Mr. Abdul Samad - Mudaraba

192 Ahmad Block, New Garden Town, Lahore - Pakistan.
Ph: (92-42) 35913096 - 98, Fax: (92-42) 35913056
Email: [email protected]
Two Days Specialized Training Workshop On
Islamic Microfinance
Abdul Samad
Scope of the Presentation
Terminology of Musharaka
Types of Musharaka
Structure of Musharaka
Rules of Musharaka
 Profit and loss;
 Termination
 Security / Collateral in Musharaka
Concept of limited liability
Modern partnerships
Case in point
The literal meaning of Musharakah is sharing.
The root of the word "Musharakah" in Arabic is
Shirkah, which means being a partner.
Under Islamic jurisprudence, Musharakah means
a joint enterprise formed for conducting some
business in which all partners share the profit
according to a specific ratio while the loss is
shared according to the ratio of the contribution.
declared that He becomes a party in
a business between two Musharakain
until one indulges in cheating or
breach of trust (Khayanah) with
other in Musharakah.” (Sunan-i-Abi
Daud, Kitabul Buyuo)
Types of Shirkah
(Co- ownership)
(Contractual Partnership)
Shirkat-ul-Milk (Joint ownership)
• Joint ownership of two or more persons in
a particular property/ asset with out any
business intention.
• This comes into being as a result of joint
purchase, joint acceptance of gift or a
bequest and inheritance of joint property
Types of Shirkat-ul-Milk
Shirkat-ul-Milk Optional (Ikhtiari)
This comes into operation through the act of
parties e.g., purchase of asset with mutual
This comes into operation without any action
on the part of parties e.g., ownership of heirs
on the inherited property.
(Joint venture/partnership).
Shirkat-ul-Aqd or Contract Partnership is
an Agreement between two or more
parties to combine their assets or to
merge their services or obligations and
liabilities with the aim of making profit.
It can also be referred to as a joint
commercial enterprise or activity
Difference between
Shirkat-ul-Aqd and Shirkat-ul-Milk
In Shirkat ul Aqd both parties create
partnership for sharing profit earned by
Shirkah asset, while in Shirkat ul milk both
partners do not intend to earn profit from
Shirkah asset.
In Shirkat ul Aqd, each partner is an agent of
others while in Shirkat ul Milk each partner is
stranger with respect to other’s share.
Kinds of Shirkat-ul-Aqd
(Investment /Capital Partnership)
(Work Partnership)
(Credit Partnership)
Where all the partners invest some capital
into a commercial enterprise and share its
profits according to agreement.
Where all the partners jointly undertake to
render some services for their customers, and
the fee charged from them is distributed among
them according to an agreed ratio.
For example, if two persons agree to undertake
tailoring services for their customers on the
condition that the wages so earned will go to a
joint pool which shall be distributed between
Where the partners have no investment at
all, they purchase commodities on
deferred price by their goodwill and sell
them on spot. Their capital is their credit
worthiness and reputation.
Types of Shirkat-ul-Aqd
All the three are further divided in to two types:
Subdivision of Shirkat-ul-Aqd
Where capital, profit, loss and management are
equal among the partners.
Partners’ share capital, management, profit and
risk are not equal and may differ for each
partner. This is common type of partnership.
Rules of Shirkat-ul-Milk
Each partner is a stranger with respect to the
share of the others.
The partners are not allowed to undertake any
act of disposal with respect to the other’s
share except with the latter’s permission.
Each partner can sell his own share without
the other partners’ consent, except in cases
where share of one partner can not be
distinguished from the other.
Rules of Shirkat-ul-Milk
Profit & loss will be according the ratio of
Expenses related to ownership will be borne by
all partners according to the ratio of
Every partner has the right to sale/gift/lease to
the extent of his share.
One partner can promise to purchase the
share of other partner at any price, may be at
face value, market value or pre-agreed price.
 It is an agreement between two or more
persons to invest a sum of money in a
business and share its profits according to
agreement. The investment of this
partnership consists of capital contributed
by the partners.
