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Types of Mudaraba


Mudaraba, in general, can be classified based on the number of involved parties as a first-tier mudaraba (simple mudaraba) and a two-tier mudaraba (intermediary mudaraba). The second type (two-tier mudaraba) can also be categorized as restricted mudaraba and unrestricted mudaraba.

A first-tier mudaraba is concluded between two parties without an intermediary, whilst a two-tier mudaraba involves three parties (the three are not connected all at a time): a depositor (capital provider), an intermediary bank, and a user of funds (mudarib). The intermediary has connections with both parties, while these parties are not linked in any way.

An unrestricted mudaraba is one in which the capital provider allows the mudarib to invest the mudaraba funds without any restrictions. An example is when the capital provider permits the mudarib to do business according to his best judgment and in accordance with the interests of both parties without breaching the terms of the mudaraba contract. A restricted mudaraba is a contract whereby the capital provider restricts the actions or choices of the mudarib by stipulating that the mudaraba business be confined to a particular location or type of investment, etc.



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