modaraba - participation between money and ability - by yousuf ibnul hasan - icompetences ifc2012

7/29/2019 Modaraba - Participation Between Money and Ability - By Yousuf Ibnul Hasan - iCompetences IFC2012

http://slidepdf.com/reader/full/modaraba-participation-between-money-and-ability-by-yousuf-ibnul-hasan 1/34

Riba Free Mode of Financing

Modaraba, Participation between

Money and Ability

Islamic Finance IFC 2012

107/01/13Yousuf Ibnul Hasan IQRA University

Pakistan



Commenda - Qarad – Modaraba

Three names for an ancient background of aneconomic activities classified as business

activities under a contract of

Money and Ability

The owner of money,

Rab-Al-Maal (Financier)

The worker is called

Modarib (Entrepreneur)


Pakistan



Commenda

It is a pre-Islamic word from Italy

Qarad

This word generally found inImam Malik s & Imam Shafeis

Schools of Thought.

Modaraba It is of Iraqi origin and found mostly in

Imam Abu Hanifas and Imam Ibn Hambals Schools

of Thought. 307/01/13Yousuf Ibnul Hasan IQRA University

Pakistan



Fuqaha define Modaraba

Partnership contract between persons to person,

organizations to person or Organization withorganization in which ONE brings the Capital, theother shares his Time Skill, Experience & Goodwill inthe respective business field for a specified project or

transaction.On the maturity, profit is divided according to the

agreement, which will either be equal or

Pre Agreed Ratio of Net Earned Profit.

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


Pakistan



Historical Perspective

The history of Modaraba reveals that the businessunder the concept of Commenda was in practicein the medieval period before the rise of Islam.

It emerged from Italian City Rome ,

Rome was the center for Art, Culture, trade &

Business in the European Christian world.

Archives indicate that it was an idea of the Churchas alternate to the Loan on Interest


Pakistan



Christian traders explore the Arab world,they chose Capital of Iraq, Baghdad for

business as Baghdad was the center of Trade, Education & Culture.

Business community in Iraq acknowledged

Commenda as business practice on itsmechanism.Later Scholars & Jurists polish the system in

the Iraqi business practices by bringing it

into legal frame work.

In Iraq Commenda change to Qarad


Pakistan



Through Iraqi caravans Qarad entered in Arab &Persian world & eventually Qarad penetrated to

the locations where Islam reached, either throughtraders or by Muslim conquerors.

Credit goes to Islam in the developing a proper

shape to the concept of Qarad and named it asModaraba.

Islam put restrictions to all Riba involvement in

Modaraba Transactions and develop it on thepattern of Ability Financing .


Pakistan



Sunnah and Ijma. Prophet Mohammad ( Peace Be Upon Him) left

on a trading trip to Syria & used Modaraba method Which was financed by Hazrat Al Khatija on pre-agreed Terms and Conditions similar to Modaraba.

Hazrat Al Khadija is recognized as Entrepreneur &Financier who use to finance business transactions before she married to Prophet Mohammad ( Peace BeUpon Him).

Therefore,

Modaraba is treated as Sunnah


Pakistan



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 unknownamount of work. Wage is only allowed in accordance with theteachings of the Holy Quran, Sunnah and the Ijma againsthuman effort as in employment..

Ibne Taymiya & Ibne Ghaziagree to

Al Kassani explanation


Pakistan



Rab-al-Maal (the financier) does not have to take an

active part in the daily operations as in the case of employment

In case of loss the Modarib is not entitled of an fee,commission or profit and lose his efforts, time and

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

In any negligence, misappropriation or a purposefulmistake by the Modarib, financier can claim the PrincipleFinancing.


Pakistan



Investigating the cause of loss in Modaraba

transaction is permitted and Modarib is bound to provide the justification to thesatisfaction of Rab-al-Maal on the loss.

Dispute over the causes of a loss or in any case, the jurists permit the arbitrationclause in the agreement.

Arbitrator should be man of wisdom andaccepted by Rab-al-Maal and Modarib.


Pakistan



Money 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 justanybody.

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


Pakistan



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

Shariah.Paper Currency is the most suitable Capitalform of Modaraba and not the coin because it

establishes value that is easily traded and thecommodity s market value infrequently changed

Currency should be the currency of location of Modaraba carrying out.


Pakistan



Commodity should not be exchanged with

another of the same quality and the same

quantity, it has to be bought through currency that acts as a medium of exchange. Islam doesnot consider money as commodity.

Prophet Muhammad ( Peace Be Upon Him) restricted

Modaraba capital with useable or consumable

product or commodity including restriction toBarter System of exchange.

07/01/13 14Yousuf Ibnul Hasan IQRA University

Pakistan



Capital in other valuables, consumables oruseable material is restricted due to the

involvement of material in value which is afluctuate.

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

Receiving Capital in physical possession by Modarib confirm the value date of contract.


Pakistan



Return of Capital not be delayed beyond Maturity f the contract purposely for making more money.

Capital not to be Roll-over or extended for furtherperiod under same agreement.

Delay or roll over in returning capital on maturity means Modarib mighty be in a monetary constraintand wish to keep money for longer period.

