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MUSHARAKAH MUSHARAKAH &&

MUDARABAHMUDARABAH

Abdul SamadAbdul SamadAlHuda CIBEAlHuda CIBE

Two Days Specialized Training Workshop On

Islamic Microfinance

ShirkahShirkah

Scope of the PresentationScope of the Presentation

Terminology of Musharaka Terminology of Musharaka Types of Musharaka Types of Musharaka Structure of Musharaka Structure of Musharaka Rules of Musharaka Rules of Musharaka

Capital;Capital; Profit and loss;Profit and loss; TerminationTermination Security / Collateral in Musharaka Security / Collateral in Musharaka

Concept of limited liabilityConcept of limited liability Modern partnershipsModern partnerships Case in pointCase in point

MEANING OF SHAIRKATMEANING OF SHAIRKAT

The literal meaning of Musharakah is The literal meaning of Musharakah is sharing. The root of the word sharing. The root of the word "Musharakah" in Arabic is Shirkah, which "Musharakah" in Arabic is Shirkah, which means being a partner. means being a partner.

Under Islamic jurisprudence, Musharakah Under Islamic jurisprudence, Musharakah means a joint enterprise formed for means a joint enterprise formed for conducting some business in which all conducting some business in which all partners share the profit according to a partners share the profit according to a specific ratio while the loss is shared specific ratio while the loss is shared according to the ratio of the contribution. according to the ratio of the contribution.

LEGITIMACY OF SHIRKATLEGITIMACY OF SHIRKAT

Allah- Subhana- o-Ta’ala has Allah- Subhana- o-Ta’ala has declared that He becomes a declared that He becomes a party in a business between two party in a business between two Musharakain until one indulges Musharakain until one indulges in cheating or breach of trust in cheating or breach of trust (Khayanah) with other in (Khayanah) with other in Musharakah.”Musharakah.” (Sunan-i-Abi Daud, (Sunan-i-Abi Daud, Kitabul Buyuo)Kitabul Buyuo)

Types of ShirkahTypes of Shirkah

ShirkahShirkah

Shirkat-ul-MilkShirkat-ul-Milk(Co- ownership)(Co- ownership)

Shirkat-ul-AaqdShirkat-ul-Aaqd(Contractual Partnership)(Contractual Partnership)

Shirkat-ul-MilkShirkat-ul-Milk (Joint ownership)(Joint ownership)

• Joint ownership of two or more persons in a particular property/ asset with out any business intention.

• This comes into being as a result of joint purchase, joint acceptance of gift or a bequest and inheritance of joint property etc.

Types of Shirkat-ul-MilkTypes of Shirkat-ul-Milk

Shirkat-ul-Milk Optional (Ikhtiari)Shirkat-ul-Milk Optional (Ikhtiari) This comes into operation through

the act of parties e.g., purchase of asset with mutual consent.

Shirkat-ul-Milk Compulsory (Ghair Shirkat-ul-Milk Compulsory (Ghair Ikhtiari) Ikhtiari)

This comes into operation without any action on the part of parties e.g., ownership of heirs on the inherited property.

Shirkat-ul-AqdShirkat-ul-Aqd (Joint venture/partnership).

Shirkat-ul-AqdShirkat-ul-Aqd or Contract Partnership or Contract Partnership is an Agreement between two or more is an Agreement between two or more parties to combine their assets or to parties to combine their assets or to merge their services or obligations and merge their services or obligations and liabilities with the aim of making profit.liabilities with the aim of making profit.

It can also be referred to as a joint It can also be referred to as a joint commercial enterprise or activitycommercial enterprise or activity

Difference between Difference between Shirkat-ul-Aqd and Shirkat-ul-MilkShirkat-ul-Aqd and Shirkat-ul-Milk

In Shirkat ul Aqd both parties create partnership for sharing profit earned by Shirkah asset, while in Shirkat ul milk both partners do not intend to earn profit from Shirkah asset.

In Shirkat ul Aqd, each partner is an agent of others while in Shirkat ul Milk each partner is stranger with respect to other’s share.

Shirkat-ul-WojoohShirkat-ul-Wojooh(Credit Partnership)(Credit Partnership)

Shirkat-ul-AamalShirkat-ul-Aamal(Work Partnership)(Work Partnership)

Shirkat-ul-AmwalShirkat-ul-Amwal(Investment /Capital Partnership)(Investment /Capital Partnership)

Kinds of Shirkat-ul-AqdKinds of Shirkat-ul-Aqd

Shirkat-ul-AmwalShirkat-ul-Amwal

Where all the partners invest some capital into a commercial enterprise and share its profits according to agreement.

