modaraba application permission & restrictions

Riba Free Mode of Riba Free Mode of FinancingFinancing

Riba Free Mode of Riba Free Mode of FinancingFinancing

Modaraba,Modaraba, Participation between

Money and AbilityMoney and Ability

Modaraba,Modaraba, Participation between

Money and AbilityMoney and Ability

04/12/23 1Yousuf Ibnul Hasan IQRA University

Pakistan

Modaraba – Qarad – Commenda Modaraba – Qarad – Commenda

Three names with an ancient Three names with an ancient background of transactions used background of transactions used

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

Modaraba – Qarad – Commenda Modaraba – Qarad – Commenda

Three names with an ancient Three names with an ancient background of transactions used background of transactions used

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

ModaribModarib04/12/23 2

Yousuf Ibnul Hasan IQRA University Pakistan

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

QaradQarad This word generally found in This word generally found in

Imam Malik’s & Imam Shafei’s Imam Malik’s & Imam Shafei’s

Schools of Thought.Schools of Thought.

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

Imam Abu Hanifa’s and Imam Ibn Imam Abu Hanifa’s and Imam Ibn Hambal’s Schools of Thought.Hambal’s Schools of Thought.


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Fuqaha define Fuqaha define ModarabaModarabaIt is a partnership contract between two It is a partnership contract between two

parties, persons to person, organizations to parties, persons to person, organizations to person or Organization with organization in person or Organization with organization in which ONE brings the which ONE brings the Capital, the Other Capital, the Other

shares his Time Skill, Experience & Goodwill shares his Time Skill, Experience & Goodwill in the respective business fieldin the respective business field for a for a

specified project or transactionspecified project or transaction..

On the maturity, profit is divided according to On the maturity, profit is divided according to the agreement, which will either be equal or the agreement, which will either be equal or

Pre Agreed RatioPre Agreed Ratio of of Net Earned ProfitNet Earned Profit..

In the loss Financier looses Capital Investment In the loss Financier looses Capital Investment & Modarib loses Time, Efforts & Reputation& Modarib loses Time, Efforts & Reputation


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Historical Perspective The history of The history of ModarabaModaraba reveals that reveals that

the business under the concept of the business under the concept of Commenda Commenda was in practice in the was in practice in the medieval period before the rise of medieval period before the rise of

Islam, emerging from the Italian city Islam, emerging from the Italian city of Rome, which was the centre for of Rome, which was the centre for

trade & culture in the Christian world.trade & culture in the Christian world.

City of Rome City of Rome

Always a centre of attraction for Always a centre of attraction for

Art, Culture, Business & Lifestyle Art, Culture, Business & Lifestyle 04/12/23 5


When Christian traders entered the When Christian traders entered the Arab world, they chose Capital of Arab world, they chose Capital of

Iraq, the City Iraq, the City BaghdadBaghdad for business. for business.

Baghdad was the centre of Trade, Baghdad was the centre of Trade, Education & Culture. Education & Culture.

Business community of Iraq Business community of Iraq acknowledged acknowledged CommendaCommenda as as

business practice & started accepting business practice & started accepting the system & its mechanism.the system & its mechanism.

Later Scholars & Jurists polish the Later Scholars & Jurists polish the system in the Iraqi business practices system in the Iraqi business practices by bringing it into a legal framework. by bringing it into a legal framework.


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In Iraq Commenda change to In Iraq Commenda change to Qarad Qarad Through Iraqi caravans Qarad entered in Through Iraqi caravans Qarad entered in

Arab & Persian world & eventually Arab & Persian world & eventually Qarad penetrated to the locations where Qarad penetrated to the locations where Islam reached, either through traders or Islam reached, either through traders or

by Muslim conquerors.by Muslim conquerors.Credit goes to Credit goes to IslamIslam in the developing a in the developing a

proper shape to the concept of proper shape to the concept of Commenda and cover the technique of Commenda and cover the technique of

Qarad and named it as Qarad and named it as Modaraba.Modaraba.Islam puts restriction to all Riba Islam puts restriction to all Riba

involvement in Modaraba Transaction. involvement in Modaraba Transaction.


