Losses in Mudarabah

The following question and answer by Sheikh Yusuf Talal DeLorenzo attendees of the Dow Jones University Courses on Islamic Investement.Question:: If in mudarabah partnership, mudarib has had some losses and inanother transaction he reaps profit. This means that profit should be taken to offset thelosses first and the remaining profit, if any, can be distributed to all the parties according to the pre agreed proportion. My question is which losses should be offset? Losses in capital owned by robbul maal or loss in mudarib's effort?Answer: There appear to be a number of points in this question which require clarification. To begin with, a mudarabah differs substantially from a partnership, which is termed in Islamic law a musharakah and may take a number of different forms. Nonetheless, a mudarabah might be termed a form of what is commonly known as a silent partnership. Secondly, the question speaks of "another transaction" without specifying what sort of transaction, and whether or not it was a part of the mudarabah contract. The content of the second sentence, i.e., that "profit should be taken to offset the losses first and the remaining profit, if any, can be distributed to all the parties according to the pre agreed proportion" is unclear. Is the proposed distribution of profits from one transaction meant to offset losses from theother transaction? Or is the intent that the revenues from the profitable mudarabah transaction should be used first to offset expenses incurred in the mudarabah operation, and that whatever revenue remains will be accounted profits? The final part of the question, however, regardless of what preceded it, may be answered as follows: In a classical mudarabah, the capital investment comes from the rabb ul mal, or investor, while the work comes from the mudarib or agent-manager. Under the terms of the mudarabah contract, the investor is liable for all losses, to the extent of his/her capital share. The agent-manager, however, will bear no loss other than the loss of time and effort.

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