Shirkat-ul-Aamal Shirkat-ul-Aamal

Where all the partners jointly undertake to Where all the partners jointly undertake to render some services for their customers, render some services for their customers, and the fee charged from them is distributed and the fee charged from them is distributed among them according to an agreed ratio. among them according to an agreed ratio.

For example, if two persons agree to For example, if two persons agree to undertake tailoring services for their undertake tailoring services for their customers on the condition that the wages customers on the condition that the wages so earned will go to a joint pool which shall so earned will go to a joint pool which shall be distributed between them be distributed between them

Shirkat-ul-WujoohShirkat-ul-Wujooh

Where the partners have no investment at all, they purchase commodities on deferred price by their goodwill and sell them on spot. Their capital is their credit worthiness and reputation.

Shirkat-ul-AmwalShirkat-ul-Amwal Shirkat-ul-WojoohShirkat-ul-WojoohShirkat-ul-AamalShirkat-ul-Aamal

Shirkat-ul-Shirkat-ul-MufawadahMufawadah Shirkat-ul-IShirkat-ul-Inannan

All the three are further divided in to two types:All the three are further divided in to two types:

Types of Shirkat-ul-AqdTypes of Shirkat-ul-Aqd

Subdivision of Shirkat-ul-Subdivision of Shirkat-ul-AqdAqd

1-Shirkat-ul-Mufawadah:1-Shirkat-ul-Mufawadah: Where capital, profit, loss and management

are equal among the partners.

2-Shirkat-ul-Inan2-Shirkat-ul-Inan: : Partners’ share capital, management, profit Partners’ share capital, management, profit

and risk are not equal and may differ for each and risk are not equal and may differ for each partner. This is common type of partnership.partner. This is common type of partnership.

SHIRKAH

Shirkat-ul-Aqd

Shirkat-ul-Milk

Shirkat-ul-Amwal

Shirkat-ul-A’mal(Shirkat-ul-

Abdan)

Shirkat-ul-

Wajooh

Shirkat-ul-Mufawada

h

Shirkat-ul-Inan

Shirkat-ul-Mufawadah

Shirkat-ul-Inan

Shirkat-ul-Mufawadah

Shirkat-ul-Inan

OptionalCompulsor

y

Rules of Shirkat-ul-MilkRules of Shirkat-ul-Milk

Each partner is a stranger with respect to the share of the others.

The partners are not allowed to undertake any act of disposal with respect to the other’s share except with the latter’s permission.

Each partner can sell his own share without the other partners’ consent, except in cases where share of one partner can not be distinguished from the other.

Rules of Shirkat-ul-MilkRules of Shirkat-ul-Milk

Profit & loss will be according the ratio of ownership.

Expenses related to ownership will be borne by all partners according to the ratio of ownership.

Every partner has the right to sale/gift/lease to the extent of his share.

One partner can promise to purchase the share of other partner at any price, may be at face value, market value or pre-agreed price.

Shirkat-ul-AmmwalShirkat-ul-Ammwal

Definition: Definition: It is an agreement between two or

more persons to invest a sum of money in a business and share its profits according to agreement. The investment of this partnership consists of capital contributed by the partners.

SHIRKAT-UL- AMWAL: SHIRKAT-UL- AMWAL:

Capital of MusharakahCapital of Musharakah It should be known, ascertained and available at

the time of contract. The value should be agreed upon in case of kinds;The value should be agreed upon in case of kinds; Capital paid in different currencies should be valued into Capital paid in different currencies should be valued into

the currency of Shirkah;the currency of Shirkah; Capital advanced by the parties. Should be

uniform (currency of partnership). Share capital in a Musharakah can be contributed

either in cash or in the form of commodities In the letter case the market value of the

commodities shall determine the share of the partner in the capital.

Capital of MusharakahCapital of Musharakah

Capital of partnership is Amanat in the hands of partners. If loss occurred due to negligence, the partner responsible for loss, will compensate the loss.

Management of Management of MusharakahMusharakah

Each partner has right to take part in Musharakah Each partner has right to take part in Musharakah management.management.

The partner may appoint a managing partner by The partner may appoint a managing partner by mutual consent.mutual consent.