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Sunnah and IjmaSunnah and Ijma..The Prophet Mohammad (The Prophet Mohammad (Peace Be Upon HimPeace Be Upon Him) left ) left On a trading trip to Syria & used Modaraba method On a trading trip to Syria & used Modaraba method For a participation contract with For a participation contract with Hazrat Al Khatija Hazrat Al Khatija

on on pre-agreed Terms and Conditionspre-agreed Terms and Conditions

Hazrat Al KhadijaHazrat Al Khadija was the first recognized Women was the first recognized Women Entrepreneur & Financier who financed the Entrepreneur & Financier who financed the Transactions before she entered married to the Transactions before she entered married to the

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

Therefore, Therefore,

Modaraba is treated as SunnahModaraba is treated as Sunnah


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Islamic JurisprudenceIslamic Jurisprudence

ModarabaModaraba is a contract between persons, is a contract between persons, between persons and institutions, and between persons and institutions, and between institutions, through which between institutions, through which

finances are given for trading or finances are given for trading or manufacturing purpose.manufacturing purpose.

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

In case of loss, the Rab-al-Maal loses In case of loss, the Rab-al-Maal loses

financing & Modarib loses his time, financing & Modarib loses his time, efforts and talent. efforts and talent.

Islamic JurisprudenceIslamic Jurisprudence

ModarabaModaraba is a contract between persons, is a contract between persons, between persons and institutions, and between persons and institutions, and between institutions, through which between institutions, through which

finances are given for trading or finances are given for trading or manufacturing purpose.manufacturing purpose.

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

In case of loss, the Rab-al-Maal loses In case of loss, the Rab-al-Maal loses

financing & Modarib loses his time, financing & Modarib loses his time, efforts and talent. efforts and talent.


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Permission and Restrictions Permission and Restrictions Permission and Restrictions Permission and Restrictions

Modaraba on the basis of Modaraba on the basis of fixed return or wages fixed return or wages Is not allowed. Reason is the unknown salary for an Is not allowed. Reason is the unknown salary for an Unknown activity.Unknown activity.

Al KASSANI Al KASSANI says says Modaraba becomes invalid if it Modaraba becomes invalid if it is is

On the basis of Wages as it involves an unknown On the basis of Wages as it involves an unknown Salary for an unknown amount of work. Wage is Salary for an unknown amount of work. Wage is Only allowed in accordance with the teachings of Only allowed in accordance with the teachings of The Holy Quran, Sunnah and the Ijma against The Holy Quran, Sunnah and the Ijma against Human effort as in employment.Human effort as in employment...

In TaymiyaIn Taymiya & & Ibne Ghazi Ibne Ghazi agrees to agrees to Al KassaniAl Kassani

04/12/23 10


Rab-al-MaalRab-al-Maal (the financier) does not have to (the financier) does not have to take an active part in the daily operations as take an active part in the daily operations as in the case of employmentin the case of employment

In case of loss In case of loss in the Modaraba the Modarib in the Modaraba the Modarib is not entitled to a fee, commission or profit is not entitled to a fee, commission or profit and lose his efforts, time and reputation does and lose his efforts, time and reputation does not result in the transaction. not result in the transaction.

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

In any negligenceIn any negligence, misappropriation or a , misappropriation or a purposeful mistake by the Modarib, financier purposeful mistake by the Modarib, financier can claim the Principle Financing.can claim the Principle Financing.


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There is no harm in investigating the There is no harm in investigating the cause of loss in Modaraba. Modarib cause of loss in Modaraba. Modarib is bound to provide the justification is bound to provide the justification to the satisfaction of Rab-al-Maal on to the satisfaction of Rab-al-Maal on loss.loss.

In case of any dispute over the In case of any dispute over the causes of a loss, the jurists permit causes of a loss, the jurists permit the arbitration clause in the the arbitration clause in the agreement.agreement.


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Money in ModarabaMoney in Modaraba

The only money in shape of Dirham, Dinars, The only money in shape of Dirham, Dinars, Rupees, DollarsRupees, Dollars or any other currency is used or any other currency is used as a medium of exchange in the 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 anybody.established with just anybody.

Experience, knowledge and skill of related Experience, knowledge and skill of related business processes are an essential condition business processes are an essential condition of the contract. of the contract.


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In return for financing with a condition of profit & loss sharing is the legitimate and allowed by Shariah.

Paper Currency Paper Currency is the most suitable is the most suitable Capital form of Modaraba and not the Capital form of Modaraba and not the coincoin because it establishes value that is because it establishes value that is easily traded and the market value is easily traded and the market value is infrequently changed infrequently changed

Prophet Muhammad Prophet Muhammad ((Peace Be Upon HimPeace Be Upon Him)) a a commodity cannot be the capital of a commodity cannot be the capital of a ModarabaModaraba contract. contract.


