Submitted To:

Sir AbdulRaof

Submitted By:
Tanveer Ahsan BT-04-16
Jahanzeb Ali BT-04-48
Semester 7th
Topic:
Mudarbah, Musharakah, Ijara

INSTITUTE OF MNAGEMENT OF
SCIENCES
Bahauddin Zakariya University
Multan
 Islamic Banking
• The term “Islamic banking” refers to a conduct of banking
operation in consonance with Islamic teachings.

Why Islamic Banking

• The main principle of Islamic banking comprises prohibition of

interest in all forms of transactions, business undertakings and
trade activities.

Islamic Banking In Pakistan

• The gradual process of Islamisation of the banking system in

Pakistan started in February 1979 when the President of Pakistan
announced that interest was to be removed from the economy
within a period of three years

Examples

• Meezan Islamic Bank

• Al-Falah Islamic Bank
• Dubai Islamic Bank

Islamic Modes of Financing

• Mudarabah
• Musharakah
• Diminishing Musharakah
• Murabaha
• Salam
• Istisna
• Istijrar
• Ijarah
• Ijara Wa Iqtina

Meaning of Musharakah

• The literal meaning of Musharakah is “sharing”.

• The root of word Msharakah is “Shirkah”.
• Shirkah means “partner”.

BT-04-16 2
BT-04-48
 • Musharakah is a limited term of Shirkah.
• Musharakah is a sub part if Shirkah.

Kinds of Shirkah

• Shirkah is divided into two kinds.

1) Shirkat-ul-Milk
2) Shirkat-ul-Aqd

Shirkat-ul-Milk

• It means a joint ownership by two or more persons in a

particular property. It has two different types.

1) Optional
2) Compulsory

Shirkat-ul-Aqd

• It means a partnership effected by a mutual contract also

translated as “joint commercial enterprise”. It is divided into
three kinds.
1) Shirkat-ul-Amwal (Musharakah)
2) Shirkat-ul-Aamal
3) Shirkat-ul-Wujooh

Musharakah

“Partnership in capital”
• Partners invest some capital into a commercial enterprise.
• It is a relationship established by the parties through a mutual
contract.
• All ingredients of a valid contract must be present in
Musharakah.

Rules of Capital in Musharakah

1. Quantified (How Much)

2. Specified (Currency)
3. Not Necessarily be Merged
4. Not Necessarily be in Liquid Form

BT-04-16 3
BT-04-48
Management of Musharakah

• Every partner has a right to take part in management.

• Partners may agree upon a condition that the management shall
be carried out by one of them.
• If all the partners agree to work for the joint venture, each one
of them shall be treated as the agent of all the others.

Rules of Distribution of Profit

1. The ratio of profit for each partner must be determined in

proportion to the actual profit not in proportion to the
investment.
2. A fixed lump sum amount for any of the partner is not allowed.
3. If partners agree that each will get percentage of profit based on
his capital percentage, whether all work or not, it is allowed.
4. If an investor is working, his profit can be more than his capital
base.
5. The profit of sleeping partner can’t be more than the ratio of his
investment.
6. The profit of sleeping partner can’t be established less than his
capital share.
7. If all the partners are working the share of profit can differ still.

Rules of Distribution of Loss

Sayings of Syedna Ali Ibn Talib

“Loss is distributed exactly according to the ratio of investment

and the profit is divided according to the agreement of the partners ”

Rights of Partners in Musharakah

1. The right to buy and sell the mutually owned property for
business purpose.
2. The right to buy raw material or other stock on cash or credit
using Shirkah funds.
3. The right to hire people.
4. The right to deposit money and goods.
5. The right to use Shirkah funds or goods in Mudarabah.
6. The right of giving funds as hiba or loan.

BT-04-16 4
BT-04-48
Termination of Musharakah

1. If the purpose has been achieved.

2. By a notice from any one of the partners.
3. In case of death of any one of the partners.
4. In the case of damage to the share capital of one partner before
mixing it in total investment.

Termination of Musharakah without Closing the Business

• If one of the partners wants to termination while others like to

continue, then the partners who want to run the business can
purchase the share of the partner, who wants termination.

Interest Based Financing VS Musharakah

Interest Based Financing

1. Fixed rate of return.

2. The financier can’t suffer loss.
3. Results in injustice either to creditor or to the debtor.

Musharakah

1. The return is based on profit and loss.

2. The financier can suffer loss.
3. Results in justice either to creditor or to the debtor.

Diminishing Musharakah

• Another form of Musharakah.

• A financer and his client participate either in the joint ownership
of a property or in a joint commercial enterprise.
• The share of financer is further divided into a number of units
and it is understood that the client will purchase these units one
by one periodically.

BT-04-16 5
BT-04-48
Criticism of Musharakah

• Criticized as being an old instrument.

• Cannot be applied in the modern world.
• Profits being guaranteed by some financial institutions to
make the product more appealing to the customer.

Mudarabah

A kind of partnership where one partner gives money to another for

investing in a commercial enterprise.
• Investor is called “Rab-ul-Maal”.
• Management is called “Mudarib”.
• Profits are shared in a predetermined ratio.

Types of Mudarabah

There are two types of Mudarabah.