One are more of the partners may decide not to One are more of the partners may decide not to work for the Musharakah and work as a sleeping work for the Musharakah and work as a sleeping partner.partner.

It is not allowed to specify a fixed remuneration to a It is not allowed to specify a fixed remuneration to a partner Musharaka who manages funds or provides partner Musharaka who manages funds or provides some form of other services, such as accounting;some form of other services, such as accounting;

However, it is permissible to give him a greater However, it is permissible to give him a greater share of profit than he would receive solely on the share of profit than he would receive solely on the basis of his share in the partnership capital;basis of his share in the partnership capital;

Distribution of ProfitDistribution of Profit The ratio of profit distribution must be agreed The ratio of profit distribution must be agreed

at the time of execution of the contract.at the time of execution of the contract. It is not necessary for sharing profit according It is not necessary for sharing profit according

to proportionate capital contribution;to proportionate capital contribution; It is not allowed to defer the determination of

profit until realization of profit. The ratio must be determined as a proportion The ratio must be determined as a proportion

on the actual profit earned by the enterprise.on the actual profit earned by the enterprise. Not as percentage of partner’s investment.Not as percentage of partner’s investment. Not in lump sum amount.Not in lump sum amount.1. It is not allowed to defer the determination of profit

until realization of profit.2.2. A sleeping partner cannot share in the profit more A sleeping partner cannot share in the profit more

than the percentage of his capital.than the percentage of his capital.

Rules of Profit Determination/Distribution

• No guarantee can be given by the partners for the payment of profit or capital.

Different partners may be given different weightings according to amount and period of their investment.

Tiered profit sharing ratios can also be agreed.Tiered profit sharing ratios can also be agreed. Profit ratio can either be fixed or variable according to Profit ratio can either be fixed or variable according to

the tiers;the tiers; Both partners can agree that first 6-month profit

e.g. will be distributed at ratio of 50% : 50% and next 6-month profit will be distributed at ratio of 30% : 70%.

Rules of Loss Determination/Distribution

Sharing of Loss:Sharing of Loss: As a matter of principle the loss has to be shared As a matter of principle the loss has to be shared

according to the ratio of capital contribution;according to the ratio of capital contribution; Partners are not allowed to adopt any other Partners are not allowed to adopt any other

mechanism except the mechanism that ensure mechanism except the mechanism that ensure distribution of loss among partners on pro rata basis;distribution of loss among partners on pro rata basis;

Any other arrangement, even agreed upon by partners, Any other arrangement, even agreed upon by partners, will be invalid and void.will be invalid and void.

It is not allowed to hold one partner or group of partners liable for entire loss.

- All partners in Shirkah maintain the assets of the partnership as a trust.

- No one is liable except in cases of breach of the contract, misconduct or proven negligence.

- Negligence will be considered to have occurred in any of the following three cases: (i) A partner does not abide by the terms and conditions of the contract; (ii) A partner works against the norms of the concerned business; and (iii) The established ill-intention of a partner.

- The profit or even capital of any partners cannot be guaranteed by the co-partners.

- One partner can demand from another partner to provide any surety, security or pledge to cover the case of misconduct and negligence.

Guarantees in Shirkah ContractsGuarantees in Shirkah Contracts

Rules of Musharakah – terminationRules of Musharakah – termination Musharakah terminates in any of the following event:Musharakah terminates in any of the following event:

Death of a partner during the Musharakah;Death of a partner during the Musharakah; Heirs of the deceased partner have option either to draw the Heirs of the deceased partner have option either to draw the

share of the deceased from the business, or to continue with share of the deceased from the business, or to continue with the contract of Musharakah;the contract of Musharakah;

If any one of the partners becomes insane or otherwise If any one of the partners becomes insane or otherwise becomes incapable of effecting commercial transactions, the becomes incapable of effecting commercial transactions, the Musharaka stands terminated.Musharaka stands terminated.

