or constructive liquidation; and (2) where the parties agree a duration, in which case it cannot be terminated before the end of that duration except by mutual agreement. Clause 10/1/1 confirms that, being non-binding, it can otherwise be liquidated by unilateral termination.

Correct answer: A. Clauses 4/4 and 6: Mudarabah is a trust-based contract; the Mudarib is not liable for losses except for breach of trust, i.e. misconduct, negligence or breach of the contract terms, in which case he becomes liable for the Mudarabah capital. The capital provider may obtain adequate and enforceable guarantees from the Mudarib, provided they are not enforced except in cases of misconduct, negligence or breach of contract. Enforcing guarantees for ordinary business losses would convert the Mudarabah into a guaranteed loan.

Correct answer: D. Clauses 7/3 and 7/4: It is not permissible to use a debt owed by the Mudarib or another party to the capital provider as Mudarabah capital. The capital must be, wholly or partially, put at the Mudarib’s disposal or freely accessible to him; converting a debt into capital would mean the Mudarib continues to hold his own debt, and any ‘profit’ could disguise Riba on the rescheduled Murabahah debt. The debt’s maturity, certainty or acknowledgement does not change this.