SILENT PARTNERSHIP (MUDHARABA)
Mudharaba is a contract between two parties: the owner of money (the silent partner) and another person (the active partner) who trades with it in lieu of a certain proportion of profits. It is necessary that the contract consists of an offer and an acceptance by any way that indicates it, whether by words or conduct. The contract comes into effect by handing over the money with the intention of silent partnership.
Ruling 472: It is necessary in silent partnership that the money stays in the ownership of its owner, so the active partner acts as his agent. This money can be gold, silver or bank notes. It may also be other tangible assets if it is agreed that its like or its worth be preserved as capital.
Ruling 473: A transaction will be valid if it is based on handing over a certain benefit to the active partner in exchange for a specific portion of the profit, but this will not be considered to be mudharabah; for example, giving a vehicle to someone to use for transport with the income divided between them. Similarly, a transaction is also valid if it is based on giving both benefit and money; for example, one party provides a factory and another party provides money, for the third party to use both for his business, with the division of the profits between them.
Ruling 474: A contractual agreement will not be regarded as silent partnership unless the profits are shared amongst them both in specified undivided portions, such as splitting it fifty-fifty, or a third for one party and two-thirds for the other.
Ruling 475: It is obligatory upon the active partner to limit his activities to such transactions and dealings which have been authorized, such as in respect to the type of items to be traded, the timeframe of the business, the place, etc. If he does not stay within the stipulated limits, he is liable for any loss if the loss is due to him, even if it is not due to the actual the violation of the terms. If the loss is not due to the violation, establishing liability on him is problematic, so they should conciliate with one another. If no such limits were stipulated and the disposal of the money was delegated absolutely to the active partner, he will not be liable for loss except if he transgresses or acts negligently.
Ruling 476: Loss will be made up by the gains obtained in the partnership, so the active partner will not receive anything except after the losses are made up. However, if the money invested into the partnership – or some of it – perishes before trading with it, any subsequent gains will not make those losses up.
Ruling 477: The active partner will not be liable if the invested money is lost, and nor will he bear accidental losses, except if he violated what the owner of the money stipulated and the loss is due to the violation, or if he acted with transgression, not as how one is usually expected to act in fulfilling his duty. Furthermore, the owner of the money cannot make it a condition that the active partner be liable for losses without such negligence.