In normal course of business, every partner has a right to In normal course of business, every partner has a right to terminate the Musharakah at any time after giving notice to other terminate the Musharakah at any time after giving notice to other partner;partner;

In this case, if all the assets of the Musharakah are in cash form In this case, if all the assets of the Musharakah are in cash form then they will be distributed pro rata between the partners;then they will be distributed pro rata between the partners;

In case they are mixed assets the partners may agree either on:In case they are mixed assets the partners may agree either on: Physical distribution of the assets among partners; orPhysical distribution of the assets among partners; or Liquidation of the assets in open market (market price); orLiquidation of the assets in open market (market price); or Internal liquidation i.e. purchasing from one partner share of Internal liquidation i.e. purchasing from one partner share of

other at any agreed price between them;other at any agreed price between them;

Rules of Musharakah – Rules of Musharakah – termination with one partnertermination with one partner

In case a partner wishes termination of the Musharakah, In case a partner wishes termination of the Musharakah, while others do not, this can be achieved by mutual while others do not, this can be achieved by mutual consent;consent;

The partners who wish to run the business may purchase The partners who wish to run the business may purchase the share of the other partner who wants termination;the share of the other partner who wants termination;

The reason is that the termination of Musharakah with one The reason is that the termination of Musharakah with one partner does not imply its termination between other partner does not imply its termination between other partners;partners;

However, in this case, the price of the share of the leaving However, in this case, the price of the share of the leaving partner has to be determined by mutual consent;partner has to be determined by mutual consent;

In case of dispute on the valuation of the share the leaving In case of dispute on the valuation of the share the leaving partner may compel other partners on the distribution of partner may compel other partners on the distribution of the assets;the assets;

However, if they are not divisible then the partner may an However, if they are not divisible then the partner may an arbitrator to solve the dispute;arbitrator to solve the dispute;

Musharakah – applicationMusharakah – application Musharakah is top preferable mode of financing Musharakah is top preferable mode of financing

recommended by Islam;recommended by Islam; It one of the important factors that help in achieving It one of the important factors that help in achieving

‘distribution of wealth’ which is a key feature of Islamic ‘distribution of wealth’ which is a key feature of Islamic financial and economic system;financial and economic system;

As Mudarabah, Musharakah is also not a vastly practiced As Mudarabah, Musharakah is also not a vastly practiced Islamic mode of financing by Islamic IMFs due to certain Islamic mode of financing by Islamic IMFs due to certain reasons;reasons;

However, Musharakah could easily be used as a vast However, Musharakah could easily be used as a vast mode of financing for almost every financial need;mode of financing for almost every financial need;

Below are some fields where this mode can easily be Below are some fields where this mode can easily be applied:applied: Long-term Finance;Long-term Finance; Running Finance (limited scope);Running Finance (limited scope); Investment IMFing;Investment IMFing; Project Financing;Project Financing; Private Equity Investment;Private Equity Investment; Redeemable capital investment.Redeemable capital investment.

QUESTIONS??QUESTIONS??

MUDARABAHMUDARABAH

Scope of the PresentationScope of the Presentation

DefinitionDefinition Mudaraba CapitalMudaraba Capital Profit / Loss Distribution Profit / Loss Distribution Types of MudarabaTypes of Mudaraba Capacities of MudaribCapacities of Mudarib Participation from MudaribParticipation from Mudarib More than one Rabbul MaalMore than one Rabbul Maal Termination of MudarabaTermination of Mudaraba Mudaraba Vs MusharakahMudaraba Vs Musharakah Problems and risksProblems and risks

Mudaraba Introduction - Mudaraba Introduction - DefinitionDefinition

““Mudaraba” is a kind of partnership Mudaraba” is a kind of partnership where one partner gives money to where one partner gives money to another for investing in profitable another for investing in profitable avenues.avenues.

The investor (fund supplier) is called The investor (fund supplier) is called “Rabb-ul-Mal” ( “Rabb-ul-Mal” ( المال المال رب while the ) while the ( ربperson who utilizes this fund (the fund person who utilizes this fund (the fund manager) is called “Mudarib” (manager) is called “Mudarib” ( مضاربمضارب ) ) who is exclusively responsible for who is exclusively responsible for management of the business.management of the business.

Types of MudarabaTypes of Mudaraba

• Al Mudarabah Al Muqayyadah (Restricted Mudarabah)

Rab-ul-Maal may specify a particular business or a particular place for the Mudarib.

 In which case he shall invest the money in that particular business or place.

• Al Mudarabah Al Mutlaqah (Unrestricted Mudarabah)

Rab-ul-Maal gives full freedom to Mudarib to undertake whatever business he deem fit.

 Mudarib is authorized to do anything normally done in the course of business.

