GUIDANCE
Islamic Financial
Products and Processes
Ameenullah Sheikh
[Link]@[Link]
GUIDANCE
MUDARABAAbility/Skill Financing
GUIDANCE
Mudaraba
Mudaraba is a partnership agreement in which one partner invests money while the other manages the business only. The one who provides capital is called Rabb-ul-Maal Recipient of the fund who provides know-how towards carrying out the venture is called Mudarib Rab-ul-Mal has authority to oversee the Mudaribs activities and work with Mudarib if the Mudarib consents Capital in Mudaraba may be either cash or in kind. If capital is in kind, its valuation is a prerequisite for validity of the Mudaraba
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Types of Mudaraba
Mudaraba
Restricted Mudaraba (Mudaraba-al-Muqayyada) Rabb-ul-Maal may specify a particular business for the Mudarib Mudarib can invest the money in that particular business only
Unrestricted Mudaraba (Mudaraba-al-Mutallaqah) Rabb-ul-Maal gives full freedom to Mudarib to undertake whatever business he deems fit Mudarib is authorized to do anything normally done in the course of business
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BASIC RULES
1. Capital of Modaraba
The capital of Modaraba should be clearly known to the contracting parties and defined in terms of quality and quantity in a manner that eliminates any possibility of uncertainty or ambiguity.
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Mixing of Funds by Mudarib
There may be situation where Mudarib also invests his money in the business For example, Natasha gives Aiza Rs.100,000/- in a contract of Mudaraba. And Aiza also added Rs. 50,000/- from her own pocket with the permission of Natasha.
This type of partnership will be treated as a combination of Mudaraba and Musharaka
Mudarib in this case may allocate for himself a certain percentage of profit as his share as Shareek and another percentage for his services as Mudarib
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Role of Mudarib
Ameen (Trustee) Wakeel (Agent) Shareek (Partner) Zamin (Liable) Ajeer (Employee)
Money given by Rabb-ul-maal (investor) and the assets required therewith are held by him as a trust While purchasing goods for trade, he is an agent of Rabbul-maal He is a partner of Rabb-ul-maal who shares the profit in agreed ratio If the enterprise suffers a loss due to his negligence or misconduct, he is liabel to compensate the loss If the Mudarabah becomes Void due to any reason, the Mudarib is entitled to get a fee for his services
GUIDANCE
Profit and Loss Sharing in Mudaraba
Parties in Mudaraba can share the profit in any ratio. Some incentives may, however, be given to the Mudarib as bonus It is necessary for the parties to agree on a definite profit sharing ratio at the time of entering into a Mudaraba contract In case the parties have entered into a Mudaraba without mentioning the profit percentages, the Mudaraba is instituted with an assumption of a 50-50% sharing Apart from the agreed proportion of the profit, the Mudarib cannot claim any periodical salary or a fee or remuneration for the work done by him for the Mudaraba
GUIDANCE
Profit and Loss Sharing in Mudaraba
Losses in the Modaraba
Losses occruing in the Modaraba shall only be sustained by the Rab-ul-Mal and not the Modarib. The Modarib shall only be responsible for the recovery of loss in the case of negligence and willful misconduct.
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Profit and Loss Sharing in Mudaraba
The Mudarib and Rabb-ul-Maal cannot allocate a lump sum amount of profit for each other nor they can determine their shares in profit as a fixed percentage of capital
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Profit & Loss Distribution
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-ul-Maal.
- 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.
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Collective & Running Mudaraba
Collective Mudarabah means a joint pool created by many investors and managed by a single Mudarib Direct expenses are borne by the Mudaraba pool while indirect expenses are borne by the Mudarib
Investors come in and leave at different dates e.g. Islamic Banks Profits are calculated on a daily product basis
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Mudaraba Termination
Termination of Mudarabah means that the Mudarib cannot purchase new goods for the Mudarabah. However, he may sell the existing goods that were purchased before termination. Mudaraba may be terminated at any time by notice of either one of the parties If the Mudaraba is for a particular term, it will be terminated at the end of such term
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Mudarabah in Banking
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FLOW OF MODARABA TRANSACTION BANK AS MODARIB
Deposit of surplus money
[Link] open account and deposit their surplus money on Modaraba basis.
[Link] enters into a Modaraba contract with depositor for sharing profit or loss from their investment in different projects.
Project
Depositors
Bank
[Link] advances the deposited money on profitable projects in order to provide return to depositors on their deposits.
[Link] on investment accrued and Profit is divided between Bank and Depositors on agreed ratio in case of Modaraba arrangement.
Profit accrued
[Link] deducts its expenses incurred as Modarib and provides return to depositors from the balance.
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FLOW OF MODARABA TRANSACTION BANK AS RAB-UL-MAL
THE PROJECT
Provision of capital
[Link] bank provides the capital and the Modarib provides the expertise for which a Modaraba contract is entered into between the two parties.
Proposals of work
Modarib
BANK
[Link] from the Modaraba is calculated periodically.
Share of profit
Share of profit
Recovery of capital
Accruing Profits
[Link] are distributed among the bank and the Modarib, in case of loss; it is borne solely by the bank.
Capital
[Link] bank recovers the capital from the Modaraba after distribution of profit or the agreement is renewed.
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Any Questions?? THANK YOU
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