ISLAMIC FINANCIAL ISLAMIC FINANCIAL SYSTEMSYSTEM

ISLAMIC FINANCIAL ISLAMIC FINANCIAL SYSTEMSYSTEM

Riba Free Mode Riba Free Mode

of of

FinancingFinancing

Riba Free Mode Riba Free Mode

of of

FinancingFinancing

Part 1Part 1MODARABAMODARABA

Part 1Part 1MODARABAMODARABA

ModarabaModaraba

CommendaCommenda

QaradQarad

Three distinct concepts Three distinct concepts appropriate appropriate

ForFor

Riba Free Economic Activities.Riba Free Economic Activities.

MODARABA MODARABA MODARABA MODARABA Three names with an ancient background of Three names with an ancient background of

transactions used for economic activities transactions used for economic activities classified as business activities under a contract classified as business activities under a contract

of of

““Money and AbilityMoney and Ability””

The owner of money, the financier is calledThe owner of money, the financier is called

Rab-Al-MaalRab-Al-Maal

The worker is calledThe worker is called

ModaribModarib

Three names with an ancient background of Three names with an ancient background of transactions used for economic activities transactions used for economic activities

classified as business activities under a contract classified as business activities under a contract of of

““Money and AbilityMoney and Ability””

The owner of money, the financier is calledThe owner of money, the financier is called

Rab-Al-MaalRab-Al-Maal

The worker is calledThe worker is called

ModaribModarib

CornendaCornenda

It is a pre-Islamic word from ItalyIt is a pre-Islamic word from Italy

QaradQarad It is a Hegari word generally found in Imam It is a Hegari word generally found in Imam

Malik’s and Imam Shafei’s schools of Malik’s and Imam Shafei’s schools of thought.thought.

ModarabaModaraba It is of Iraqi origin and found mostly in Imam It is of Iraqi origin and found mostly in Imam

Abu Hanifa’s  and Imam Ibn Hambal’s Abu Hanifa’s  and Imam Ibn Hambal’s schools of thought.schools of thought.

According to Fuqaha According to Fuqaha ModarabaModaraba

It is a partnership contract between two It is a partnership contract between two parties, persons or organizations in which parties, persons or organizations in which one brings the capital, the other shares his one brings the capital, the other shares his

time and skill for a specified project or time and skill for a specified project or transactiontransaction..

Upon the maturity, profit is divided Upon the maturity, profit is divided according to the agreement, which will according to the agreement, which will

either be equal or one third, in proportioneither be equal or one third, in proportion..

In case of loss the Financier looses the In case of loss the Financier looses the Capital Investment and Skill lose its Time, Capital Investment and Skill lose its Time,

Efforts and ReputationEfforts and Reputation

The history of The history of ModarabaModaraba reveals reveals that the business under the that the business under the concept of concept of ModarabaModaraba was in was in

practice before the rise of Islam, practice before the rise of Islam, emerging from Italian city of emerging from Italian city of

Rome, which was the center for Rome, which was the center for trade and culture in the trade and culture in the

Christian world.Christian world.

When Christian traders entered the When Christian traders entered the Arab Arab

world, they chose Baghdad as the place world, they chose Baghdad as the place for for

business. As a capital of Iraq, Baghdad business. As a capital of Iraq, Baghdad was was

the center of trade, education and the center of trade, education and culture. Business communities of Iraq culture. Business communities of Iraq

acknowledged acknowledged the the CommendaCommenda mode of business and mode of business and

started practicing it.started practicing it.

Iraq developed the system and named it Iraq developed the system and named it

QuardQuard, which spread in the Arab and, which spread in the Arab and

Persian world, and eventually penetrated Persian world, and eventually penetrated to to

all places where the religion of Islam all places where the religion of Islam

reached, either through traders or by the reached, either through traders or by the

Muslim conquerors.Muslim conquerors.Credit goes to Islam in the developing a Credit goes to Islam in the developing a proper shape for the concept of proper shape for the concept of ModarabaModaraba by prohibiting Riba in financial dealings. by prohibiting Riba in financial dealings.