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The currency should be the currency The currency should be the currency of the location of Modaraba execution.of the location of Modaraba execution.

Capital Capital in coins other material is in coins other material is restricted due to the involvement of restricted due to the involvement of material value which is a commodity.material value which is a commodity.

LiabilitiesLiabilities cannot be the capital of cannot be the capital of ModarabaModaraba


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The commodityThe commodity should not be should not be exchanged with another of the same exchanged with another of the same quality and the same quantity, it has quality and the same quantity, it has to be bought through a currency that to be bought through a currency that acts as a medium of exchange. Islamic acts as a medium of exchange. Islamic economics does not treat money as a economics does not treat money as a commodity. commodity.

CapitalCapital of Modaraba should be of Modaraba should be deposited in cash with the Modarib in deposited in cash with the Modarib in full trust and confidence till the full trust and confidence till the maturity of the Modaraba.maturity of the Modaraba.


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ReturnReturn on capital is not guaranteed. on capital is not guaranteed.

ModarabaModaraba becomes invalid if the return becomes invalid if the return of of

Finance is guaranteed.Finance is guaranteed.

QualityQuality and quantity should be of and quantity should be of known and known and

Agreed between the two parties in the Agreed between the two parties in the contract. contract.

IgnoranceIgnorance leads to differences and leads to differences and disputes. disputes. 04/12/23 17


Profit Sharing Profit Sharing should be at maturity of the should be at maturity of the transaction transaction

Because part payment might exceed the share and Because part payment might exceed the share and Any one of the two partners might devour all the Any one of the two partners might devour all the Profit.Profit.

ModarabaModaraba is only achieved through is only achieved through Participation because of profit & loss sharing Participation because of profit & loss sharing Contract, based on justice and trust among the Contract, based on justice and trust among the Partners. It is not justice that all profit goes to Partners. It is not justice that all profit goes to One and another suffers.One and another suffers.


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Return of Principle Return of Principle

Capital Capital that could be delayed purposely in that could be delayed purposely in making more money is prohibited. making more money is prohibited.

CapitalCapital cannot be rollover under same cannot be rollover under same Agreement.Agreement.

Delay or roll over Delay or roll over means Modarib might be means Modarib might be in a Monetary constraint and wish to keep in a Monetary constraint and wish to keep money for longer has to first end the money for longer has to first end the agreement and enter into fresh agreement agreement and enter into fresh agreement either with same terms or Additional either with same terms or Additional

mutually mutually agreed upon.agreed upon.


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It is like It is like a commodity given to a commodity given to Modarib Modarib which which

can Be used as a capital for the transaction.can Be used as a capital for the transaction.

All Fuqaha All Fuqaha agreed that only capital should agreed that only capital should be in be in

the Form of cash as a Participation of Rab-al- the Form of cash as a Participation of Rab-al- Maal.Maal.

Cash Participation Cash Participation is the capital of is the capital of Modaraba Modaraba

and Remain with Modarib in trust.and Remain with Modarib in trust.04/12/23 20


Essential conditions of Essential conditions of Modaraba mode of Modaraba mode of

financing financing

Differentiating Modaraba financing Differentiating Modaraba financing and Loan on Interest, that in the and Loan on Interest, that in the

normal banking and lending normal banking and lending transaction, money is made available transaction, money is made available

to the borrower against a to the borrower against a guaranteed return of principle with guaranteed return of principle with excess amount to the principle as excess amount to the principle as

pre-fixed.pre-fixed.


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CollateralCollateral of various nature is the of various nature is the cover cover

against The lending that ultimately against The lending that ultimately

liquidated in case of Loss by lender. liquidated in case of Loss by lender.

In Modaraba, profit and loss is the end In Modaraba, profit and loss is the end of of

the contract and the profit and loss the contract and the profit and loss sharing sharing

is the key is the key 04/12/23 22


In the loss, Rab-al-Maal suffers the financial loss In the loss, Rab-al-Maal suffers the financial loss and Modarib faces loss in time, effort and his and Modarib faces loss in time, effort and his name.name.

Capital has to be surrendered to Modarib who is Capital has to be surrendered to Modarib who is free to utilize it in business mutually agreed free to utilize it in business mutually agreed between Modarib and Rab-al-Maal.between Modarib and Rab-al-Maal.

