modaraba, introduction, restrictions and permissions

Riba Free Mode of Riba Free Mode of FinancingFinancing

Modaraba,Modaraba, Participation between Participation between

Money and AbilityMoney and Ability

Riba Free Mode of Riba Free Mode of FinancingFinancing

Modaraba,Modaraba, Participation between 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.


Pakistan

Fuqaha define Fuqaha define ModarabaModarabaIIt is a partnership contract between two parties, t is a partnership contract between two parties,

persons to person, organizations to person or persons to person, organizations to person or Organization with organization in which ONE Organization with organization in which ONE brings the Capital, the Other shares his Time brings the Capital, the Other shares his Time Skill, Experience & Goodwill in the respective Skill, Experience & Goodwill in the respective

business fieldbusiness field for a specified project or for a specified project or transaction.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 & ReputationModarib loses Time, Efforts & Reputation


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Historical Perspective The history of Modaraba reveals that the business under the concept of Commenda was in practice in the medieval period the

before the rise of Islam, emerging from Italian city of Rome, which was the center for trade & culture in the Christian world.

City of Rome Always a center of attraction for Art, Culture, Business & Lifestyle


Pakistan

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

Iraq, the City Baghdad for business.

Baghdad was the center of Trade, Education & Culture.

Business community of Iraq acknowledged Commenda as

business practice & started accepting the system & its mechanism.

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


Pakistan

In Iraq Commenda change to Qarad Through Iraqi caravans Qarad entered in Arab & Persian world & eventually Qarad penetrated to the locations where Islam reached, either through traders or by

Muslim conquerors.

Credit goes to Islam in the developing a proper shape to the concept of Commenda

and cover the technique of Qarad and named it as Modaraba.

Islam put restriction to all Riba involvement in Modaraba Transaction. .


Pakistan

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

on pre-agreed Terms and Conditions

Hazrat Al Khadija was the first recognized Women Entrepreneur & Financier who financed the transactions before she entered married to Prophet Mohammad (Peace Be Upon Him).

Therefore,

Modaraba is treated as SunnahModaraba is treated as Sunnah


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Islamic JurisprudenceIslamic Jurisprudence

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

finances are given for trading or manufacturing purpose.

Profit sharing is agreed upon beforehand at a predetermined Ratio.

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

financing & Modarib loses his time, efforts and talent.

Islamic JurisprudenceIslamic Jurisprudence

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

finances are given for trading or manufacturing purpose.

Profit sharing is agreed upon beforehand at a predetermined Ratio.

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

financing & Modarib loses his time, efforts and talent.


Pakistan

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

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

Al KASSANI says Modaraba becomes invalid if it is on the basis of Wages as it involves an unknown salary for an unknown amount of work. Wage is only allowed in accordance with the teachings of the Holy Quran, Sunnah and the Ijma against human effort as in employment..

Ibne Taymiya & Ibne Ghazi agree to Al Kassani

04/12/23 10


Rab-al-Maal (the financier) does not have to take an active part in the daily operations as in the case of employmentIn case of loss in the Modaraba the Modarib is not entitled of an fee, commission or profit and lose his efforts, time and reputation does not result in the transaction. Rab-al-Maal has the right to investigate the cause of loss.In any negligence, misappropriation or a purposeful mistake by the Modarib, financier can claim the Principle Financing.


Pakistan

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

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


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Money in ModarabaMoney in Modaraba

Only money in shape of Dirham, Dinars, Rupees, Dollars or any other currency is used as a medium of exchange in the Modaraba mode.

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

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


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Return on financing with a condition of profit & loss sharing is the legitimate and allowed by Shariah.

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

Prophet Muhammad (Peace Be Upon Him) a commodity cannot be the capital of a Modaraba contract. Currency should be the currency of location of Modaraba execution.04/12/23 14


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

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

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


Pakistan

Liabilities cannot be the capital of Modaraba

Return on capital is not guaranteed.

Modaraba becomes invalid if the return of finance is guaranteed.Quality and quantity should be of known

and agreed between the two parities in contract.

Ignorance lead to differences and disputes.


Pakistan

Profit Sharing should be at maturity of transaction because part payment might exceed the share and any one of the two partners might devour all the profit.

Modaraba is only achieved through participation because of profit & loss sharing contract, based on justice and trust among the partners. It is not justice that all profit goes to one and other suffers.


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Return of Principle Return of Principle

Capital that could be delayed purposely for making

more money is prohibited.

Capital cannot be Roll-over under same agreement.

Delay or roll over means Modarib mighty be in a

monetary constraint and wish to keep money for

longer has to first end the agreement and enter into

fresh agreement either with same terms or additional mutually agreed upon.04/12/23 18


It is like a commodity given to Modarib which can

be used as a capital of the transaction.

