The qirad (also known as Muqaradah by
Hanafi
The Hanafi school ( ar, حَنَفِية, translit=Ḥanafiyah; also called Hanafite in English), Hanafism, or the Hanafi fiqh, is the oldest and one of the four traditional major Sunni schools ( maddhab) of Islamic Law (Fiqh). It is named aft ...
and
Hanbali
The Hanbali school ( ar, ٱلْمَذْهَب ٱلْحَنۢبَلِي, al-maḏhab al-ḥanbalī) is one of the four major traditional Sunni schools (''madhahib'') of Islamic jurisprudence. It is named after the Arab scholar Ahmad ibn Hanbal ...
scholars)
[Sapuan, Noraina Mazuin. "An evolution of Mudarabah contract: a viewpoint from classical and contemporary Islamic scholars." Procedia economics and finance 35, no. 3 (2016): 349-358.] was one of the basic financial instruments of the
medieval Islamic world. It was an arrangement between one or more investors and an agent where the investors entrusted capital to an agent who then traded with it in hopes of making profit. Both parties then received a previously settled portion of the profit. The agent was not liable for any losses, provided these did not exceed the capital subscribed. (In later Hanafi jurisprudence, the agent had no authority to incur liabilities in excess of the capital, and so would have to bear any further losses personally.)
In modern Islamic finance, the term "
Mudarabah
Profit and Loss Sharing (also called PLS or participatory banking) refers to Sharia-compliant forms of equity financing such as mudarabah and musharakah. These mechanisms comply with the religious prohibition on interest on loans that most Musli ...
" is used for the same instrument. "Mudarabah" is derived from "al-darb al-ard", which is mentioned in the Quran, however "Mudarabah" as a term technically has no explicit basis in the Quran and Sunnah.
Origins and history
Although the qirad is never mentioned in the
Qur'an
The Quran (, ; Standard Arabic: , Quranic Arabic: , , 'the recitation'), also romanized Qur'an or Koran, is the central religious text of Islam, believed by Muslims to be a revelation from God. It is organized in 114 chapters (pl.: , sing. ...
, many Islamic traditions attribute its origin to the Prophet
Muhammad
Muhammad ( ar, مُحَمَّد; 570 – 8 June 632 Common Era, CE) was an Arab religious, social, and political leader and the founder of Islam. According to Muhammad in Islam, Islamic doctrine, he was a prophet Divine inspiration, di ...
and his companions. These traditions describe
Muhammad
Muhammad ( ar, مُحَمَّد; 570 – 8 June 632 Common Era, CE) was an Arab religious, social, and political leader and the founder of Islam. According to Muhammad in Islam, Islamic doctrine, he was a prophet Divine inspiration, di ...
and his companions either using the qirad or endorsing the institution. Many will notice that the qirad is almost identical to the institution of the
commenda The commenda was a medieval contract which developed in Italy around the 10th century, and was an early form of limited partnership. The commenda was an agreement between an investing partner and a traveling partner to conduct a commercial enterpris ...
later used in western Europe, though whether the qirad transformed into the commenda, or the two institutions evolved independently cannot be stated with certainty.
Legal technicalities
Though there existed several different major schools of Islamic law, the basic legalities of the qirad were rather uniform throughout the schools.
Dinars
The dinar () is the principal currency unit in several countries near the Mediterranean Sea, and its historical use is even more widespread.
The modern dinar's historical antecedents are the gold dinar and the silver dirham, the main coin o ...
and
dirhams
The dirham, dirhem or dirhm ( ar, درهم) is a silver unit of currency historically and currently used by several Arab and Arab influenced states. The term has also been used as a related unit of mass.
Unit of mass
The dirham was a un ...
, as well as gold, silver, and copper coins in circulation were allowed to be invested. However, goods such as barley were restricted from the qirad because the possible fluctuations in their value in the free market. In the Mongol Empire, the contractual features of a Mongol-''ortoq'' partnership closely resembled that of qirad arrangements, however, Mongol investors were not constrained using uncoined precious metals and tradable goods for partnership investments.
The agent was allowed to take the investment and split up his investments in any way, as well as invest in anything he wanted, except in cases where stocks are plentiful and not seasonally bound.
[Malik's Muwatta 32.3.5]
/ref> It was also permissible for an investor to forbid the agent from buying certain kinds of goods.[ Many of the third parties involved in the qirad were actually unaware of their involvement which allowed the agent to trade freely and without liability.
Although the fractional split in profit was agreed on beforehand, the investor could not stipulate a specific sum of the money from the profit, or that a certain profit be made. In this way, the qirad remained a complete risk on the investor and did not infringe on the free market economy., It was however possible to make a deal on the split of the profit beforehand by stipulating a specific percentage. This could be either a low or a high percentage.][
The principal investment can not be paid back, either by the investor ending the agreement, or the agent ending the agreement, if the principal is still invested in goods. The goods must be sold before the principal can be handed back, and the profits split. On the other hand, the investor is allowed to buy goods from the agent if he does not connect any conditions to this transaction.]
/ref>
The agent can also ask the help of a servant of the investor, but this servant also has to share in the profit and can not be asked to do any other work than work connected to the investment.[ A servant can also invest in the same investment as his master and also shares in the profit.][
If the agent has to hire help for a job, the wage for this person can be paid from the principal, except if the wage should result in loss for the investor, the agent himself is responsible for whatever is not covered by the principal.
The agent can use the principal for food and clothes if he should travel for his business, and the principal is large enough to allow it. If he stays at home this is not allowed.][
An agent can invest the money of an investor, the agent then becomes an investor himself, but he is then liable for the losses of the second agent. If the principal decreases, the original investor is allowed to ask the original agent to cover the loss.]
/ref>
Notes
{{Islamic banking and finance
Islamic banking
Islamic jurisprudence
Investment
Economy of the medieval Islamic world
Islamic banking and finance terminology