Definition: This is a kind of partnership where one partner gives money to another for investing in a commercial enterprise.

The investment comes from the first partner who is called "Rab-ul-Maal" while the management and work is an exclusive responsibility of the other, who is called "Mudarib" and the profits generated are shared in a predetermined ratio. Types of Mudarabah There are 2 types of Mudarabah namely: 1. Al Mudarabah Al Muqayyadah: Rab-ul-Maal may specify a particular business or a particular place for the mudarib, in which case he shall invest the money in that particular business or place. This is called Al Mudarabah Al Muqayyadah (restricted Mudarabah). 2. Al Mudarabah Al Mutlaqah: However if Rab-ul-maal gives full freedom to Mudarib to undertake whatever business he deems fit, this is called Al Mudarabah Al Mutlaqah (unrestricted Mudarabah). However Mudarib cannot, without the consent of Rab-ul-Maal, lend money to anyone. Mudarib is authorized to do anything, which is normally done in the course of business. However if they want to have an extraordinary work, which is beyond the normal routine of the traders, he cannot do so without express permission from Rab-ul-Maal. He is also not authorized to: a) keep another Mudarib or a partner b) mix his own investment in that particular Modarabah without the consent of Rab-ul Maal. Conditions of Offer & Acceptance are applicable to both. A Rab-ul-Maal can contract Mudarabah with more than one person through a single transaction. It means that he can offer his money to 'A' and 'B' both so that each one of them can act for him as Mudarib and the capital of the Mudarabah shall be utilized by both of them jointly, and the share of the Mudarib. Difference between Musharakah and Mudarabah Musharakah Mudarabah 1. All partners invest. Only Rab-ul-Maal invests. 2. All partners participate in the management of the business and can work for it. Rab-ul-maal has no right to participate in the management which is carried out by the Mudarib only. 3. All partners share the loss to the extent of the ratio of their investment. Only Rab-ul-maal suffers loss because the Mudarib does not invest anything. However this is subject to a condition that the Mudarib has worked with due diligence. 4. The liability of the partners is normally unlimited. If the liabilities of business exceed its assets and the business goes in liquidation, all the exceeding liabilities shall be borne pro rata by all partners. But if the partners agree that no partner shall incur any debt during the course of business, then the exceeding liabilities shall be borne by that partner alone who has incurred a debt on the business in violation of the aforesaid condition. The liability of Rab-ul-maal is limited to his investment unless he has permitted the Mudarib to incur debts on his behalf. As soon as the partners mix up their capital in a joint pool, all the assets become jointly owned

by all of them according to the proportion of their respective investment. All partners benefit from the appreciation in the value of the assets even if profit has not accrued through sales. The goods purchased by the Mudarib are solely owned by Rab-ul-maal and the Mudarib can earn his share in the profit only in case he sells the goods profitably. Investment In Mudarabah, Rab-ul-maal provides the investment and Mudarib the management therefore the Rab-ul-maal should hand over the agreed investment to Mudarib and leaves everything to Mudarib with no interference from his side but he has the authority to: a) Oversee the Mudarib's activities and b) Work with Mudarib if the Mudarib consents. In what form should the capital be? Should it be liquid or non-liquid assets like equipment, land etc. can these form a capital? The basic principle is that the capital in Mudarabah is valid just the way as it is in Shirkah which according to Hanafi fiqh should be in liquid form but according to other scholars equipment, land etc can also be included as capital. However all agree on the following: Assets other than cash can be used as an intermediate step, meaning: However this is subject to the determination of exact amount of the assets before it is used for Mudarabah. If the assets are not correctly evaluated, the Mudarabah is not valid. Mudarabah Expenses The Mudarib shares profit of the Mudarabah as per agreed rate with the investor but his expenses like meals, clothing, conveyance and medical are not borne by Mudarabah. However, if he is traveling on business and is overstaying the night, then the above expenses shall be covered from capital. If Mudarib goes for a journey which constitutes Safar-e-Sharai (more than 48 miles) but does not overstay the night, his expenses will not be borne by Mudarabah. All expenses which are incidental to the Mudarabah's function like wages of employees/workers or Commission in buying/selling or stitching, dyeing expenses etc have to be paid by the Mudarabah. However all expenses will be included in the cost of commodities which Mudarib is selling for eg. if he is selling ready made garments then the stitching, dyeing, washing expenses etc. can be included by the Mudarib in the total cost of the garments. If the Mudarib manages the Mudarabah within his city , he will not be allowed any expenses, only his profit share. Similarly, if he keeps an employee, this employee will not be allowed any expenses, just his salary. If the Mudarabah agreement becomes Fasid due to any reason, the Mudarib's status will be like an employee, meaning:

a) whether he is traveling or doing business in his city, will not be entitled to any expense such as meals, conveyance, clothing, medicine etc. b) he will not be sharing any profit and will just get Ujrat-e-Misl (ordinary pay) for his job.