The Holy Quran saysThe Holy Quran says,,

“ “Whereas Allah permitted trading forbid Whereas Allah permitted trading forbid Riba ”Riba ”..

The Prophet Mohammad (The Prophet Mohammad (Peace Be Upon HimPeace Be Upon Him) )

left on a trading trip to Syria and used left on a trading trip to Syria and used ModarabaModaraba

method by making a contract with Hazrat method by making a contract with Hazrat

Khadija, who financed the transactions before Khadija, who financed the transactions before the the

Prophet Mohammad (Prophet Mohammad (Peace Be Upon HimPeace Be Upon Him) )

married her. married her. Therefore, Modaraba is Therefore, Modaraba is treated as Sunnah and Ijma.treated as Sunnah and Ijma.

In Islamic jurisprudenceIn Islamic jurisprudence

ModarabaModaraba is a contract between is a contract between persons, between persons and persons, between persons and

institutions, and between institutions, institutions, and between institutions, through which finances are given for through which finances are given for trading or manufacturing purpose.trading or manufacturing purpose.

Profit sharing is agreed upon Profit sharing is agreed upon beforehand at a predetermined ratio.beforehand at a predetermined ratio.

In case of loss, the financier loses the In case of loss, the financier loses the money used to finance and the worker money used to finance and the worker

loses his time, efforts and talent.loses his time, efforts and talent.

In Islamic jurisprudenceIn Islamic jurisprudence

ModarabaModaraba is a contract between is a contract between persons, between persons and persons, between persons and

institutions, and between institutions, institutions, and between institutions, through which finances are given for through which finances are given for trading or manufacturing purpose.trading or manufacturing purpose.

Profit sharing is agreed upon Profit sharing is agreed upon beforehand at a predetermined ratio.beforehand at a predetermined ratio.

In case of loss, the financier loses the In case of loss, the financier loses the money used to finance and the worker money used to finance and the worker

loses his time, efforts and talent.loses his time, efforts and talent.

Islamic jurisprudenceIslamic jurisprudence show the legal demonstration show the legal demonstration

in accordance with the in accordance with the Quran, Quran, HadithHadith, , SeeratSeerat of the of the Prophet (Prophet (May May Peace Be Upon HimPeace Be Upon Him))

and the practice of and the practice of AshabAshab

(companions of Prophet (companions of Prophet May May Peace Be Upon HimPeace Be Upon Him))..

The Great FuqahaThe Great Fuqaha ((Religious ScholarsReligious Scholars) )

The Great FuqahaThe Great Fuqaha ((Religious ScholarsReligious Scholars) )

ModarabaModaraba on the basis of on the basis of QiyasQiyas (fixed return or (fixed return or wages) is not allowed. wages) is not allowed.

The reason for this is the The reason for this is the unknown salary for an unknown salary for an

unknown activity.unknown activity.

Al KASSANIAl KASSANI

says says

ModarabaModaraba becomes invalid if it is becomes invalid if it is on the basis of on the basis of QiyasQiyas as it as it

involves an unknown salary for involves an unknown salary for an unknown amount of work. an unknown amount of work.

QiyasQiyas is only allowed in is only allowed in accordance with the teachings of accordance with the teachings of the Holy Quran, the Holy Quran, SunnahSunnah and the and the

IjmaIjma....

IBNE TAYMIYAIBNE TAYMIYA    ModarabaModaraba is valid on the basis of is valid on the basis of

QayasQayas. Fuqaha had invalidated . Fuqaha had invalidated ModarabaModaraba on the basis of on the basis of QayasQayas

(wages(wages).).

