A Mudarabah contract is based on a partnership in which one partner is the financier (the investor, or rabb-ul-mal) and the other partner (the fund manager, or “mudarib”) manages the financier’s investment in a business activity. Both parties agree in advance to a profit sharing ratio.
If the investor (rabb-ul-mal) leaves it open for the mudarib to undertake whatever business he/she wishes, the mudarib has the liberty to invest the money as they see fit. This type of mudarabah is called “al-mudarabah al-mutlaqah” (unrestricted mudarabah)
Most people who earn income are engaged in business activity; they are trading in their time and skilled labor in order to receive an income. Whether the person is a doctor, engineer, teacher, mechanic etc. they are all selling their time and skilled labor in order to generate an income.
Typically, Mudarabah implementations have been limited to only certain types of business activity i.e. trading in material goods. However, based on the fact that most income earners are engaged in business activity, I believe the applications of Mudarabah are far more versatile than current implementations suggest. Specifically, I believe Mudarabah contracts can be used to finance the personal needs of virtually anyone who plans on earning income. I call the product “Human Capital Mudarabah” or HCM.
In a nutshell, HCM allows people to raise money for themselves in return for them committing to share a fixed percentage of whatever they earn (profit sharing ratio) for a fixed period of time in which they are working.
Financing this way guarantees affordable payments for the financed (since payments are a percentage of income rather than a fixed dollar amount) and allows investors to invest in a more stable asset class than equity i.e. wages.
When adopted in mass, Human Capital Mudarabah will form the foundation of an economy more equitable than its debt-based counterparts; an economy where human capital is valued more than monetary capital and where opportunity is based on the merit of the individual rather than the social class they belong to.
As I will illustrate in coming posts, Human Capital Mudarabah agreements are better for the financed, the financier and the economy as a whole.