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6..Riba Free Financial Product Modaraba Part 1

6..Riba Free Financial Product Modaraba Part 1

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05/10/2014

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Riba Free Mode of Financing

ISLAMIC FINANCIAL SYSTEM

Modaraba Commenda Qarad Three distinct concepts appropriate For Riba Free Economic

Part 1 MODARABA

MODARABA
Three names with an ancient background of transactions used for economic activities classified as business activities under a contract of

“Money

and Ability”

The owner of money, the financier is called

Rab-Al-Maal
The worker is called

Modarib

Cornenda
It is a pre-Islamic word from Italy

Qarad
It is a Hegari word generally found in Imam Malik’s and Imam Shafei’s schools of thought.

Modaraba
It is of Iraqi origin and found mostly in Imam Abu Hanifa’s  and Imam Ibn

According to Fuqaha Modaraba
It is a partnership contract between two parties, persons or organizations in which one brings the capital, the other shares his time and skill for a specified project or transaction. Upon the maturity, profit is divided according to the agreement, which will either be equal or one third, in proportion. In case of loss the Financier looses the Capital Investment and Skill lose its Time, Efforts and Reputation

The history of Modaraba reveals that the business under the concept of Modaraba was in practice before the rise of Islam, emerging from Italian city of Rome, which was the center for trade and culture in the Christian world.

When Christian traders entered the Arab world, they chose Baghdad as the place for business. As a capital of Iraq, Baghdad was the center of trade, education and culture. Business communities of Iraq acknowledged the Commenda mode of business and started practicing it.

Iraq developed the system and named it Quard, which spread in the Arab and Persian world, and eventually penetrated to all places where the religion of Islam reached, either through traders or by the Muslim conquerors.
Credit goes to Islam in the developing a proper shape for the concept of Modaraba by prohibiting Riba in financial dealings.

The Holy Quran says, “Whereas Allah permitted trading forbid Riba ”. The Prophet Mohammad (Peace Be Upon Him) left on a trading trip to Syria and used Modaraba method by making a contract with Hazrat Khadija, who financed the transactions before the Prophet Mohammad (Peace Be Upon Him) married her. Therefore, Modaraba is treated as Sunnah and Ijma.

In Islamic 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 financier loses the money used to finance and the worker loses his time, efforts and talent.

Islamic jurisprudence
show the legal demonstration in accordance with the Quran, Hadith, Seerat of the Prophet (May Peace Be Upon Him) and the practice of Ashab (companions of Prophet
May Peace Be Upon Him).

The Great Fuqaha
(Religious
Scholars)

Modaraba on the basis of Qiyas (fixed return or wages) is not allowed. The reason for this is the unknown salary for an unknown activity.

Al KASSANI
says

Modaraba becomes invalid if it is on the basis of Qiyas as it involves an unknown salary for an unknown amount of work. Qiyas is only allowed in accordance with the teachings of the Holy Quran, Sunnah and the Ijma..

IBNE TAYMIYA  
Modaraba is valid on the basis of Qayas. Fuqaha had invalidated Modaraba on the basis of Qayas (wages).

IBNE GHAZI says
Modaraba is permissible as an exception to Gharar (fraud) and unknown remuneration

Modaraba falls in the partnership type of contract, which has a vague similarity to Mufawadah. It differs because money is the main objective in Modaraba and work in the second. Rab-al-Maal (the financier) does not have to take an active part in the daily operations as in the case of employment.

There will be no return for Modarib if a profit does not result in the transaction. In case of loss Rab-al-Maal has the right to investigate the cause of loss, whereas, in case of any negligence or misappropriation or a purposeful mistake by the Modarib, financier can claim the financing.

Al-Baghi’s definition
“Money that can be fructifying through work

should not be lent for higher return, but can be traded for generating a profit”.

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.

Return on financing with a condition of profit & loss sharing is the legitimate and allowed by Shariah. There is no harm in investigating the cause of loss in Modaraba. Modarib is bound to provide the justification to the satisfaction of Rab-alMaal on loss. In case of any dispute over the causes of a loss, the jurists permit the arbitration clause in the agreement.

penetrated in the economic activities and Shariah accepted the mode, scholars laid down Modaraba conditions & rules. Though rules and conditions of Modaraba are in accordance with the teachings of the Holy Quran and Sunna, different

The Four School of Thoughts
IMAM ABU HANIFA He was flexible on the conditions of Modaraba. He was a trader and made several transoceanic voyages in connection with trading & preaching. He faced countless problems of hardship of traveling, Imam Abu Hanifa justified the flexibility in certain conditions. His teaching on the legal framework of

IMAM MALIK and IMAM SHAFEI
The two were more rigid in terms of the limitations of economic activities. They had adhered to the Shariah rules theoretically. The Four Imams agreed on certain

 Capital is the soul of

Modaraba and it should be in the form of currency instead of a commodity. and value of goods.

 Currency is the origin of price

currency does not change that is why almost all Fuqaha had invalidated Modaraba with commodities.

The Market value of

• • • • • • • • •

Superior quality dates presented to Prophet (Peace Be Upon Him). These dates obtained in exchange with inferior quality dates. Prophet (Peace Be Upon Him) refused to accept the gift and asked to return the superior dates to its original owner. Prophet (Peace Be Upon Him) stressed on sale of inferior dates, first. Then, with the amount received from the sale of the inferior dates, superior dates were to be purchased. When transaction was completed, quantity was lesser then it was before. Accordance to Prophet’s (Peace Be Upon Him) a commodity cannot be the capital of a Modaraba contract. As far as coins are concerned, their restrictions are due to involvement of metal, which is also a commodity. Any commodity should be exchanged with another of the same quality and the same quantity, or it has to be bought through a currency that acts as a medium of exchange in the economic affairs of Islam. Islamic economics does not treat money as a commodity. All the Four Imams have forbidden Modaraba between coins and commodities

Metal Coins too cannot be the capital of Modaraba as coins are restricted due to involvement of metal, which is also a commodity. Commodity must be exchanged by another of same quality & quantity. It has to be bought through a currency that acts as a medium of exchange in the economic affairs of Islam. All Four Imams forbidden Modaraba between coins and commodities

With this clarification, it is set that the capital of the Modaraba must be in currency and not in coin form and the most preferred form of currency should be paper because it establishes value that is easily traded and the market value is infrequently changed

SAMARKANDI
has given his views that capital should consist of consummate value. Here is the reason:

Modaraba transaction with paper currency is permissible. Even gold, silver and precious metals are not

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