MODARBA: DEFINITION

An Islamic Finance Technique / Instrument

/ Contract / Mode of Non-Interest Islamic
Financial System
In which
A Lender / Silent Partner / Financier
Investor /RAB-AL-MAAL
And
A Borrower / Investment Manager
/MODARIB / AAMIL / Entrepreneur
Establish A Profit-Sharing Partnership
To undertake a business or investment
activity
 MODARBA: FEATURES
 It allows for funds to be provided to a party
seeking an investment
 One party entrusts money to another party
for the purpose of carrying out a business
 A person participates with his money and
another with his efforts and/or skill,
professional, managerial, and technical
know-how, labor or expertise
 The capital provided by RAB-AL-MAAL is
derived from Sharia compliant means
 MODARIB must invest the funds on a Sharia-
compliant basis, not in prohibited products or
activities- tobacco, alcohol, or gambling
 MODARBA: FEATURES
 Role of RAB-AL-MAAL is restricted to provide
finance in the business and he (or his agent)
cannot take part in the business [a complete
lack of operational control of the venture at
any time]
 MODARIB Puts only his time and effort at
risk and does not contribute any capital
 The MODARIB or AAMIL is completely
responsible for all the affairs of the business
 MODARIB earns a fee that is deducted from
any profits for managing the funds or
business
 MODARBA: FEATURES
PROFIT SHARING BETWEEN PARTIES AND
LIQUIDATION SCENARIO
AT THE END OF THE CONTRACT /
COMPLETION OF THE BUSINESS ACTIVITY
 The capital (principal) is repaid to the
financier along with the pre-agreed share of
the profits, if any
 At the same time, the entrepreneur keeps the
remaining profit as compensation for their
ideas and services
 MODARBA: FEATURES
 Though the money will be paid back to the
investor at the successful completion of the
contract, it is different to a conventional loan
as there can be no interest, which is
prohibited in Islamic finance
 The financier does not have a right to
demand a fixed rate of returns or entitlement
to any addition in the principal sum unless
the risk involved in the venture is shared
 MODARBA: FEATURES
 The division of profit must necessarily be on a
proportional basis [a pre-agreed ratio]
 The division of profit cannot be a lump sum or
guaranteed returns
 An agreed split of profits can be determined
at the outset of the contract, which will be the
split after the taxes and expenses
 MODARBA: FEATURES
 The Financial Loss if any will be borne by
RAB-AL-MAAL (financier) only [who
contributed all the capital]
 MODARIB is not responsible for any losses of
the venture. Losses, are borne entirely by the
RAB-AL-MAAL
 The reason is that since AAMIL (entrepreneur)
has not invested in the business hence his loss
will be in the form of loss of his invested time,
effort and labor which he has lost
 MODARBA: FEATURES
 If the MODARIB has been reckless, negligent
or fraudulent, and this has caused the loss of
capital, then the MODARIB will have to pay
back the capital to the RAB-AL-MAAL
 In the event the MODARIB pursues something
which is not specified in the contract and as a
result the capital is lost, the MODARIB will
have to compensate the RAB-AL-MAAL
 MODARBA: USES
1. To manage investment accounts
Bank is the MODARIB
Depositor is the RAB-AL-MAAL
The bank manages the funds in
exchange for a fee
 The bank is not liable for any losses that
may occur (other than for negligence)
At the end of the contract, the bank
shall return the capital (plus the
depositor's share of any profits)
minus any losses and fees
 MODARBA: USES
2. As a financing mechanism
The bank is the RAB-AL-MAAL
The borrower is the MODARIB
The borrower manages the funds in
exchange for a fee
 The borrower is not liable for losses that
may occur (other than for breaches of
the agreement and negligence)
The borrower is obligated to return
the capital to the bank minus losses
and fees
Co-operative Society
 Co-operative Society: Definition
A co – operative society is a
voluntary association of persons of
moderate means , who unite
together to protect and promote
their common economic and social
interests

It is based on the principles of

collective effort and mutual self-help
 Co-operative Society: Features
 It represents an attempt by poor
and weaker persons to protect
themselves against the
exploitation and oppression of
the economically strong
 Registered under Co-operative
Societies Act 1925
 Voluntary Association
 Number of Members
 Co-operative Society: Features
 Registration
 State Control
 Return on Capital Investment
 Democratic Management
 Equality of Voting Rights
 Limited Liability
 Separate legal existence and
Stability
 Co-operative Society: Features
 They raise capital among
themselves
 Annual Fees
 Can get quick loans from
Cooperative Banks
 Managing Committee
 No profit no loss
 Profit is shared among members
 Return on Capital Investment
 Cheaper products/ Low prices
 Co-operative Society: Features
 Skipping Middlemen
 Economies of Large Scale
 Possibility of high profits
 No hoarding or black marketing
 Limited Owned Capital
 Inefficiency In Management
 Difference of opinion
 Conflicts Among Members
 Types of Cooperative Societies
 Consumers’ Co-Operative Societies
 Producers’ Co-Operative Societies
 Co-Operative Marketing Societies
 Credit Co-Operative Societies
 Agricultural or Farmers’ Co-
Operative Societies
 Cooperative Housing Societies