Modaraba agreement first to be end at maturity andthen fresh agreement to be executed either withsame terms or additional terms mutually agreed

upon. 1607/01/13Yousuf Ibnul Hasan IQRA University

Pakistan



Liabilities cannot be the capital of Modaraba. It

should be clear prior to execution of Modarabacontract that all parties are clear from any liabilities

Quality and quantity should be of known andagreed between the two parities in contract. Itmean type of Modaraba, Purpose and Value

should be pre agreed.

Ignorance to any term of the contract lead todifferences and disputes.


Pakistan



Profit Sharing should be shared at the maturity of theTransaction and part payment of profit is restricted.

Part payments of profits might exceed the share of any one of the two partners who might devour all theprofit.

Modaraba only achieved on the basis justice and

trust among the partners. Both partners have to

use all the means to appraise each.It is not justice as well as permitted that all profit

goes to one and other suffers.


Pakistan



Cash Participation is the capital of Modaraba andRemain with Modarib in trust.

In Modaraba, profit and loss is the end of contractand profit and loss sharing is the key

Modaraba develop high value of human factors interms of its viability, integrity, reputation, ability,experience and knowledge in the related line of

Trade which no other economic system offer such amagnificent role of men in economic affairs.


Pakistan



The essential conditions of

Modaraba mode of financing

Differentiating Modaraba financing and Loan oninterest, in the normal bank lending transaction,money is given to borrower against guaranteed

return of principle with excess amount on theprinciple remain pre-fixed and without change.

Collateral of various nature is the cover againstthe loan that ultimately liquidated in case of lossby lender.


Pakistan



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

According to Imam Ibn Hambal, this condition

satisfies the Modarib for his free actions in regard toCapital utilization and can take better way to earn best.

Rab-al-Maal can assist the Modarib on the request but cannot dictate the terms prior to the maturity of the agreement

2107/01/13Yousuf Ibnul Hasan IQRA UniversityPakistan



Rab-al-Maal interference in the working disrupts theconnection 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 toincorporated in the agreement.

Rab-al-Maal cannot impose the amount of percentage

for his or her profit or Modaribs Management Fee.




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

Net Profit has to be shared in agreed Ratioafter deduction of pre-agreed Cost & Expensesincluding Modarib management fee.

Capital Assets shall be the right of Modarabaand shall be shared between Rab-al-Maal andModarib after Capital satisfied to Rab-al-Maal.

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




Classes of ModarabaModaraba can be classified as, General

purpose and Specific purpose.General Purpose Modaraba is not restrictedto activity, partner and place and mostly used

between Modarib and Rab-al-Maal in whichRab-al-Maal empowers, Modarib to act, investor activate capital for earning profit.

Specific Modaraba is limited by one orseveral aforementioned restrictions. Modarabacan be restricted to certain conditions and hasto commit for the non-compliance.




Multiple ModarabaOne Rab-al-Maal finance several Modarib at one

time with different terms & conditions of contract.

Several Rab-al-Maal finance to one Modarib asgroup by Capital in Equity under Single agreement

between Modarib and Rab-al-Mall either in group or by proxy to single person in representation.

One Rab-al-Maal finance to several Modarib andEach Modarib using the financing amount investingin several transaction for specified period underSingle agreement.

.2507/01/13 Yousuf Ibnul Hasan IQRA UniversityPakistan



Modarib in person keep single agreement at onetime .

Modarib cannot enter into multiple agreement atone time as not is not permitted due to favor andinterest in any one for more benefits.

Affairs of Modaraba must agreed in witting properrecord, supported in documents proof of operation inis the responsibility of Modarib

07/01/13 26Yousuf Ibnul Hasan IQRA UniversityPakistan



Modarib invest Capital by self or by makingsimilar contract with other person, institute ororganization 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 agreementin transaction.

2707/01/13 Yousuf Ibnul Hasan IQRA UniversityPakistan



Banking & Financial InstitutesBanks can finance funds from their deposits on under

Modaraba in which Banks can be Modarib for theirDepositors & Rab-al-Maal to Modarib seeking financingIn 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 differentprofit sharing.

Both the contract should be matured on the pre agreeddate and bank cannot pay-off without realizing the profitof its financing or from own source.




Banks can specify the purpose of Modaraba tosafeguard depositors capital.

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

Banks are not permitted to ask for guarantee Against the loss of capital, but participate in thetransaction 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.




Modaraba Financing is an ideal way to 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




Risk FactorModaraba is Small & Medium term financing having

Risk factor appraise on Medium & High Level.

Modarib Risk is higher then Rab-al-Maal due to theInvolvement of Time, Efforts, Experience &Reputation

which never recover as money can be recover if loss isreported.

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 categoriesof the Riba.




Summaryn A profit-sharing agreement between two parties, in

which one provides the finance, and the otherprovides entrepreneurial and management skills.

n Profits are divided on a pre-determined ratio.

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


Morabaha Financing to Modarib for furniture order to Value



Morabaha Financing to Modarib for furniture order to Value1,000,000 at Management Fee 10% of Gross profit and ProfitSharing 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 Profit

Rab-al Maal Profit 108,000 54% of Gross Profit




Thank You

You are welcome for Question related to the

topic

07/01/13 34Yousuf Ibnul Hasan IQRA UniversityPakistan

modaraba - participation between money and ability - by yousuf ibnul hasan - icompetences ifc2012

Documents