Capacities of MudaribCapacities of Mudarib

Mudarib has different capacities for Mudarib has different capacities for which rules are different. Listed down which rules are different. Listed down are his roles:are his roles: Ameen (trustee):Ameen (trustee):

Mudarib holds money and assets of Mudarabah as trustee;Mudarib holds money and assets of Mudarabah as trustee; Therefore, he is responsible for management of assets Therefore, he is responsible for management of assets

honestly;honestly; In case of actual loss he is responsible for nothing;In case of actual loss he is responsible for nothing;

Wakeel (Agent):Wakeel (Agent): Mudarib manages Mudarabah as an agent of owner;Mudarib manages Mudarabah as an agent of owner; Therefore his actions are considered as of Rabbul Maal;Therefore his actions are considered as of Rabbul Maal; Actual loss is born by Rabbul Maal in case it happens;Actual loss is born by Rabbul Maal in case it happens;

Shareek (partner):Shareek (partner): Mudarib becomes partner in the profit that Mudarabah Mudarib becomes partner in the profit that Mudarabah

generates;generates;

Zamin (liable/guarantor):Zamin (liable/guarantor): In situation of loss due to misconduct / In situation of loss due to misconduct /

negligence Mudarib has to bear it;negligence Mudarib has to bear it; Ajeer (employee):Ajeer (employee):

Mudarib gets a fee if Mudarabah becomes Mudarib gets a fee if Mudarabah becomes void due to any reason; void due to any reason;

Capacities of MudaribCapacities of Mudarib

Mudaraba Introduction – Mudaraba Introduction – Mudaraba capitalMudaraba capital

Mudaraba Capital:Mudaraba Capital: The capital of Mudaraba should be in form of known The capital of Mudaraba should be in form of known

cash as a matter of principle;cash as a matter of principle; However, tangible assets could also be accepted if However, tangible assets could also be accepted if

valued with mutual consent.valued with mutual consent. In such case the determined value of the assets will be In such case the determined value of the assets will be

the Mudaraba capital;the Mudaraba capital; The Capital of Mudaraba should be clearly known to the The Capital of Mudaraba should be clearly known to the

contracting parties and defined in terms of quality and contracting parties and defined in terms of quality and quantity;quantity;

The capital should be in hand, therefore, receivables The capital should be in hand, therefore, receivables (debt etc.) can not be capital of Mudaraba;(debt etc.) can not be capital of Mudaraba;

Mudaraba Introduction – Mudaraba Introduction – Mudaraba capitalMudaraba capital

Mudaraba Capital:Mudaraba Capital: The capital should be handed over to The capital should be handed over to

Mudarib;Mudarib; Simple segregation of funds for Mudaraba is Simple segregation of funds for Mudaraba is

not enough;not enough; Therefore, increase in value of Mudaraba Therefore, increase in value of Mudaraba

capital before start of Mudaraba will account capital before start of Mudaraba will account for increase in Mudaraba capital and will not for increase in Mudaraba capital and will not be treated as Profit;be treated as Profit;

Mudaraba Introduction - profit Mudaraba Introduction - profit & loss distribution& loss distribution

Profit and Loss distribution:Profit and Loss distribution: The Mudaraba contract should mention profit sharing The Mudaraba contract should mention profit sharing

ratio in defined and clear terms;ratio in defined and clear terms; The profit sharing ratio should be:The profit sharing ratio should be:

specific;specific; of the expected profit;of the expected profit;

Apart from the agreed proportion of the profit, the Apart from the agreed proportion of the profit, the Mudarib cannot claim any periodical salary or a fee or Mudarib cannot claim any periodical salary or a fee or remuneration for the work done by him for the remuneration for the work done by him for the Moradabad.Moradabad.

  The Mudarib & Rab-ul-Maal cannot allocate a lump sum The Mudarib & Rab-ul-Maal cannot allocate a lump sum amount of profit for any party nor can they determine the amount of profit for any party nor can they determine the share of any party at a specific rate tied up with the share of any party at a specific rate tied up with the capital.capital.

Profit & Loss DistributionProfit & Loss Distribution ExampleExample

If the capital is Rs. 100,000/- they cannot agree on a If the capital is Rs. 100,000/- they cannot agree on a condition that Rs. 10,000 out of the profit shall be condition that Rs. 10,000 out of the profit shall be the share of the Mudarib nor can they say that 20% the share of the Mudarib nor can they say that 20% of the capital shall be given to Rab-ul-Maal. However of the capital shall be given to Rab-ul-Maal. However they can agree that 40% of the actual profit shall go they can agree that 40% of the actual profit shall go to the Mudarib and 60% to the Raab-ul-Maal or vice to the Mudarib and 60% to the Raab-ul-Maal or vice versa.versa.

