ISLAMIC FINANCIAL SYSTEM

Riba Free Mode of Financing

Part 1 MODARABA
Modaraba Commenda Qarad Three distinct concepts appropriate For Riba Free Economic Activities.

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-AlRab-Al-Maal
The worker is called

Modarib

Commenda
It is a pre-Islamic word from Italy pre-

Qarad
It is a Hegari word generally found in Imam Maliks and 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.

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 also 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 Qarad, which Qarad, 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. 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 (Peace Him) trading trip to Syria and used Modaraba method by making a contract with Hazrat Khatija, who financed Khatija, the transactions before the Prophet Mohammad (Peace Be Upon Him) married her. Him) Therefore, Modaraba is treated as Sunnah and Ijma. 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.

The Great Fuqaha

(Religious
Scholars)

Modaraba on the basis of Wages (fixed return) 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 Wages it involves an unknown salary for an unknown amount of work. Wages is only allowed in accordance with the teachings of the Holy Quran, Sunnah and the Ijma. Ijma.

IBNE GHAZI says Modaraba is permissible as an exception to Gharar (fraud) and unknown remuneration. IBNE TAYMIYA Modaraba is valid on the basis of Wages. Fuqaha had invalidated Modaraba on the basis of Wages.

Modaraba falls in the partnership type of contract, which has a vague similarity to Mufawadah. It differs Mufawadah. because money is the main objective in Modaraba and work in the second. Rab-alRab-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 Rab-althe cause of loss, whereas, in case of any negligence or misappropriation or a purposeful mistake by the Modarib, Modarib, financier can claim the financing.

AlAl-Baghis 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. 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. Shariah. There is no harm in investigating the cause of loss in Modaraba. Modaraba. Modarib is bound to provide the justification to the satisfaction of Rab-alRab-alMaal on loss. loss. In case of any dispute over the causes of a loss, the jurists permit the arbitration clause in the agreement.

As the Modaraba mode 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, Sunna, different scholars have interpreted them differently.

The Four School of Thoughts

IMAM ABU HANIFA He was flexible on the conditions of Modaraba. 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 Modaraba is treated as the most rational approach

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 conditions and differed on some.

 Capital is the soul of Modaraba and it

should be in the form of currency instead of a commodity.

 Currency is the origin of price and value

of goods.


The Market value of currency does

not change that is why almost all Fuqaha had invalidated Modaraba with commodities. This condition is explained an example:

Accordance to Prophets (Peace Be Upon Him) (Peace 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 fixed 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 permitted for the capital of Modaraba

Can Liability be a capital of Modaraba or Capital can 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 Modaraba becomes invalid if the return of finance is guaranteed/ or fixed.

   

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 and trust among the partners. It is not justice that all profit goes to one and other suffers.

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 Rollagreement. 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 mutually agreed upon.

AL 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.

IBN KADAMA


 

There is no wrongdoing if the debts are taken as Modaraba Capital with the permission of Rab-al-Maal Rab-alwho 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. Rab-al-Maal. The debts remain in the possession of debtor. Participation with Cash is different from debts, as it remains the property of Rab-al-Maal even when it is Rab-al-

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 liquidated in case of loss by lender.

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 Rab-alloss 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. Rab-al-Maal. According to Imam Ibn Hambal, this condition Hambal, satisfies the Modarib for his free actions in regard to Capital utilization and can take better way to earn best.

 

Rab-alRab-al-Maal interference in the working disrupts the connection between Capital and Modarib. But the cooperation of Rab-al-Maal is accepted. Rab-alRelationship as employee and employer between RabRabal-Maal & Modarib invalidate Modaraba transaction. alShare/Ratio of profit has to be pre-agreed. preModarib 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 preincorporated in the agreement. Rab-alRab-al-Maal cannot impose the amount of percentage .

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 preModarib fee. Rab-alRab-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-alRab-al-Maal cannot claim his capital.  Assets shall be the right of Rab-al-Maal. Rab-al-Maal.

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-alRab-alRab-al-Maal empowers, Modarib to act, invest or activate capital for earning profit.

Multiple Modaraba


One Rab-al-Maal finance several Modarib at one Rab-altime with different terms and conditions of contract. Several Rab-al-Maal finance to one Modarib as Rab-alindividual or as in group by pool of capital under single agreement between Modarib and Rab-alRab-al-Mall either in group or by proxy to single person in representation.

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, fastModarib will be responsible for the nonnoncompliance of the conditions.

Fuqaha Belief


All activities pertaining to Modaraba should be agreed in writing 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 Rab-albut keeping him in confidence. Modarib status could be change to Rab-al-Maal and Rab-alRab-alRab-al-Maal could be Modarib too with the condition of contract and agreement in transaction.

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 RabRabal-Maal for Modarib seeking financing. alThe 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. Both the contract should be matured on the pre agreed date and bank cannot pay-off without realizing pay-

Banks can specify the purpose of Modaraba to safeguard depositors capital. Bank can enter into a General Purpose Modaraba. But in case of being a Rab-al-Maal it only enters into Rab-alSpecific 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 Musharaka, Morabaha, Ijarah, Ijarah, Havania, Havania, Musaqa or Mussaja. Mussaja.