Capital of Musharakah
It should be known, ascertained and available at the
time of contract.
The value should be agreed upon in case of kinds;
Capital paid in different currencies should be valued into the
currency of Shirkah;
Capital advanced by the parties. Should be uniform
(currency of partnership).
Share capital in a Musharakah can be contributed
either in cash or in the form of commodities
In the letter case the market value of the commodities
shall determine the share of the partner in the capital.
Capital of Musharakah
Capital of partnership is Amanat in the
hands of partners. If loss occurred due to
negligence, the partner responsible for
loss, will compensate the loss.
Management of Musharakah
Each partner has right to take part in Musharakah
The partner may appoint a managing partner by mutual
One are more of the partners may decide not to work for
the Musharakah and work as a sleeping partner.
It is not allowed to specify a fixed remuneration to a
partner Musharaka who manages funds or provides
some form of other services, such as accounting;
However, it is permissible to give him a greater share of
profit than he would receive solely on the basis of his
share in the partnership capital;
Distribution of Profit
The ratio of profit distribution must be agreed
at the time of execution of the contract.
It is not necessary for sharing profit according to
proportionate capital contribution;
It is not allowed to defer the determination of
profit until realization of profit.
The ratio must be determined as a proportion
on the actual profit earned by the enterprise.
Not as percentage of partner’s investment.
Not in lump sum amount.
It is not allowed to defer the determination of profit
until realization of profit.
A sleeping partner cannot share in the profit more
than the percentage of his capital.
Rules of Profit
No guarantee can be given by the partners for the
payment of profit or capital.
Different partners may be given different weightings
according to amount and period of their investment.
Tiered profit sharing ratios can also be agreed.
Profit ratio can either be fixed or variable according to the
Both partners can agree that first 6-month profit e.g.
will be distributed at ratio of 50% : 50% and next 6month profit will be distributed at ratio of 30% : 70%.
Rules of Loss
Sharing of Loss:
As a matter of principle the loss has to be shared according to
the ratio of capital contribution;
Partners are not allowed to adopt any other mechanism except
the mechanism that ensure distribution of loss among partners
on pro rata basis;
Any other arrangement, even agreed upon by partners, will be
invalid and void.
It is not allowed to hold one partner or group of partners liable
for entire loss.
Guarantees in Shirkah Contracts
- All partners in Shirkah maintain the assets of the partnership as a
- No one is liable except in cases of breach of the contract, misconduct
or proven negligence.
- Negligence will be considered to have occurred in any of the
following three cases:
(i) A partner does not abide by the terms and conditions of the contract;
(ii) A partner works against the norms of the concerned business; and
(iii) The established ill-intention of a partner.
- The profit or even capital of any partners cannot be guaranteed by the
- One partner can demand from another partner to provide any surety,
security or pledge to cover the case of misconduct and negligence.
Rules of Musharakah – termination
Musharakah terminates in any of the following event:
 Death of a partner during the Musharakah;
Heirs of the deceased partner have option either to draw the share
of the deceased from the business, or to continue with the contract
of Musharakah;
If any one of the partners becomes insane or otherwise becomes
incapable of effecting commercial transactions, the Musharaka
stands terminated.
In normal course of business, every partner has a right to terminate the
Musharakah at any time after giving notice to other partner;
In this case, if all the assets of the Musharakah are in cash form then
they will be distributed pro rata between the partners;
In case they are mixed assets the partners may agree either on:
 Physical distribution of the assets among partners; or
Liquidation of the assets in open market (market price); or
Internal liquidation i.e. purchasing from one partner share of other
at any agreed price between them;
Rules of Musharakah – termination
with one partner
In case a partner wishes termination of the Musharakah, while
others do not, this can be achieved by mutual consent;
The partners who wish to run the business may purchase the share
of the other partner who wants termination;
The reason is that the termination of Musharakah with one partner
does not imply its termination between other partners;
However, in this case, the price of the share of the leaving partner
has to be determined by mutual consent;
In case of dispute on the valuation of the share the leaving partner
may compel other partners on the distribution of the assets;
However, if they are not divisible then the partner may an arbitrator
to solve the dispute;
Musharakah – application
recommended by Islam;
 It one of the important factors that help in achieving ‘distribution
of wealth’ which is a key feature of Islamic financial and economic
 As Mudarabah, Musharakah is also not a vastly practiced Islamic
mode of financing by Islamic IMFs due to certain reasons;
However, Musharakah could easily be used as a vast mode of
financing for almost every financial need;
Below are some fields where this mode can easily be applied:
 Long-term Finance;
 Running Finance (limited scope);
 Investment IMFing;
 Project Financing;
 Private Equity Investment;
 Redeemable capital investment.