Distribution of Profit & Loss It is necessary for the validity of Mudarabah that the parties agree, right at the beginning, on a definite proportion of the actual profit to which each one of them is entitled. The Shariah has prescribed no particular proportion; rather it has been left to their mutual consent. They can share the profit in equal proportions and they can also allocate different proportions for Rab-ul-Maal and Mudarib. However in extreme case where the parties have not predetermined the ratio of profit, the profit will be calculated at 50:50. The Mudarib & Rab-ul-Maal cannot allocate a lump sum amount of profit for any party nor can they determine the share of any party at a specific rate tied up with the capital. For example, if the capital is Rs.100,000/-, they cannot agree on a condition that Rs.10,000 out of the profit shall be the share of the Mudarib nor can they say that 20% of the capital shall be given to Rab-ulMaal. However they can agree that 40% of the actual profit shall go to the Mudarib and 60% to the Rab-ul-Maal or vice versa. It is also allowed that different proportions are agreed in different situations. For example, the Rab-ul-Maal can say to Mudarib "If you trade in wheat, you will get 50% of the profit and if you trade in flour, you will have 33% of the profit". Similarly, he can say "If you do the business in your town, you will be entitled to 30% of the profit and if you do it in another town, your share will be 50% of the profit". Apart from the agreed proportion of the profit, as determined in the above manner, the Mudarib cannot claim any periodical salary or a fee or remuneration for the work done by him for the Mudarabah. All schools of Islamic Fiqh are unanimous on this point. However, Imam Ahmad has allowed for the Mudarib to draw his daily expenses of food only from the Mudarabah Account. The Hanafi jurists restrict this right of the Mudarib only to a situation when he is on a business trip outside his own city. In this case he can claim his personal expenses, accommodation, food, etc. but he is not entitled to get anything as daily allowances when he is in his own city. If the business has incurred loss in some transactions and has gained profit in some others, the profit shall be used to offset the loss at the first instance, then the remainder, if any, shall be distributed between the parties according to the agreed ratio. The Mudarabah becomes void (Fasid) if the profit is fixed in any way. In this case, the entire amount (Profit + Capital) will be the Rab-ul-Maal's. The Mudarib will just be an employee earning Ujrat-e-Misl. The remaining amount will be called (Profit).

This profit will be shared in the agreed (pre-agreed) ratio. Roles of the Mudarib: Ameen (Trustee): To look after the investment responsibly, except in case of natural calamities. Wakeel (Agent) : To purchase from the funds provided by Rab-ul-Maal Shareek (Partner): Sharing in any profit Zamin (Liable): To provide for the loss suffered by the Mudarabah due to any act on his part. Ajeer (Employee): When the Mudarabah gets Fasid due to any reason, the Mudarib is entitled to only the salary, Ujrat-e-Misl. In case there is a loss, the Mudarib will not even get the Ujrat-e-Misl. Termination of Mudarabah The Mudarabah will stand terminated when the period specified in the contract expires. It can also be terminated any time by either of the two parties by giving notice. In case Rab-ul-Maal has terminated services of Mudarib, he will continue to act as Mudarib until he is informed of the same and all his acts will form part of Mudarabah. If all assets of the Mudarabah are in cash form at the time of termination, and some profit has been earned on the principal amount, it shall be distributed between the parties according to the agreed ratio. However, if the assets of Mudarabah are not in cash form, it will be sold and liquidated so that the actual profit may be determined. All loans and payables of Mudarabah will be recovered. The provisional profit earned by Mudarib and Rab-ul-Maal will also be taken into account and when total capital is drawn, the principal amount invested by Rab-ul-Maal will be given to him, balance will be called profit which will be distributed between Mudarib and Rabul-Maal at the agreed ratio. If no balance is left, Mudarib will not get anything. If the principal amount is not recovered fully, then the profit shared by Mudarib and Rab-ul-Maal during the term of Mudarabah will be withdrawn to pay the principal amount to Rab-ul-Maal. The balance will be profit, which will be distributed between Mudarib and Rab-ul-Maal. In this case too if no balance is left, Mudarib will not get anything. Uses Of Musharakah / Mudarabah : These modes can be used in the following areas (or can replace them according to Shariah rules). Asset Side Financing

