 In this module, we shall study risk management in Mudarba. Mudarba is a contract which has been cited as a perfect substitute for interest-based transactions by many enthusiasts. However, I must say that Mudarba has its own problems, especially when it comes to risk management. I must remind myself and yourself the definition of Mudarba before we continue in this module. Remember, we said that Mudarba is a contract between two parties. These parties could be more than two, but at least two parties in such a way that one party provides capital and the other party does the business. On the understanding that if there is any profit from this business activity, the two parties would share the profit in accordance with a profit distribution ratio, which must be agreed between the two parties. And if there is a loss, that loss would be borne by the party providing capital. So, this is the definition of Mudarba. Now, Mudarba contract doesn't allow interference of investor. We know that we call the investor in this case Rabbul Mal or the party providing capital in day-to-day running of the business. This is a very important restriction. If I have provided you 10 lakh rupees as Mudarba capital for you to do an agreed business, I cannot intervene in the day-to-day business which you are conducting. In other words, Rabbul Mal does not have management rights. Management rights are actually with the party doing business with the money. Rabbul Mal, however, has right to seek information. It could be in the form of daily reports, weekly reports, monthly reports or reports of any frequency that has been agreed between the two parties. So, at least this would give some information to the Rabbul Mal that the money he has provided to someone is being utilized in the activity which was agreed between the two parties. This creates an imbalance between the management and control of the business. One party is actually managing it and it is controlling it at the same time as well. The Rabbul Mal has some kind of control by way of having the information and then advising based on that information that this would be done or that would be done, but that's only an advice. In this context, Mudarba actually becomes a highly risked contract for investors. Misreporting or underreporting of Mudarba profits can become a major concern. In economics, we call it agency problem and agency problem prevails in quite a number of other contracts as well. Now additionally, in Mudarba, burden of proof of cheating is on the investor. If I have given you money on Mudarba and I say that you are actually cheating, you are underreporting profits, in Mudarba rules, if I say this thing, if I blame you or claim that you are not doing the right thing or you are misreporting the profit, the burden of proof is on me. If this dispute goes to the court, the judge would ask me, okay, you have made this claim, prove it. This aspect of Mudarba makes Mudarba even more risky. So Mudarba becomes even riskier in the wake of this restriction or this requirement. So because of imbalance of management and control and because of burden of proof of cheating on the investor, Mudarba is a risky proposition for the investors. So what are the risks in Mudarba consequent to this inherent structure of Mudarba? Loss of profit could be one. There could be loss of capital and loss of profit and misuse of capital because the Rabbul Mal does not have management right. It has only to seek information. It is quite possible that the person who was given money somewhere else. So that is an example of misuse of capital and of course burden of proof of cheating. This is another risk in Mudarba. Now in summary, loss of profit, this is a risk, loss of capital, it is a risk. Misuse of capital, this is a risk and burden of proof, this is a risk as well. What could be the control mechanisms to manage these risks? Now loss of capital to ensure that profit is not under reported or misreported, periodic reporting may be required. So this is a risk management tool. Loss of capital, the chances of this can be minimized by way of asking the Mudarba to provide a feasibility study even before the Mudarba business is started. Now many contemporary scholars, they say that if a Mudarba has provided a feasibility study, this should be deemed as an authentic document. This means that the person who is seeking financing on Mudarba believes in it. And if there is any deviation in the actual business from this feasibility study and there is a loss of capital or in certain cases loss of profit as well, then the Mudarba would be held responsible for this. So this is another risk management tool. Misuse of capital, monitoring and auditing, this is something which can be used to ensure that the capital is not misused. Burden of proof, this can actually be shifted to the Mudarba if a feasibility study has been provided by the Mudarba. Now all these measures would not take away all the risks. Remember, we are trying to understand how the risks can be minimized in Islamic structures. It is not the case of avoiding the risk. The risks can be avoided in certain other ways. And we said that one way is by way of prohibition. So there is prohibition of riba. There is prohibition of gharrar. There is prohibition of maistr, gambling. So the risks involved in those situations are avoided by way of observing the prohibitions which are given in the Quran and in the Sunnah of Prophet Sallallahu Alaihi Wasallam.