1. Al Mudarabah Al Muqayyadah
2. Al Mudarabah Al Mutlaqah

Al Mudarabah Al Muqayyadah

Rab-ul-Maal will specify a 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

• Rab-ul-Maal gives full freedom to Mudarib to undertake whatever

business he deems fit.
• Mudarib is authorized to do anything which is normally done in
the course of business.
• Mudarib can’t lend money to any one without the consent of
Rab-ul-Maal.
• Mudarib can keep another Mudarib or a partner.
• Mudarib can mix his own investment without the consent of Rab-
ul-Maal.
BT-04-16 6
BT-04-48
 Mudarabah VS Musharakah

Mudarabah

1. Only Rab-ul-Maal invests.

2. Rab-ul-Maal has no right to particirpate.
3. Only Rab-ul-Maal suffers loss.
4. The liability of Rab-ul-Maal is limited to his investment.
5. All assets are solely owned by Rab-ul-Maal.

Musharakah

1. All partners invest.

2. All partners can participate in work.
3. All partners share loss.
4. The liability of partners is normally unlimited.
5. All assets become jointly owned.

Investment

• Rab-ul-Maal should hand over investment to Mudarib and leaves

everything to Mudarib. He has the authotity to:
1. Oversee the Mudarib’s activities
2. Work with Mudarib if the mudarib consents
NOTE: Investment given by Rab-ul-Maal can be liquid or non-liquid.

Distribution of Profit And Loss

1. Shariah has prescribed no particular proportion.

2. All depends upon the mutual consent of parties.
3. Parties should agree right at the beginning.
4. If parties have not predetermined the ratio then it will be 50:50.
5. No lump sum amount for any party.
6. Mudarib can’t claim any periodical salary.

Roles of Mudarib

Ameen:
To look after the investment.
Wakeel:

BT-04-16 7
BT-04-48
 To purchase from the funds provided by
Rab-ul-Maal.

Shareek:
Sharing in any profit.
Zamin:
To provide for the loss suffered due to any act on his part.
Ajeer:
When Mudarabah gets Fasid, Mudarib is entitled only salary.

Termination of Mudarabah

1. When specified period in the contract expires.

2. Any time by either of the parties by giving notice.
3. At termination, if assets are liquid and there is a profit, it will be
distributed.
4. If assets are non-liquid they will be sold to determine profit.
5. If no balance is left, Mudarib will not get any thing.

Uses of Musharakah and Mudarabah

Asset Side Financing

• Short/medium/long term financing.

• Project financing.
• Small, medium and large enterprise setup financing.
• Import financing.
• Export financing.
• Working capital financing.

Liability Side Financing

• Inter bank financing.

• Term Finance Certificates.
• Certificate of investment based on Mudarabah.
• Islamic Musharakah bonds.
• For current/saving/mahana amdni/investment account.

BT-04-16 8
BT-04-48
 Ijara (leasing)

• Ijara is a form of leasing.

• It involves a contract where the bank buys and then leases an
item.
• The duration of the lease, as well as the basis for rental, are set
and agreed in advance.
• Islamic Bank retains ownership of the item throughout the
arrangement and takes back the item at the end.

Basic Rules of Ijara

1. Transfer of usufruct not ownership.

2. Subject of lease.
3. All consumer things can’t be leased.
4. All liabilities of ownership is borne by lessor.

Lease For a Specific Purpose

• The lessee can’t use the leased asset for any purpose other than
the purpose specified in the lease agreement.
• The lessee can use it for whatever purpose it is used in the
normal course.

Lessee As Ameen

• The lessee is liable to compensate for every harm to the leased

asset caused by any negligence.
• The leased asset shall remain in the risk of the lessor throughout
the lease period.

Lease of Jointly Owned Property

• A jointly owned property can be leased out.

• Rental shall be distributed according to the proportion of asset
by owners.
• A joint owner of a property can lease his proportionate share
only to his co-sharer.

BT-04-16 9
BT-04-48
Determination of Rental

• Rental must be determined at the time of contract for the whole

period.
• Different amounts of rental con be fixed for different phases.
• The determination of rental on the bases of the aggregate cost,
incurred in the purchase of asset, is not against Shariah.
• The lessor can’t increase the rent unilareally.
• The rent may be payable in advance before the delivery of asset,
but it will be adjusted towards the rent after its being due.
• The lease period will start right after the delivery of leased asset.
• If the leased asset has totally lost its function, contract will be
terminated.
• The rentals can be benchmarked with some index as well.

Rentals In Long Term Leased

• It is not suitable to fix one amount of rent for the whole period
because market conditions changes. So the lessor has two
options.

1. Condition that the rent will increase according to a specified

proportion after a specified period.
2. He can contract lease for a shorter period after which the parties
can renew the lease at new terms.

Penalty for Late Payment of Rent

• A penalty is imposed on the lessee in case he delays the

payment of rent.
• This penalty can’t be added to the income of lessor, because it is
not warranted in Shariah.
• The lessee may asked to undertake that, if he fails to pay rent
on time, he will pay certain amount to charity.

Termination of Lease

• If lessee breaks any term of the agreement the lessor has a right
to terminate the contract unilaterally.
• Lease can be terminated with mutual consent.

BT-04-16 10
BT-04-48
 • The lessor can’t terminate lease unilaterally.

Ijara-wa-Iktana
• Ijara-wa-iktana is similar to Ijara, except that included in the
contract is a promise from the customer to buy the equipment at
the end of the lease period, at a pre-agreed price.
• Rentals paid during the period of the lease constitute part of the
purchase price.

BT-04-16 11
BT-04-48