 In this module, we are going to discuss a very important concept. It's called Mudaraba. Mudaraba is a contract between two or more parties in which one party provides money and the other party does the business. With an explicit understanding that the money would be used by the party doing business for a Sharia compliant activity or business. If this activity generates some profit, this profit would be distributed between the party providing money and the party doing business in accordance with a pre-agreed ratio. If loss occurs, the party providing money would bear all the financial loss. The party doing business would of course lose their effort. This is a very important concept and contract in Islamic banking and finance. Important thing here is that the money is lost for the one who has provided the money when there is a loss. This is important because profit distribution ratio should be agreed between the two parties beforehand. Once it has been agreed and the Mudaraba business has been initiated this profit sharing ratio cannot be changed. I must emphasize on this one that profit distribution ratio once it has been agreed between the two parties, it cannot be changed. Unless there are some exceptional circumstances and the two parties mutually agree to it. In this case, there is neither security of money nor guaranteed return. If you remember in our module on investments, investment contracts, we very explicitly mentioned that in case of investments, there is no fixed guaranteed return. Investments are inherently risky and Mudaraba is one investment-related contract in Islamic business and finance. I am using the word Islamic business and finance and not Islamic banking and finance because Mudaraba has a wider application in business as well. Actually, this is a business contract which is used as an Islamic mode of financing by Islamic financial institutions. So, there is neither security of capital nor guaranteed return. Classical Mudaraba was in general for a specific activity. For example, purchase and sale of leather. Someone used to give money to someone on Mudaraba and he used to say, you have to do this business. You have to buy leather and sell it. In this way, the profit will be distributed under an agreed distribution ratio. The money provider in the context of Mudaraba is also called Rabbulmal. So, when you read on Mudaraba, you will come across this word Rabbulmal. Rabbulmal means the party providing money, providing capital. The party doing business is called Mudarib. So, in a Mudaraba contract there is Rabbulmal, the party providing money or capital and the other party Mudarib doing the business. Now, the money may be called Mudaraba capital. Now, Mudaraba capital should ideally be in the form of money but there is a provision that it could be in the form of another asset as well. However, it is always recommended and advised that that asset should be valued at the start and that value would be considered as the Mudaraba capital. So, there is Rabbulmal, the party providing capital, Mudarib, the party doing business and the money is called Mudaraba capital. Now, I have explained what a Mudaraba is in a very general way. It is also important to understand what Mudaraba is not. When a company gets money in the form of Mudaraba the Mudaraba capital is not deemed as equity capital of the company. Many people who are talking about Mudaraba rather wrongly say that Mudaraba is like providing equity capital. No, that is not the case. When a company finances Mudaraba from a bank it does not mean that it is taking equity capital from a bank. Actually, high street banks, retail banks like Habib Bank, United Bank, MCB, etc. they are not allowed by the regulator to invest in businesses. So, when a company finances Mudaraba the business that takes money on the basis of Mudaraba Rabbulmal does not participate in its equity. So, this is very important. Mudaraba capital is also not treated like any other debt owned by the company. This is not equity nor is it like debt. In fact, many people would argue that Mudaraba capital is an asset class in its own or Mudaraba business is a very distinct form of activity which may not come under equity and debt both. It is a different thing. Let us explain this with one example. In this picture, I am showing a company. A company and a bank. This is a company and this is a bank. Now, company A gets money from the bank on the Mudaraba basis. Now, the important thing is that the money that is given to this company on the basis of Bank Mudaraba will be made up of Mudaraba assets. Either something will be bought, for example, if this company is a trader then it will take the money and buy it. So, the name of that activity will be Mudaraba assets. So, these Mudaraba assets, they would be identifiable. In case of profit, from that activity, the bank and the company they would be sharing the profit in accordance with whatever they agreed upon at the start of the Mudaraba. So, in case of profit, some money is generated from these assets in the form of profit. The bank will go and some company will keep it in accordance with profit distribution ratio. For example, if they want to do half profit, the company will keep half profit and the bank will give half profit. In case of loss, whatever loss, for example, the bank had given 1 lakh rupees and after a year, when all the purchases were over, there would be 90,000 rupees left. So, the loss would go to the bank and the party in this case, company A would not be bearing any financial loss. Of course, it would not get any profit because there was no profit. Now, this last point is very important. In case, this company had taken money from the bank for Mudaraba but this company would be bankrupt during this period. Now, when this company would be bankrupt, these Mudaraba assets, we call them as bankruptcy remotes. These Mudaraba assets would be removed from the company and then the debt holders and equity holders would be divided as per the law. So, Mudaraba assets are actually bankruptcy controlled. Mudaraba assets or Mudaraba capital is not like equity, it is not like debt and of course, this is bankruptcy remote and it is a very important aspect of using Mudaraba in Islamic business.