Islamic

Financial
System
Financial
Products
 PART 2
“MODARABA”
RESTRICTIONS
AND
PERMISSIONS
 Liability be a capital of
Modaraba or Capital only be
cash?
 Liabilities cannot be the
capital.
 Return on capital is not
guaranteed.
 The capital of Modaraba
should be deposited in cash
with the Modarib in full trust
and confidence
 It should be of known in quality and
quantity.
 Ignorance lead to differences and
disputes.
 Profit Sharing should be at maturity
of transaction.
 It should not be paid in parts before
the maturity of the transaction
because 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
 Imam Malik
 Refund of liabilities that could be
delayed purposely for making more
money is prohibited.
 Debtor has to refund his debts and
creditor has a choice to invest
money that is returned on maturity
of Modaraba. It cannot be Roll-over
under same agreement.
 Modarib 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
 ALBASHI says that it
might be Modarib
intention for benefit in
order to prolong payment
of his liabilities which
cannot be permitted.
 Almost all scholars have
forbidden the usage of
debts as Modaraba
capital.
 IBN KADAMA
 There is no wrongdoing if the debts
are taken as Modaraba Capital
with the permission of Rab-al-Maal
who has settled the price with a clear
conscience”.
 In another way, 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 it is the Participation of
Rab-al-Maal.
 The debts remain in the possession of debtor.

 The essential conditions of
Modaraba mode of
financing
 For differentiating Modaraba mode of
financing and interest mode of loans,
principals should be kept in mind before
establishing a financial transaction that in
the normal banking and lending practice,
money is made available to the borrower
against the guaranteed return of principle
with profit.
 In such practice collateral is the cover
against the lending that ultimately
 In Modaraba, profit and loss is the end of
the contract and profit and loss sharing is
the key
 In case of a loss, the 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
 Rab-al-Maal interference in the working
disrupts the connection between Capital
and Modarib. But the cooperation of Rab-
al-Maal is accepted.
 Relationship as employee and employer
between Rab-al-Maal. Modarib invalidate
Modaraba transaction.
 Share of profit has to be pre-agreed.
 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
 The ignorance and discriminative
distribution share of profit invalidates the
Modaraba. Profit is the essence of
contract and its ignorance invalidate the
terms of the contract.
 Profit has to be divided by half or by third
after deduction of pre-agreed Cost and
Expenses including Modarib fee.
 Rab-al-Maal gets the share of his Capital
investment and Modarib gets the share
for his efforts.
 In case of loss, Modarib has no right for
his share, as Rab-al-Maal cannot claim his
 Classification of Modaraba
 Modaraba can be classified as, General
purpose Modaraba and Specific
Modaraba.
 In General purpose Modaraba, the
operation is not restricted to activity,
partner and place.
 General purpose Modaraba is 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.
 Multiple Modaraba
 One Rab-al-Maal finance several Modarib
at one time with different terms and
conditions of contract.
 Several Rab-al-Maal finance to one
Modarib as individual or as in group by
pool of capital 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 and each Modarib using the
 HAKIM IBN HAZAM
 Close Companion of Prophet (May
Peace be upon him) Says and it has
to be taken as the authentic
condition in the present practices
“ I lay down conditions in
Modaraba that if my money is
left in a humid place or
taken across the sea or
washed between fast-moving
water, Modarib will be
 Fuqaha Belief
 All activities pertain to Modaraba should
be agreed in witting including functions
and operation in proper record, supported
with documentary proof.
 Modarib can invest the 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
 Banking & Financial
Institutes
 Banks can finance their funds or from
their deposits for financing someone to
carry out Modaraba.
 Banks can be Modarib for their Depositors
and Rab-al-Maal for Modarib seeking
financing.
 The contract shall be two separate.
 The first contract with the Depositor as
Modarib and second contract with
Modarib whom financed.
 The contracts can have different terms
and different profit sharing.
 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 can be in consolidation with
other mode of financing permitted like
 Al Mighty Allah
instruct
Oh you misuse your wealth in self-
importance among them. This wealth
should be used for trade on mutual
consent”. Those who believe in Allah should
observe their duty to Allah and give up what
remains from Riba, if they are true
believers. If they do not, then they are
warned for a war with Allah and his
Prophet (Peace be upon him) and if you ask
forgiveness, then you have your principal
without interest. Wrong not and you shall
not be wronged.”
 Summary
 A profit-sharing agreement between two
parties, in which one provides the
finance, and the other provides
entrepreneurial and management skills.
 Profits are divided on a pre-determined
ratio.
 Losses are borne by the provider of
capital and Modarib loose its reputation,
time and efforts.
 Financing is made in the absolute trust on
the skills, experience, reputation,
capability and feasibility of Modaraba