Short/medium/long - term financing Project financing Small & medium enterprises setup financing Large enterprise financing Import financing

Import bills drawn under import letters of credit Inland bills drawn under inland letters of credit Bridge financing LC without margin (for Mudarba) LC with margin (for Musharakah) Export financing (Pre-shipment financing) Working capital financing Running accounts financing / short term advances

Liability Side Financing

For current /saving/mahana amdani/investment accounts (deposit giving Profit based on Musharkah / Mudarabah - with predetermined ratio ) Inter- Bank lending / borrowing Term Finance Certificates & Certificate of Investment T-Bill and Federal Investment Bonds / Debenture. Securitization for large projects (based on Musharkah) Certificate of Investment based on Murabahah (Eg: Al Meezan Riba Free ) Islamic Musharakah bonds (based on projects requiring large amounts - profit based on the return from the project)

Mudarabah
Mudarabah is a special kind of partnership where one partner providers the capital (rabb-ulmaal) to the other (mudarib) for investment in a commercial enterprise. According to Mufti Taqi Usmani, a mudarabah arrangement differs from the musharakah in five major ways: 1. The investment in musharakah comes from all the partners, while in mudarabah, investment is the sole responsibility of rabb-ul-maal. 2. In musharakah, all the partners can participate in the management of the business and can work for it, while in mudarabah, the rabb-ul-maal has no right to participate in the management which is carried out by the mudarib only. 3. In musharakah all the partners share the loss to the extent of the ratio of their investment while in mudarabah the loss, if any, is suffered by the rabb-ul-mal only, because the mudarib does not invest anything. His loss is restricted to the fact that his labor has gone in vain and his work has not brought any fruit to him. However, this principle is subject to a condition that the mudarib has worked with due diligence which is normally required for the business of that type. If he has worked with negligence or has committed dishonesty, he shall be liable for the loss caused by his negligence or misconduct. 4. The liability of the partners in musharakah is normally unlimited. Therefore, if the liabilities of the business exceed its assets and the business goes in liquidation, all the exceeding liabilities shall be borne pro rata by all the partners. However, if all the partners have agreed that no partner shall incur any debt during the course of business, then the exceeding liabilities shall be borne by that partner alone who has incurred a debt on the business in violation of the aforesaid condition. Contrary to this is the case of mudarabah. Here the liability of rabb-ul-maal is limited to his investment, unless he has permitted the mudarib to incur debts on his behalf. 5. In musharakah, as soon as the partners mix up their capital in a joint pool, all the assets of the musharakah become jointly owned by all of them according to the proportion of their respective investment. Therefore, each one of them can benefit from the appreciation in the value of the assets, even if profit has not accrued through sales. The case of mudarabah is different. Here all the goods purchased by the mudarib are solely owned by the rabb-ul-maal, and the mudarib can earn his share in the profit only in case he sells the goods profitably. Therefore, he is not entitled to claim his share in the assets themselves, even if their value has increased. Types of Mudarabah 1. The rabb-ul-maal may specify a business in which to invest, in which case the mudarib is restricted only to such business as pointed out by rabb-ul-maal. This is called restricted mudarabah or al-mudarabah al-muqayyadah. 2. If rabb-ul-maal has not specified a business in which to invest, it is considered an unrestricted mudarabah or al-mudarabah al-mutalaqah.

Distribution of Profit The distribution of profit must be pre-determined by the two parties. Furthermore, the amount of profit ascribed to either of the parties must be independent of the capital amount, dependent solely on the actual profit realized by the commercial enterprise. That is, the profit assigned to a party cannot be a percentage of capital amount contributed as that would be considered a fixed return, or interest. The profit assigned to either of the parties cannot be a lumpsum amount either as this would also constitute interest. As such, the only determination of profit distribution that is permissible is based on the actual profit earned by the enterprise. The Shari'ah does not restrict or specify proportions to be distributed between the parties, leaving it to the best judgement of the two independent parties. Termination of Mudarabah The mudarabah contract can be terminated by either of the two parties at any time as long as a notice, per the contract terms, is given to the other party. Furthermore, Hanafi and Hanbali jurists are of the opinion that a maximum term of the mudarabah contract can be set, whereafter the contract is terminated automatically. The Shafe'i and Maleki jurists are of the opinion that no term restriction can be added to the mudarabah contract. All jurists agree that one may not specify a minimum term of the mudarabah contract.

