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
Return on capital is not
should be deposited in cash with the Modarib in full trust and confidence
capital of Modaraba
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
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
BASHI 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.
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.
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
The essential conditions of Modaraba mode of financing
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 Rabal-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
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.
Classification of 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
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 Rabal-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-alMaal 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
Oh you misuse your wealth in selfimportance 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.”
Al Mighty Allah instruct
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