Islamic Islamic Financial Financial System System Financial Financial ProductsProducts

Islamic Islamic Financial Financial System System Financial Financial ProductsProducts

PART 2PART 2“MODARABA”“MODARABA”

RESTRICTIONS RESTRICTIONS

AND AND PERMISSIONSPERMISSIONS

PART 2PART 2“MODARABA”“MODARABA”

RESTRICTIONS RESTRICTIONS

AND AND PERMISSIONSPERMISSIONS

Liability be a capital of Liability be a capital of ModarabaModaraba or Capital only be or Capital only be

cash? cash? LiabilitiesLiabilities cannot be the capital. cannot be the capital.Return Return on capital is not guaranteed. on capital is not guaranteed. The capitalThe capital of of ModarabaModaraba should be should be

deposited in cash with the deposited in cash with the ModaribModarib in in full trust and confidencefull trust and confidence

ModarabaModaraba becomes invalid if the becomes invalid if the return of finance is guaranteed.return of finance is guaranteed.

It should be of known in quality and It should be of known in quality and quantity. quantity.

Ignorance lead to differences and Ignorance lead to differences and disputes. disputes.

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

It should not be paid in parts before the It should not be paid in parts before the maturity of the transaction because maturity of the transaction because payment might exceed the share and any payment might exceed the share and any one of the two partners might devour all one of the two partners might devour all the profit.the profit.

ModarabaModaraba is only achieved through is only achieved through participation because of profit & loss participation because of profit & loss sharing contract, based on justice and sharing contract, based on justice and trust among the partners. trust among the partners.

It is not justice that all profit goes to one It is not justice that all profit goes to one and other suffers.and other suffers.

Imam MalikImam Malik Refund of liabilities that could be Refund of liabilities that could be

delayed purposely for making more delayed purposely for making more money is prohibited. money is prohibited.

Debtor has to refund his debts and Debtor has to refund his debts and creditor has a choice to invest money creditor has a choice to invest money that is returned on maturity of that is returned on maturity of Modaraba. It cannot be Roll-over under Modaraba. It cannot be Roll-over under same agreement.same agreement.

Modarib in a monetary constraint and Modarib in a monetary constraint and wish to keep money for longer has to wish to keep money for longer has to first end the agreement and enter into first end the agreement and enter into fresh agreement either with same terms fresh agreement either with same terms or additional mutually agreed upon.or additional mutually agreed upon.

AL BASHI says that it AL BASHI says that it might be Modarib might be Modarib intention for benefit in intention for benefit in order to prolong payment order to prolong payment of his liabilities which of his liabilities which cannot be permitted.cannot be permitted.

Almost all scholars have Almost all scholars have forbidden the usage of forbidden the usage of debts as debts as ModarabaModaraba capital. capital.

IBN KADAMAIBN KADAMA There is no wrongdoing if the debts are There is no wrongdoing if the debts are

taken as taken as Modaraba CapitalModaraba Capital with the with the permission of Rab-al-Maal who has settled permission of Rab-al-Maal who has settled the price with a clear conscience”. the price with a clear conscience”.

In another way, it is like a commodity given to In another way, it is like a commodity given to ModaribModarib which can be used as a capital of the which can be used as a capital of the transaction.transaction.

All Fuqaha agreed that only capital should be in the All Fuqaha agreed that only capital should be in the form of cash as it is the form of cash as it is the ParticipationParticipation of of Rab-al-MaalRab-al-Maal..

The debts remain in the possession of debtor.The debts remain in the possession of debtor. Participation with Cash is different from debts, as it Participation with Cash is different from debts, as it

remains the property of remains the property of Rab-al-MaalRab-al-Maal even when it is even when it is with with ModaribModarib..

Cash Participation is the capital of Cash Participation is the capital of ModarabaModaraba and and remain with remain with ModaribModarib in trust. in trust.