Scope of the Presentation
Mudaraba Capital
Profit / Loss Distribution
Types of Mudaraba
Capacities of Mudarib
Participation from Mudarib
More than one Rabbul Maal
Termination of Mudaraba
Mudaraba Vs Musharakah
Problems and risks
Mudaraba Introduction - Definition
“Mudaraba” is a kind of partnership where
one partner gives money to another for
investing in profitable avenues.
 The investor (fund supplier) is called
“Rabb-ul-Mal” ( ‫ ) رب اﻟﻤﺎﻝ‬while the person
who utilizes this fund (the fund manager)
is called “Mudarib” ( ‫ ) ﻣﻀﺎﺭﺏ‬who is
exclusively responsible for management of
the business.
Types of Mudaraba
• Al Mudarabah Al Muqayyadah (Restricted Mudarabah)
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.
• Al Mudarabah Al Mutlaqah (Unrestricted Mudarabah)
Rab-ul-Maal gives full freedom to Mudarib to undertake
whatever business he deem fit.
Mudarib is authorized to do anything normally done in
the course of business.
Capacities of Mudarib
Mudarib has different capacities for which
rules are different. Listed down are his
Ameen (trustee):
 Mudarib holds money and assets of Mudarabah as trustee;
 Therefore, he is responsible for management of assets honestly;
 In case of actual loss he is responsible for nothing;
Wakeel (Agent):
 Mudarib manages Mudarabah as an agent of owner;
 Therefore his actions are considered as of Rabbul Maal;
 Actual loss is born by Rabbul Maal in case it happens;
Shareek (partner):
 Mudarib becomes partner in the profit that Mudarabah generates;
Capacities of Mudarib
Zamin (liable/guarantor):
 In situation of loss due to misconduct / negligence
Mudarib has to bear it;
Ajeer (employee):
 Mudarib gets a fee if Mudarabah becomes void due
to any reason;
Mudaraba Introduction – Mudaraba
Mudaraba Capital:
The capital of Mudaraba should be in form of known cash as a
matter of principle;
However, tangible assets could also be accepted if valued with
mutual consent.
In such case the determined value of the assets will be the
Mudaraba capital;
The Capital of Mudaraba should be clearly known to the
contracting parties and defined in terms of quality and
The capital should be in hand, therefore, receivables (debt
etc.) can not be capital of Mudaraba;
Mudaraba Introduction – Mudaraba
Mudaraba Capital:
The capital should be handed over to Mudarib;
Simple segregation of funds for Mudaraba is not
Therefore, increase in value of Mudaraba capital
before start of Mudaraba will account for increase in
Mudaraba capital and will not be treated as Profit;
Mudaraba Introduction - profit &
loss distribution
Profit and Loss distribution:
The Mudaraba contract should mention profit sharing ratio in
defined and clear terms;
The profit sharing ratio should be:
of the expected profit;
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 Moradabad.
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.
Profit & Loss Distribution
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 Raab-ul-Maal or vice versa.
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 profit, if any, shall be distributed between the
parties according to the agreed ratio.