If the business has incurred loss in some transactions If the business has incurred loss in some transactions and has gained profit in some others, the profit shall and has gained profit in some others, the profit shall be used to offset the loss at the first instance, then be used to offset the loss at the first instance, then the remainder profit, if any, shall be distributed the remainder profit, if any, shall be distributed between the parties according to the agreed ratio.between the parties according to the agreed ratio.

Mudaraba – participation from Mudaraba – participation from MudribMudrib

Mixing of funds by MudaribMixing of funds by Mudarib The basic feature of Mudaraba is that the Mudarib performs The basic feature of Mudaraba is that the Mudarib performs

only business operations and does not add capital;only business operations and does not add capital; The capital is provided by Rabbul Maal and the Mudarib is The capital is provided by Rabbul Maal and the Mudarib is

responsible for the management only;responsible for the management only; But the Mudarib may also add capital into the business of But the Mudarib may also add capital into the business of

Mudaraba with permission of Rabbul Maal;Mudaraba with permission of Rabbul Maal; In such cases Musharaka and Mudaraba are combined;In such cases Musharaka and Mudaraba are combined; For example, “A” gave to “B” Rs.100,000/- in a contract of For example, “A” gave to “B” Rs.100,000/- in a contract of

Mudaraba. B added Rs. 50,000/- from his own pocket with Mudaraba. B added Rs. 50,000/- from his own pocket with the permission of A;the permission of A;

This type of partnership will be treated as a combination of This type of partnership will be treated as a combination of Musharaka and Mudaraba;Musharaka and Mudaraba;

Here the Mudarib may allocate for himself certain Here the Mudarib may allocate for himself certain percentage of profit as partner (Sharik), and at the same percentage of profit as partner (Sharik), and at the same time he may allocate another percentage for his time he may allocate another percentage for his management and work as a Mudarib.management and work as a Mudarib.

Mudaraba – more than one Mudaraba – more than one Rabbul MaalRabbul Maal

Mudaraba can be between two prsons: Rabbul Mudaraba can be between two prsons: Rabbul Maal and Mudarib;Maal and Mudarib;

But Rabbul Maal may also be more than one;But Rabbul Maal may also be more than one; If a Mudaraba starts by provision of funds from If a Mudaraba starts by provision of funds from

one Rabbul Maal and after the start Mudarib one Rabbul Maal and after the start Mudarib wishes to add some more funds from others, this wishes to add some more funds from others, this would be allowd if Rabbul Maal permits;would be allowd if Rabbul Maal permits;

In such case all funds providers (Rabbul Maals) In such case all funds providers (Rabbul Maals) are partners among themselves;are partners among themselves;

The share for Rabbul Maal will be divided among The share for Rabbul Maal will be divided among them as per their contribution ratio;them as per their contribution ratio;

Mudaraba – terminationMudaraba – termination Termination of Mudaraba:Termination of Mudaraba:

The contract of Mudaraba can be terminated at any time by either of The contract of Mudaraba can be terminated at any time by either of the parties;the parties;

This termination should be with consent of concerned parties;This termination should be with consent of concerned parties; A notice to the other party is also sufficient if it was agreed at the A notice to the other party is also sufficient if it was agreed at the

time of inception of Mudaraba;time of inception of Mudaraba; Termination of Mudaraba means that the Mudarib cannot purchase Termination of Mudaraba means that the Mudarib cannot purchase

new goods for the Mudaraba. However, he may sell the existing new goods for the Mudaraba. However, he may sell the existing goods that were purchase before termination.goods that were purchase before termination.

If all assets are in form of cash and some profit has been earned on If all assets are in form of cash and some profit has been earned on the principle amount, it shall be distributed between the parties the principle amount, it shall be distributed between the parties according to the agreed ratio;according to the agreed ratio;

If the assets of the Mudaraba are in other form the Mudarib shall be If the assets of the Mudaraba are in other form the Mudarib shall be given an opportunity liquidate them and the actual profit may be given an opportunity liquidate them and the actual profit may be determined after liquidation:determined after liquidation:

If there is a profit, it will be distributed between Mudarib and If there is a profit, it will be distributed between Mudarib and Rab-ul-Maal.Rab-ul-Maal.

If no profit is left, Mudarib will not get anything.If no profit is left, Mudarib will not get anything.