According to Imam Ibn Hambal, this condition According to Imam Ibn Hambal, this condition Satisfies the Modarib for his free actions in Satisfies the Modarib for his free actions in

regard regard to Capital utilization and can take better way to to Capital utilization and can take better way to earn Best. earn Best.


Pakistan

ModaribModarib is entitle for Modaraba is entitle for Modaraba Management Fee out of Gross profit Management Fee out of Gross profit and not from the Capital of Modaraba. and not from the Capital of Modaraba.

Modarib fee must be pre- Agreed and Modarib fee must be pre- Agreed and term term

have to incorporate in the Agreement. have to incorporate in the Agreement.

Rab-al-Maal Rab-al-Maal cannot impose the amount cannot impose the amount of Percentage of Management Fee. of Percentage of Management Fee.


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Rab-al-MaalRab-al-Maal interference in the interference in the working working

Disrupts the connection between Disrupts the connection between Capital and Capital and

Modarib. But The cooperation of Rab-Modarib. But The cooperation of Rab-al-al-

Maal is accepted.Maal is accepted.

IgnoranceIgnorance and bias distribution the and bias distribution the shore shore

of Profit invalidates the Modaraba. of Profit invalidates the Modaraba. 04/12/23 25


Net Profit Net Profit has to be shared in agreeing Ratio has to be shared in agreeing Ratio After deduction of pre-agreed Cost & Expenses After deduction of pre-agreed Cost & Expenses Including Modarib fee. Including Modarib fee.

Capital Assets Capital Assets shall be the right of Modaraba shall be the right of Modaraba And shall be shared between Rab-al-Maal and And shall be shared between Rab-al-Maal and Modarib after Capital satisfied to Rab-al-Maal. Modarib after Capital satisfied to Rab-al-Maal.

ModaribModarib has no right to any share or fee as has no right to any share or fee as Rab-al-Maal cannot claim his capital in case of Rab-al-Maal cannot claim his capital in case of Loss. Loss.


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Classes of ModarabaClasses of ModarabaModarabaModaraba can be classified as, can be classified as,

GeneralGeneral Purpose and Purpose and SpecificSpecific purpose. purpose.

General Purpose Modaraba General Purpose Modaraba It is not restricted to actively, partner and It is not restricted to actively, partner and place and mostly used between Modarib place and mostly used between Modarib

and and Rab-al-Maal in which Rab-al-Maal Rab-al-Maal in which Rab-al-Maal

empowers, empowers, Modarib to act, invest or activate capital Modarib to act, invest or activate capital

for for earning profit.earning profit.


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Specific Modaraba Specific Modaraba

It is limited by one or several It is limited by one or several aforementioned aforementioned

restrictions. restrictions.

Modaraba can be restricted to certain Modaraba can be restricted to certain conditions and has to commit for the conditions and has to commit for the

non-non-compliancecompliance


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Multiple Modaraba Multiple Modaraba OneOne Rab-al-Maal finance several Modarib at one Rab-al-Maal finance several Modarib at one Time with different terms & conditions of contract.Time with different terms & conditions of contract.

SeveralSeveral Rab-al-Maal finance to one Modarib as Rab-al-Maal finance to one Modarib as Group by Capital in Equity under Single agreement Group by Capital in Equity under Single agreement Between Modarib and Rab-al-Mall either in group or Between Modarib and Rab-al-Mall either in group or By proxy to single person in representation.By proxy to single person in representation.

OneOne Rab-al-Maal finance to several Modarib and Rab-al-Maal finance to several Modarib and Each Modarib using the financing amount investing Each Modarib using the financing amount investing In several transactions for specified period under In several transactions for specified period under A single agreement. A single agreement.


Pakistan

ModaribModarib in person keep single agreement in person keep single agreement at one Time. at one Time.

MultipleMultiple agreement is not permitted. agreement is not permitted.

AffairsAffairs of Modaraba must agreed in of Modaraba must agreed in witting witting

Proper record, supported in documents Proper record, supported in documents proof in operation in is the responsibility proof in operation in is the responsibility

of of ModaribModarib


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ModaribModarib invest Capital by self or by making invest Capital by self or by making Similar to contract with another person, Similar to contract with another person, institute or institute or

OrganizationOrganization without the permission of Rab- without the permission of Rab-al- Maal but keeping him in confidence.al- Maal but keeping him in confidence.

