You are on page 1of 28

ISLAMIC FINANCIAL

SYSTEM
Riba Free Mode
of
Financing
Part 1
MODARABA
Modaraba
Commenda
Qarad
Three distinct concepts
appropriate
For
Riba Free Economic
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-Al-Maal

The worker is called


Modarib
Cornenda
It is a pre-Islamic word from Italy

Qarad
It is a Hegari word generally found in Imam
Malik’s and Imam Shafei’s schools of
thought.

Modaraba
It is of Iraqi origin and found mostly in
Imam Abu Hanifa’s  and Imam Ibn
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
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
Quard, which 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.
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 trading trip to Syria and used Modaraba
method by making a contract with Hazrat
Khadija, who financed the transactions before the
Prophet Mohammad (Peace Be Upon Him)
married her. Therefore, Modaraba is
treated as Sunnah and 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.
Islamic jurisprudence
show the legal demonstration in
accordance with the Quran,
Hadith, Seerat of the Prophet
(May Peace Be Upon Him)
and the practice of Ashab
(companions of Prophet
May Peace Be Upon Him).
The Great Fuqaha
(Religious Scholars)

Modaraba on the basis of


Qiyas (fixed return or
wages) 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 Qiyas as it involves an
unknown salary for an unknown
amount of work. Qiyas is only
allowed in accordance with the
teachings of the Holy Quran,
Sunnah and the Ijma..
IBNE TAYMIYA  
Modaraba is valid on the basis of Qayas.
Fuqaha had invalidated Modaraba on
the basis of Qayas (wages).

IBNE GHAZI says


Modaraba is permissible as an
exception to Gharar (fraud) and
unknown remuneration
Modaraba falls in the partnership type of
contract, which has a vague similarity to
Mufawadah. It differs because money is the
main objective in Modaraba and work in the
second.

Rab-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 the cause of loss,
whereas, in case of any negligence or
misappropriation or a purposeful
mistake by the Modarib, financier can
claim the financing.
Al-Baghi’s 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.

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.

There is no harm in investigating the cause


of loss in Modaraba.

Modarib is bound to provide the


justification to the satisfaction of Rab-al-
Maal on loss.

In case of any dispute over the causes of a


loss, the jurists permit the arbitration
clause in the agreement.
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, different
The Four School of
Thoughts
IMAM ABU HANIFA
He was flexible on the conditions of
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
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
 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.
• Superior quality dates presented to Prophet (Peace Be Upon Him).
• These dates obtained in exchange with inferior quality dates.
• Prophet (Peace Be Upon Him) refused to accept the gift and asked to
return the superior dates to its original owner.
• Prophet (Peace Be Upon Him) stressed on sale of inferior dates, first.
• Then, with the amount received from the sale of the inferior
dates, superior dates were to be purchased.
• When transaction was completed, quantity was lesser then it
was before.
• Accordance to Prophet’s (Peace Be Upon 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 set
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