All Fuqaha agreed that only capital should be in the

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

Cash Participation is the capital of Modaraba and

Remain with Modarib in trust.04/12/23 19


The essential conditions of The essential conditions of Modaraba mode of Modaraba mode of

financing financing Differentiating Modaraba financing and Loan on interest, that in the normal banking and lending transaction, money is made available to the borrower against a guaranteed return of principle with excess amount to the principle as pre-fixed..

Collateral of various nature is the cover against the lending that ultimately liquidated in case of loss by lender.


Pakistan

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

and profit and loss sharing is the key

In the loss, Rab-al-Maal suffers the financial loss and

Modarib faces loss in time, effort and his name.

Capital has to be surrendered to Modarib who is free

To utilize it in business mutually agreed between Modarib and Rab-al-Maal.

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

to Capital utilization and can take better way to earn best. 04/12/23 21


Rab-al-Maal interference in the working disrupts the connection between Capital and Modarib. But The cooperation of Rab-al-Maal is accepted.

Modarib is entitle for Modaraba Management Fee out of Gross profit and not from the capital of Modaraba. Modarib fee must be pre- agreed and term have to incorporated in the agreement.

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


Pakistan

Ignorance and bias distribution the share of profit invalidates the Modaraba.

Net Profit has to be shared in agreed Ratio after deduction of pre-agreed Cost & Expenses including Modarib fee.

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

Modarib has no right for any share or fee as Rab-al-Maal cannot claim his capital in case of loss.


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Classes of ModarabaClasses of ModarabaModaraba can be classified as, General purpose and Specific purpose.

General Purpose Modaraba is not restricted to activity, partner and place and mostly used between Modarib and Rab-al-Maal in which Rab-al-Maal empowers, Modarib to act, invest or activate capital for earning profit.

Specific Modaraba is limited by one or several aforementioned restrictions. Modaraba can be restricted to certain conditions and has to commit for the non-compliance.


Pakistan

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 transaction for specified period under in several transaction for specified period under Single agreement. Single agreement.

ModaribModarib in person keep single agreement at one in person keep single agreement at one time . Multiple agreement is not permtted.time . Multiple agreement is not permtted.


Pakistan

Affairs of Modaraba must agreed in witting Proper record, supported in documents proof of operation in is the responsibility of Modarib

Modarib invest Capital by self or by making similar contract with other person, institute or organization without the permission of Rab-al-Maal but keeping him in confidence.

Modarib status could be change to Rab-al-Maal and Rab-al-Maal could be Modarib too with the condition of contract and agreement in transaction.


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Banking & Financial Banking & Financial Institutes Institutes Banks can finance funds from their deposits on under

Modaraba in which Banks can be Modarib for their Depositors & Rab-al-Maal to Modarib seeking financing In two separate contract.

The first contract with the Depositor as Modarib and second contract with Modarib eligible to be financed.

The contracts can have different terms and different profit sharing.

Both the contract should be matured on the pre agreed date and bank cannot pay-off without realizing the profit of its financing or from own source.


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Banks can specify the purpose of Modaraba to safeguard depositor’s capital.

Bank can enter into a General Purpose Modaraba.

But in case of being a Rab-al-Maal it only enters into

Specific Modaraba Contract.

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

Modaraba in consolidation with other mode of financing is permitted like Modaraba into Ijarah, Morabaha, Havania, Musaqa or Mussaja.


Pakistan

Modaraba Financing is an ideal way to Modaraba Financing is an ideal way to finance finance

Project Financing Working Capital Bridge Financing FIM: Finance against Imported Merchandise

FIMBMR: (Balancing Modernization &

Replacement)LMM: (Local Machine Manufacturing)SME & E: Small Medium Entrepreneur &

Enterprise


Pakistan

Risk Factor Risk Factor Modaraba is Small & Medium term financing having Risk factor appraise on Medium & High Level.

Modarib Risk is higher then Rab-al-Maal due to the Involvement of Time, Efforts, Experience &Reputation which never recover as money can be recover if loss is reported.Financing is made in absolute trust on skills, experience, reputation, capability and feasibility of Modaraba transaction or project.Modaraba agreement is made only to the transaction purely based free from all the classifications and

categories of the Riba.


Pakistan

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.

Profits are divided on a pre-determined Profits are divided on a pre-determined ratio.ratio.

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


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Morabaha Financing to Modarib for furniture order to Value 1,000,000 at Management Fee 10% of Gross profit and Profit Sharing at Ratio 40:60. Expected Sale 1,200,000.

Financing Amount 1,000,000Sales Proceeds (1,200,000)Gross Profit 200,000Management Fee 10% (20,000)Net Profit 180,000Modarib Profit Share 40 72,000Rab-al-Maal Profit 60 108,000

Modarib Earning 20,000 + 72,000 = 92,000 46% of Gross ProfitRab-al Maal Profit 108,000 54% of Gross Profit

04/12/23 32


Thank You For

Your Participation


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modaraba, introduction, restrictions and permissions

Economy & Finance

modaraba transaction

modaraba qarad commenda

modaraba mode

modaraba method

restrictions modaraba

history of modaraba

islamic jurisprudence

loss financier