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

financing financing For differentiating Modaraba mode of For differentiating Modaraba mode of

financing and interest mode of loans, financing and interest mode of loans, principals should be kept in mind before principals should be kept in mind before establishing a financial transaction that in establishing a financial transaction that in the normal banking and lending practice, the normal banking and lending practice, money is made available to the borrower money is made available to the borrower against the guaranteed return of principle against the guaranteed return of principle with profit.with profit.

In such practice collateral is the cover In such practice collateral is the 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 of In Modaraba, profit and loss is the end of the contract and profit and loss sharing is the contract and profit and loss sharing is the key the key

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

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

According to Imam Ibn Hambal, this According to Imam Ibn Hambal, this condition satisfies the Modarib for his free condition satisfies the Modarib for his free actions in regard to Capital utilization and actions in regard to Capital utilization and can take better way to earn best. can take better way to earn best.

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

Relationship as employee and employer Relationship as employee and employer between Rab-al-Maal. Modarib invalidate between Rab-al-Maal. Modarib invalidate Modaraba transaction.Modaraba transaction.

Share of profit has to be pre-agreed.Share of profit has to be pre-agreed. Modarib is entitle for Modaraba Management Modarib is entitle for Modaraba Management

Fee out of Gross profit and not from the capital Fee out of Gross profit and not from the capital of Modaraba.of Modaraba.

Modarib fee must be pre- agreed and term Modarib fee must be pre- agreed and term have to incorporated in the agreement.have to incorporated in the agreement.

Rab-al-Maal cannot impose the amount of Rab-al-Maal cannot impose the amount of percentage . percentage .

The ignorance and discriminative distribution The ignorance and discriminative distribution share of profit invalidates the Modaraba. share of profit invalidates the Modaraba. Profit is the essence of contract and its Profit is the essence of contract and its ignorance invalidate the terms of the contract. ignorance invalidate the terms of the contract.

Profit has to be divided by half or by third Profit has to be divided by half or by third after deduction of pre-agreed Cost and after deduction of pre-agreed Cost and Expenses including Modarib fee. Expenses including Modarib fee.

Rab-al-Maal gets the share of his Capital Rab-al-Maal gets the share of his Capital investment and Modarib gets the share for his investment and Modarib gets the share for his efforts.efforts.

In case of loss, Modarib has no right for his In case of loss, Modarib has no right for his share, as Rab-al-Maal cannot claim his capital. share, as Rab-al-Maal cannot claim his capital.

Assets shall be the right of Rab-al-Maal. Assets shall be the right of Rab-al-Maal.

Classification of ModarabaClassification of Modaraba Modaraba can be classified as, Modaraba can be classified as, GeneralGeneral

purpose Modaraba and purpose Modaraba and SpecificSpecific Modaraba. Modaraba. In In GeneralGeneral purpose Modaraba, the purpose Modaraba, the

operation is not restricted to activity, operation is not restricted to activity, partner and place.partner and place.

General purpose Modaraba is mostly used General purpose Modaraba is mostly used between Modarib and Rab-al-Maal in which between Modarib and Rab-al-Maal in which Rab-al-Maal empowers, Modarib to act, Rab-al-Maal empowers, Modarib to act, invest or activate capital for earning profit.invest or activate capital for earning profit.

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

Multiple Modaraba Multiple Modaraba One Rab-al-Maal finance several Modarib at One Rab-al-Maal finance several Modarib at

one time with different terms and conditions one time with different terms and conditions of contract.of contract.

Several Rab-al-Maal finance to one Modarib Several Rab-al-Maal finance to one Modarib as individual or as in group by pool of as individual or as in group by pool of capital under single agreement between capital under single agreement between Modarib and Rab-al-Mall either in group or Modarib and Rab-al-Mall either in group or by proxy to single person in representation.by proxy to single person in representation.

One Rab-al-Maal finance to several Modarib One Rab-al-Maal finance to several Modarib and each Modarib using the financing and each Modarib using the financing amount investing in several transaction for amount investing in several transaction for specified period under single agreement. specified period under single agreement.

