ISLAMIC FINANCIAL

SYSTEM
Riba Free Mode
of
Financing
 Part 1
MODARABA
Modaraba
Commenda
Qarad
Three distinct concepts appropriate
For
Riba Free Economic Activities.
 MODARABA
Three
Three names
names with
with an
an ancient
ancient background
background of of
transactions
transactions used
used for
for economic
economic activities
activities classified
classified as
as
business
business activities
activities under
under aa contract
contract of
of
““Money and Ability””
The
The owner
owner of
of money,
money, the
the financier
financier is
is called
called

Rab-Al-Maal

The
The worker
worker is
is called
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 Hambal’s schools of thought.
 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
Modaraba isis aa contract
contract between
between persons,
persons,
between
between persons
persons andand institutions,
institutions, and
and
between
between institutions,
institutions, through
through which
which
finances
finances are
are given
given for
for trading
trading or
or
manufacturing
manufacturing purpose.
purpose.

Profit
Profit sharing
sharing is
is agreed
agreed upon
upon beforehand
beforehand
at
at aa predetermined
predetermined ratio.
ratio.

In
In case
case of
of loss,
loss, the
the financier
financier loses
loses the
the
money
money used
used to
to finance
finance and
and the
the worker
worker
loses
loses his
his time,
time, efforts
efforts and
and talent.
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
The Great
Great Fuqaha
Fuqaha
((Religious Scholars))
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.
As the Modaraba mode 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 scholars have
interpreted them differently.
 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 Modaraba
is treated as the most rational approach
 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
conditions and differed on some.
 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.
This condition is explained an example:
• 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 permitted for the
capital of Modaraba