The most important objective of Islamic banking system to establish equity and justice in arena of business and ensure equitable distribution of wealth and income. The sources of fund of the Islamic Bank include paid up capital and deposits. Deposits mobilized by the Islamic Bank may be categorized into three: Current deposits, ordinary savings deposits and investment term deposits (Chakma, Islami and Karmker, 1995). Like conventional banking no return is payable on current deposits while ordinary savings deposit holders are entitled to profit earned according to the return realized by the Bank on investment? / use of proceeds of such deposits (chakma, Islami and Karmker, 1995). Investment on term deposit holders are entitled to proceeds from investment on the basis of signed agreement.? Islamic Bank?s modes of financing can be broadly classified into equity and debt instruments. While equity instruments are Mudarabah and Musharakah, debt-instruments arise from sale transactions. These fixed income instruments include Murabahah (cost-plus or mark-up sale), Bai-muajjal (price-deffered sale), Istisna / Salam (object deffered sale or prepaid sale) and Ijarah (leasing ) (khan, 1991, Khalf and????? Khan, 1992, Ahmed, 2004 and Usmani, 1999). We outline the basic concepts and properties of these mode of investment below: (a)?????? Musharakah: Sharikah is a partnership between parties in which financial capital and / or labor act as shared inputs and profit is distributed according to the capital share of the partners or in some agreed upon ratio. The loss, however, is distributed according to the share of the capital. Though there can be different kinds of partnerships based on money, labor, and reputation, one case of Sharikah is participation financing or Musharakah in which partners share both in capital and management of the business enterprise. Thus partners in Musharakah have both control right and claims to the profit. (b)????? Mudarabah (or qirad or muqadarah) : Mudarabah is similar to the concept of silent partnership in which financial capital is provided by one or more partner(s) (Rabul mal) and the work is carried out by the other partner(s) Mudarib. The funds are used in some activity for a fixed period of time (Siddiqi, 1987). The financiers and the managers of the project share the profits in an agreed upon ratio. The loss, however, is borne by the financiers according to their share in the capital. The manager?s loss is not getting any reward for his services, as the ?Rabul mal? is sleeping partner, he/she has a claim on profit without any say in the management of the firm. (c)?????? Murabahah / Bai Muajjal : Murabahah is a sale contract at a mark-up. The seller adds a profit component (mark-up) to the cost of the item being sold. When the purchase is on credit and the payment for a good / asset is delayed, the contract is called Bai-muajjal. A variant would be a sale where the payments are made in installments. These contracts create debt that can have both short and long ?term tenors. In these debt contracts, the supplier of the good has claims on a fixed amount that must be paid before arriving at profits. ?(d) Salam / Istisna : ?Salam sale? is an advance purchase or product-deferred? sale of a generic goods . In a Salam contract, the buyer of a product pays in advance for a goods that is produced and delivered later. The contract applies mainly for agricultural goods.

e)?????? Istisna contract is similar to the Salam contract with the difference ?? that in Istisna the goods is produced according to the specifications given by the buyer. This applies mainly to manufactured goods and ????????? real estate. Furthermore, in Istisna the payments can be made in installments over time with the progression of the production. ??? (e)??? Ijarah : Ijarah is a lease contract in which the lessee pays rent to the lessor for use of asset (usufruct). In Ijarah the ownership and the right to use an asset (usufruct) are separated. It falls under a sale-based contract as it involves the sale of asset( usufructs). A lease contract that results in the transfer of an asset to the lessee at the end of the contract is called ?Ijarah? wa iqtina? or ?Ijarah muntahia bittamleek?. ??Ijarah wa iqtina? combine sale and leasing contracts and use the hire-purchase or rent-sharing principles. The ownership of the asset is transferred to the lessee as payments for the asset are also made along with the rent. ?After the contract period is over, the lessee assumes the ownership of the asset.? Note that in a simple Ijarah, the rental payments made are captured in the current liabilities in the ?iqtinah?, however, the leased item would be in the form of a debt during the period of lease