IBNE GHAZIIBNE GHAZI says says

ModarabaModaraba is permissible as an is permissible as an exception to exception to GhararGharar (fraud) and (fraud) and

unknown remunerationunknown remuneration

Modaraba falls in the partnership type of Modaraba falls in the partnership type of contract, which has a vague similarity to contract, which has a vague similarity to Mufawadah. Mufawadah. It differs because money is It differs because money is

the main objective in Modaraba and the main objective in Modaraba and work in the second. work in the second.

Rab-al-MaalRab-al-Maal (the financier) does not have (the financier) does not have to take an active part in the daily to take an active part in the daily

operations as in the case of employment.operations as in the case of employment.

There will be no return for There will be no return for ModaribModarib if a profit does not if a profit does not result in the transaction. result in the transaction.

In case of loss In case of loss Rab-al-MaalRab-al-Maal has the has the right to investigate the cause of right to investigate the cause of

loss, whereas, in case of any loss, whereas, in case of any negligence or misappropriation negligence or misappropriation or a purposeful mistake by the or a purposeful mistake by the

ModaribModarib, financier can claim the , financier can claim the financing.financing.

Al-Baghi’s definitionAl-Baghi’s definition ““Money that can be fructifying through work Money that can be fructifying through work should not be lent for higher return, but can should not be lent for higher return, but can

be traded for generating a profit”.be traded for generating a profit”.

Only money in shape of Dirham, Dinars, Only money in shape of Dirham, Dinars, Rupees, DollarsRupees, Dollars or any other currency is or any other currency is

used as a medium of exchange in the used as a medium of exchange in the ModarabaModaraba mode mode..

Commodity in exchange of another commodity Commodity in exchange of another commodity (i.e. barter trade) is not permissible. On the (i.e. barter trade) is not permissible. On the other hand, other hand, ModarabaModaraba contract cannot be contract cannot be

established with just anybodyestablished with just anybody..

Experience, knowledge and skill of related Experience, knowledge and skill of related business processes are an essential business processes are an essential

condition of the contract. condition of the contract.

Return on financing with a condition Return on financing with a condition of profit & loss sharing is the of profit & loss sharing is the

legitimate and allowed by legitimate and allowed by ShariahShariah..

There is no harm in investigating the There is no harm in investigating the cause of loss in cause of loss in ModarabaModaraba..

ModaribModarib is bound to provide the is bound to provide the justification to the satisfaction of justification to the satisfaction of

Rab-al-Maal on lossRab-al-Maal on loss..

In case of any dispute over the causes In case of any dispute over the causes of a loss, the jurists permit the of a loss, the jurists permit the

arbitration clause in the agreement.arbitration clause in the agreement.

As the As the ModarabaModaraba mode mode penetrated in the economic penetrated in the economic

activities and activities and ShariahShariah accepted the mode, accepted the mode, scholars laid down scholars laid down

ModarabaModaraba conditions & conditions & rules.rules.

Though rules and Though rules and

conditions of conditions of ModarabaModaraba are are in accordance with the in accordance with the

teachings of the Holy Quran teachings of the Holy Quran and and SunnaSunna, different , different

scholars have interpreted scholars have interpreted them differently.them differently.

The Four School of The Four School of ThoughtsThoughts

IMAM ABU HANIFAIMAM ABU HANIFA

He was flexible on the conditions of He was flexible on the conditions of ModarabaModaraba. He was a trader and made . He was a trader and made

several transoceanic voyages in several transoceanic voyages in connection with trading & preaching. connection with trading & preaching.

He faced countless problems of hardship He faced countless problems of hardship of traveling, Imam Abu Hanifa justified of traveling, Imam Abu Hanifa justified

the flexibility in certain conditions. the flexibility in certain conditions.

His teaching on the legal framework of His teaching on the legal framework of ModarabaModaraba is treated as the most is treated as the most

rational approach rational approach

IMAM MALIK IMAM MALIK and and

IMAM SHAFEIIMAM SHAFEI

The two were more rigid in The two were more rigid in terms of the limitations of terms of the limitations of economic activities. They economic activities. They

had adhered to the had adhered to the ShariahShariah rules theoretically. The Four rules theoretically. The Four

Imams agreed on certain Imams agreed on certain conditions and differed on conditions and differed on

some.some.