Mudaraba – participation from
Mixing of funds by Mudarib
The basic feature of Mudaraba is that the Mudarib performs only
business operations and does not add capital;
The capital is provided by Rabbul Maal and the Mudarib is
responsible for the management only;
But the Mudarib may also add capital into the business of Mudaraba
with permission of Rabbul Maal;
In such cases Musharaka and Mudaraba are combined;
For example, “A” gave to “B” Rs.100,000/- in a contract of
Mudaraba. B added Rs. 50,000/- from his own pocket with the
permission of A;
This type of partnership will be treated as a combination of
Musharaka and Mudaraba;
Here the Mudarib may allocate for himself certain percentage of
profit as partner (Sharik), and at the same time he may allocate
another percentage for his management and work as a Mudarib.
Mudaraba – more than one Rabbul
Mudaraba can be between two prsons: Rabbul Maal and
But Rabbul Maal may also be more than one;
If a Mudaraba starts by provision of funds from one
Rabbul Maal and after the start Mudarib wishes to add
some more funds from others, this would be allowd if
Rabbul Maal permits;
In such case all funds providers (Rabbul Maals) are
partners among themselves;
The share for Rabbul Maal will be divided among them
as per their contribution ratio;
Mudaraba – termination
Termination of Mudaraba:
The contract of Mudaraba can be terminated at any time by either of the
This termination should be with consent of concerned parties;
A notice to the other party is also sufficient if it was agreed at the time of
inception of Mudaraba;
Termination of Mudaraba means that the Mudarib cannot purchase new
goods for the Mudaraba. However, he may sell the existing goods that were
purchase before termination.
If all assets are in form of cash and some profit has been earned on the
principle amount, it shall be distributed between the parties according to the
agreed ratio;
If the assets of the Mudaraba are in other form the Mudarib shall be given an
opportunity liquidate them and the actual profit may be determined after
If there is a profit, it will be distributed between Mudarib and Rab-ul-Maal.
If no profit is left, Mudarib will not get anything.
Mudaraba Vs Musharaka
1. The contribution comes
from Rabbul Maal (the
2. The
(investor) is not permitted
to manage the business;
3. The Mudarib manages the
business only;
4. The Mudarib can also
invest in the capital of
The contribution comes
from all partners in form
of cash, commodities,
services or liability in case
of reputation partnership;
The work, as a general
rule, is to be done jointly
by the parties;
partners may be sleeping;
Mudaraba – application
Scope of Mudaraba for IMF System:
Mudaraba is second preferable mode of financing recommended
by Islam;
It helps in achieving ‘distribution of wealth’ which is a key feature
of Islamic financial and economic system;
Mudaraba as a mode of financing used by Islamic IMFs for the
following purpose:
Relationship of Islamic IMFs with depositors, depositors
provide deposits to IMF as Rabb-ul-Mal, these deposits are to
be invested by Islamic IMF as Mudarib;
Islamic IMFs sometimes use Mudaraba with some of their
Islamic IMF provides the adequate finance as a capital owner
in exchange of a share in the profit to be agreed upon;
Mudaraba can be easily used for Large Enterprise financing;
Project Finance does have potential for financing on Mudaraba
Mudaraba – IMF application
Asset side:
Short / medium / long term financing;
Project financing;
Small and medium enterprise setup financing;
Large enterprises setup financing;
Import financing;
Import bills drawn under import Lcs;
Inland bills drawn under inland Lcs
Bridge financing;
LC without margin;
Export financing;
Working capital financing;
Running accounts financing/ short term advances.
Mudaraba & Musharakah on
Liability side
 Liability side:
 All types of saving / investment accounts;
 Inter- bank acceptance and placement;
 Term Finance certificates;
 Certificate of investment;
 Special rate deposits;
Calculation is attached.
Problems and Risks for Islamic
Problems and Risks for Islamic IMFs:
 Since Mudaraba is a profit and loss sharing way of
financing, it is considered a high risk financing
 Collateral can be asked but could not be used in case
of real loss;
 IMF’s existing competencies in project evaluation and
related techniques are limited;
 Dual book keeping trends in market also a threat;
 Legal mechanism for treatment with Mudarabah as a
mode of financing by Islamic IMFs, is not in place;
192 Ahmad Block, New Garden Town, Lahore - Pakistan.
Ph: (92-42) 35913096 - 98, Fax: (92-42) 35913056
Email: [email protected]