HAKIM IBN HAZAM HAKIM IBN HAZAM Close Companion of Prophet (May Peace Close Companion of Prophet (May Peace

be upon him) Says and it has to be taken be upon him) Says and it has to be taken as the authentic condition in the present as the authentic condition in the present practicespractices

“ “ I lay down conditions in I lay down conditions in Modaraba that if my money is Modaraba that if my money is left in a humid place or taken left in a humid place or taken

across the sea or washed between across the sea or washed between fast-moving water, Modarib will fast-moving water, Modarib will

be responsible for the non-be responsible for the non-compliance of the conditions.” compliance of the conditions.”

Fuqaha BeliefFuqaha Belief All activities pertain to Modaraba should be All activities pertain to Modaraba should be

agreed in witting including functions and agreed in witting including functions and operation in proper record, supported with operation in proper record, supported with documentary proof.documentary proof.

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

Modarib status could be change to Rab-al-Modarib status could be change 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.

Banking & Financial Banking & Financial Institutes Institutes Banks can finance their funds or from their Banks can finance their funds or from their

deposits for financing someone to carry out deposits for financing someone to carry out Modaraba.Modaraba.

Banks can be Modarib for their Depositors and Banks can be Modarib for their Depositors and Rab-al-Maal for Modarib seeking financing.Rab-al-Maal for Modarib seeking financing.

The contract shall be two separate. The contract shall be two separate. The first contract with the Depositor as Modarib The first contract with the Depositor as Modarib

and second contract with Modarib whom and second contract with Modarib whom financed. financed.

The contracts can have different terms and The contracts can have different terms and different profit sharing.different profit sharing.

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

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

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

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

Modaraba can be in consolidation with other Modaraba can be in consolidation with other mode of financing permitted like mode of financing permitted like MusharakaMusharaka, , Morabaha,Morabaha, Ijarah, Ijarah, Havania, Musaqa or Mussaja.Havania, Musaqa or Mussaja.

Al Mighty Allah Al Mighty Allah instructinstruct

Al Mighty Allah Al Mighty Allah instructinstruct

Oh you misuse your wealth in self-Oh you misuse your wealth in self-importance among them. This wealth importance among them. This wealth should be used for trade on mutual should be used for trade on mutual

consent”. Those who believe in Allah consent”. Those who believe in Allah should observe their duty to Allah and should observe their duty to Allah and

give up what remains from Riba, if they give up what remains from Riba, if they are true believers. If they do not, then are true believers. If they do not, then

they are warned for a war with Allah and they are warned for a war with Allah and his Prophet (Peace be upon him) and if his Prophet (Peace be upon him) and if you ask forgiveness, then you have your you ask forgiveness, then you have your principal without interest. Wrong not principal without interest. Wrong not

and you shall not be wronged.”and you shall not be wronged.”

Oh you misuse your wealth in self-Oh you misuse your wealth in self-importance among them. This wealth importance among them. This wealth should be used for trade on mutual should be used for trade on mutual

consent”. Those who believe in Allah consent”. Those who believe in Allah should observe their duty to Allah and should observe their duty to Allah and

give up what remains from Riba, if they give up what remains from Riba, if they are true believers. If they do not, then are true believers. If they do not, then

they are warned for a war with Allah and they are warned for a war with Allah and his Prophet (Peace be upon him) and if his Prophet (Peace be upon him) and if you ask forgiveness, then you have your you ask forgiveness, then you have your principal without interest. Wrong not principal without interest. Wrong not

and you shall not be wronged.”and you shall not be wronged.”

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

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

Profits are divided on a pre-determined ratio.Profits are divided on a pre-determined ratio. Losses are borne by the provider of capital Losses are borne by the provider of capital

and and ModaribModarib loose its reputation, time and loose its reputation, time and efforts.efforts.

Financing is made in the absolute trust on the Financing is made in the absolute trust on the skills, experience, reputation, capability and skills, experience, reputation, capability and feasibility of feasibility of ModarabaModaraba transaction or project. transaction or 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..