Mudaraba Vs MusharakaMudaraba Vs Musharaka

. . Mudaraba:Mudaraba:1.1. The contribution The contribution

comes from Rabbul comes from Rabbul Maal (the investor);Maal (the investor);

2.2. The Rabbul Maal The Rabbul Maal (investor) is not (investor) is not permitted to manage permitted to manage the business;the business;

3.3. The Mudarib manages The Mudarib manages the business only;the business only;

4.4. The Mudarib can also The Mudarib can also invest in the capital of invest in the capital of Mudarabah.Mudarabah.

Musharaka:Musharaka:

1.1. The contribution comes The contribution comes from all partners in from all partners in form of cash, form of cash, commodities, services commodities, services or liability in case of or liability in case of reputation partnership;reputation partnership;

2.2. The work, as a general The work, as a general rule, is to be done rule, is to be done jointly by the parties;jointly by the parties;

3.3. A partner or some A partner or some partners may be partners may be sleeping;sleeping;

Mudaraba – applicationMudaraba – application Scope of Mudaraba for IMF System:Scope of Mudaraba for IMF System:

Mudaraba is second preferable mode of financing Mudaraba is second preferable mode of financing recommended by Islam;recommended by Islam;

It helps in achieving ‘distribution of wealth’ which is a key It helps in achieving ‘distribution of wealth’ which is a key feature of Islamic financial and economic system;feature of Islamic financial and economic system;

Mudaraba as a mode of financing used by Islamic IMFs for Mudaraba as a mode of financing used by Islamic IMFs for the following purpose:the following purpose:

Relationship of Islamic IMFs with depositors, depositors Relationship of Islamic IMFs with depositors, depositors provide deposits to IMF as Rabb-ul-Mal, these deposits provide deposits to IMF as Rabb-ul-Mal, these deposits are to be invested by Islamic IMF as Mudarib;are to be invested by Islamic IMF as Mudarib;

Islamic IMFs sometimes use Mudaraba with some of Islamic IMFs sometimes use Mudaraba with some of their customers;their customers;

Islamic IMF provides the adequate finance as a capital Islamic IMF provides the adequate finance as a capital owner in exchange of a share in the profit to be agreed owner in exchange of a share in the profit to be agreed upon;upon;

Mudaraba can be easily used for Large Enterprise Mudaraba can be easily used for Large Enterprise financing;financing;

Project Finance does have potential for financing on Project Finance does have potential for financing on Mudaraba basis;Mudaraba basis;

Mudaraba – IMF applicationMudaraba – IMF application

Asset side:Asset side: Short / medium / long term financing;Short / medium / long term financing; Project financing;Project financing; Small and medium enterprise setup financing;Small and medium enterprise setup financing; Large enterprises setup financing;Large enterprises setup financing; Import financing;Import financing; Import bills drawn under import Lcs;Import bills drawn under import Lcs; Inland bills drawn under inland LcsInland bills drawn under inland Lcs Bridge financing;Bridge financing; LC without margin;LC without margin; Export financing;Export financing; Working capital financing;Working capital financing; Running accounts financing/ short term advances.Running accounts financing/ short term advances.

Mudaraba & Musharakah on Mudaraba & Musharakah on Liability sideLiability side

Liability side:Liability side: All types of saving / investment accounts;All types of saving / investment accounts; Inter- bank acceptance and placement;Inter- bank acceptance and placement; Term Finance certificates;Term Finance certificates; Certificate of investment;Certificate of investment; Special rate deposits;Special rate deposits;

Calculation is attached.Calculation is attached.

Problems and Risks for Islamic Problems and Risks for Islamic IMFsIMFs

Problems and Risks for Islamic IMFs:Problems and Risks for Islamic IMFs: Since Mudaraba is a profit and loss sharing way Since Mudaraba is a profit and loss sharing way

of financing, it is considered a high risk of financing, it is considered a high risk financing activity;financing activity;

Collateral can be asked but could not be used Collateral can be asked but could not be used in case of real loss;in case of real loss;

IMF’s existing competencies in project IMF’s existing competencies in project evaluation and related techniques are limited;evaluation and related techniques are limited;

Dual book keeping trends in market also a Dual book keeping trends in market also a threat;threat;

Legal mechanism for treatment with Legal mechanism for treatment with Mudarabah as a mode of financing by Islamic Mudarabah as a mode of financing by Islamic IMFs, is not in place;IMFs, is not in place;

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