CapitalCapital is the soul of is the soul of ModarabaModaraba and it should be in the form of and it should be in the form of currency instead of a commodity. currency instead of a commodity.

CurrencyCurrency is the origin of price is the origin of price and value of goods.and value of goods.

The MarketThe Market valuevalue of currency of currency does not change that is why almost does not change that is why almost all Fuqaha had invalidated all Fuqaha had invalidated Modaraba with commodities. Modaraba with commodities. This condition is explained an exampleThis condition is explained an example::

• Superior quality dates presented to Prophet (Superior quality dates presented to Prophet (Peace Be Upon Peace Be Upon Him)Him). .

• These dates obtained in exchange with inferior quality These dates obtained in exchange with inferior quality dates.dates.

• Prophet (Prophet (Peace Be Upon HimPeace Be Upon Him) refused to accept the gift and ) refused to accept the gift and asked to return the superior dates to its original owner.asked to return the superior dates to its original owner.

• Prophet (Prophet (Peace Be Upon HimPeace Be Upon Him) stressed on sale of inferior dates, ) stressed on sale of inferior dates, first. first.

• Then, with the amount received from the sale of the Then, with the amount received from the sale of the inferior dates, superior dates were to be purchased. inferior dates, superior dates were to be purchased.

• When transaction was completed, quantity was lesser then When transaction was completed, quantity was lesser then it was before.it was before.

• Accordance to Prophet’s (Accordance to Prophet’s (Peace Be Upon HimPeace Be Upon Him) a commodity ) a commodity cannot be the capital of a cannot be the capital of a ModarabaModaraba contract. contract.

• As far as coins are concerned, their restrictions are due to As far as coins are concerned, their restrictions are due to involvement of metal, which is also a commodity.involvement of metal, which is also a commodity.

• Any commodity should be exchanged with another of the Any commodity should be exchanged with another of the same quality and the same quantity, or it has to be bought same quality and the same quantity, or it has to be bought through a currency that acts as a medium of exchange in through a currency that acts as a medium of exchange in the economic affairs of Islam. the economic affairs of Islam.

• Islamic economics does not treat money as a commodity. Islamic economics does not treat money as a commodity. All the Four Imams have forbidden All the Four Imams have forbidden ModarabaModaraba between between coins and commodities coins and commodities

Metal Coins too cannot be the Metal Coins too cannot be the capital of Modaraba as coins are capital of Modaraba as coins are restricted due to involvement of restricted due to involvement of

metal, which is also a commodity.metal, which is also a commodity.

Commodity must be exchanged by Commodity must be exchanged by another of same quality & quantity.another of same quality & quantity.

It has to be bought through a It has to be bought through a currency that acts as a medium of currency that acts as a medium of

exchange in the economic affairs of exchange in the economic affairs of Islam. Islam.

All Four Imams forbidden All Four Imams forbidden ModarabaModaraba between coins and commoditiesbetween coins and commodities

With this clarification, it is set With this clarification, it is set that the capital of the that the capital of the ModarabaModaraba must be in must be in

currency and not in coin currency and not in coin form and the most preferred form and the most preferred form of currency should be form of currency should be paper because it establishes paper because it establishes

value that is easily traded value that is easily traded and the market value is and the market value is infrequently changedinfrequently changed

SAMARKANDISAMARKANDI has given his views that capital has given his views that capital

should consist of consummate should consist of consummate value. Here is the reason: value. Here is the reason:

Modaraba transaction with Modaraba transaction with paper currency is paper currency is

permissible. permissible.

Even gold, silver and Even gold, silver and precious metals are not precious metals are not

permitted for the capital of permitted for the capital of Modaraba Modaraba