ModaribModarib status could be changed to Rab-al- status could be changed to Rab-al-Maal and Rab-al-Maal could be Modarib too Maal and Rab-al-Maal could be Modarib too With the condition of contract and agreement With the condition of contract and agreement In transaction. In transaction.


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Banking & Financial Banking & Financial Institutes Institutes

Banks can finance funds from their deposits on Banks can finance funds from their deposits on below Modaraba in which Banks can be Modarib below Modaraba in which Banks can be Modarib

for for them Depositors & Rab-al-Maal to Modarib them Depositors & Rab-al-Maal to Modarib

seeking seeking financing in two separate contracts. financing in two separate contracts.

The first contract with the Depositor as Modarib The first contract with the Depositor as Modarib and and

Second contract with Modarib eligible to be Second contract with Modarib eligible to be financed. financed.

The contracts can have different terms and The contracts can have different terms and different different

Profit sharing.Profit sharing.04/12/23 32


Both the contract should be matured Both the contract should be matured to the to the

pre agreed the date and the bank pre agreed the date and the bank cannot cannot

payoff without realizing the profit of its payoff without realizing the profit of its financing or from own source. financing or from own source.

BanksBanks can specify the purpose of can specify the purpose of ModarabaModaraba

to safeguard depositor’s capital.to safeguard depositor’s capital.


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BankBank can enter into a General Purpose Modaraba. can enter into a General Purpose Modaraba. But in case of being a Rab-al-Maal it only enters into But in case of being a Rab-al-Maal it only enters into Specific Modaraba Contract.Specific Modaraba Contract.

BanksBanks are not permitted to ask for guarantee are not permitted to ask for guarantee Against the loss of capital, but participate in the Against the loss of capital, but participate in the Transaction as partner by holding the assets of Transaction as partner by holding the assets of Transaction excluding Capital.Transaction excluding Capital.

ModarabaModaraba in consolidation with another mode of in consolidation with another mode of Financing is permitted like Modaraba into Ijarah, Financing is permitted like Modaraba into Ijarah, Morabaha, Havania, Musaqa or Mussaja.Morabaha, Havania, Musaqa or Mussaja.


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Modaraba Financing Modaraba Financing

An ideal way to finance An ideal way to finance Project Financing Project Financing

Working Capital Working Capital

Bridge Financing Bridge Financing

FIM:FIM: Finance against Imported Merchandise FIM Finance against Imported Merchandise FIM

BMR:BMR: (Balancing Modernization & Replacement) (Balancing Modernization & Replacement)

LMM:LMM: (Local Machine Manufacturing) (Local Machine Manufacturing)

SME & E:SME & E: Small Medium Entrepreneur & Small Medium Entrepreneur & EnterpriseEnterprise


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Risk Factor Risk Factor Modaraba is Small & Medium term financing Modaraba is Small & Medium term financing

having having Risk factor appraises on Medium & High Risk factor appraises on Medium & High

Level.Level.

Modarib Risk is higher than Rab-al-Maal due Modarib Risk is higher than Rab-al-Maal due to the to the

Involvement of Time, Efforts, Experience Involvement of Time, Efforts, Experience & Reputation which never recovers as money & Reputation which never recovers as money

can be recovered if the loss is Reported.can be recovered if the loss is Reported.


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Financing is made in absolute trust on Financing is made in absolute trust on skills, skills,

Experience, reputation, capability and Experience, reputation, capability and feasibility of feasibility of ModarabaModaraba transaction or transaction or project.project.

ModarabaModaraba agreement is made only to the agreement is made only to the transaction purely based free from all the transaction purely based free from all the classifications and categories of the classifications and categories of the RibaRiba..


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SummarySummary A profit-sharing agreement between two A profit-sharing agreement between two

parties, in which one provides the parties, in which one provides the finance, and the other provides finance, and the other provides entrepreneurial and management skills.entrepreneurial and management skills.

The profits are divided on a pre-The profits are divided on a pre-determined ratio.determined ratio.

Losses are borne by the provider of Losses are borne by the provider of capital and capital and ModaribModarib lose its reputation, lose its reputation, time and efforts.time and efforts.


Pakistan


Pakistan

modaraba application permission & restrictions

Business

modaraba transaction

modaraba qarad commenda

modaraba mode

modaraba method

restrictions modaraba

history of modaraba

modaraba cont

islamic jurisprudence