Foreign%20Exchange%20

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192 Ahmad Block, New Garden Town, Lahore -
Pakistan. Ph (92-42) 35913096 - 98, Fax (92-42)
35913056 Email info_at_alhudacibe.com
www.alhudacibe.com
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MUSHARAKAH MUDARABAH
Two Days Specialized Training
Workshop On Islamic
Microfinance

• Abdul Samad
• AlHuda CIBE

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Shirkah
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Scope of the Presentation

• Terminology of Musharaka
• Types of Musharaka
• Structure of Musharaka
• Rules of Musharaka
• Capital
• Profit and loss
• Termination
• Security / Collateral in Musharaka
• Concept of limited liability
• Modern partnerships
• Case in point

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MEANING OF SHAIRKAT

• 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.

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LEGITIMACY OF SHIRKAT

• Allah- Subhana- o-Taala has 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)

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Types of Shirkah
Shirkah
Shirkat-ul-Milk (Co- ownership)
Shirkat-ul-Aaqd (Contractual Partnership)
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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 etc.

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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
  consent.
• Shirkat-ul-Milk Compulsory (Ghair Ikhtiari)
• This comes into operation without any action on
  the part of parties e.g., ownership of heirs on
  the inherited property.

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Shirkat-ul-Aqd (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

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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 others share.

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Kinds of Shirkat-ul-Aqd
Shirkat-ul-Amwal (Investment /Capital Partnership)
Shirkat-ul-Aamal (Work Partnership)
Shirkat-ul-Wojooh (Credit Partnership)
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Shirkat-ul-Amwal

• Where all the partners invest some capital
  into a commercial enterprise and share its
  profits according to agreement.

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Shirkat-ul-Aamal

• 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
  them

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Shirkat-ul-Wujooh

• 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.

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Types of Shirkat-ul-Aqd
All the three are further divided in to two
types
Shirkat-ul-Amwal
Shirkat-ul-Wojooh
Shirkat-ul-Aamal
Shirkat-ul-Mufawadah
Shirkat-ul-Inan
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Subdivision of Shirkat-ul-Aqd

• 1-Shirkat-ul-Mufawadah
• Where capital, profit, loss and management are
  equal among the partners.
• 2-Shirkat-ul-Inan
• Partners share capital, management, profit
  and risk are not equal and may differ for each
  partner. This is common type of partnership.

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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 others share
  except with the latters 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.

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Rules of Shirkat-ul-Milk

• Profit loss will be according the ratio of
  ownership.
• Expenses related to ownership will be borne by
  all partners according to the ratio of ownership.
• 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.

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Shirkat-ul-Ammwal

• Definition
• 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.

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SHIRKAT-UL- AMWAL

• 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.

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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.

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Management of Musharakah

• Each partner has right to take part in Musharakah
  management.
• The partner may appoint a managing partner by
  mutual consent.
• 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

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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 partners 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.

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Rules of Profit Determination/Distribution

• 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 tiers
• Both partners can agree that first 6-month profit
  e.g. will be distributed at ratio of 50 50
  and next 6-month profit will be distributed at
  ratio of 30 70.

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Rules of Loss Determination/Distribution

• 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.

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Guarantees in Shirkah Contracts
- All partners in Shirkah maintain the assets of
the partnership as a trust. - 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 co-partners. - One partner
can demand from another partner to provide any
surety, security or pledge to cover the case of
misconduct and negligence.
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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

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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

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Musharakah application

• Musharakah is top preferable mode of financing
  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 system
• 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.

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• QUESTIONS??

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• MUDARABAH

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Scope of the Presentation

• Definition
• 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

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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 ( ?? ????? ) while the person who
  utilizes this fund (the fund manager) is called
  Mudarib ( ????? ) who is exclusively
  responsible for management of the business.

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• Types of Mudaraba

• Al Mudarabah Al Muqayyadah (Restricted
  Mudarabah)
• Rab-ul-Maal may specify a particular business or
  a particular place for the Mudarib.
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• 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.
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• Mudarib is authorized to do anything normally
  done in the course of business.

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Capacities of Mudarib

• Mudarib has different capacities for which
  rules are different. Listed down are his roles
• 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

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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

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Mudaraba Introduction Mudaraba capital

• 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 quantity
• The capital should be in hand, therefore,
  receivables (debt etc.) can not be capital of
  Mudaraba

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Mudaraba Introduction Mudaraba capital

• Mudaraba Capital
• The capital should be handed over to Mudarib
• Simple segregation of funds for Mudaraba is not
  enough
• 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

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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
• specific
• 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.

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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 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.

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Mudaraba participation from Mudrib

• 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.

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Mudaraba more than one Rabbul Maal

• Mudaraba can be between two prsons Rabbul Maal
  and Mudarib
• 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

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Mudaraba termination

• Termination of Mudaraba
• The contract of Mudaraba can be terminated at any
  time by either of the parties
• 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 liquidation
• 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.

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Mudaraba Vs Musharaka
. Mudaraba The contribution comes from Rabbul Maal (the investor) The Rabbul Maal (investor) is not permitted to manage the business The Mudarib manages the business only The Mudarib can also invest in the capital of Mudarabah. Musharaka 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 A partner or some partners may be sleeping
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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 customers
• 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 basis

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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.

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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.

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Problems and Risks for Islamic IMFs

• Problems and Risks for Islamic IMFs
• Since Mudaraba is a profit and loss sharing way
  of financing, it is considered a high risk
  financing activity
• Collateral can be asked but could not be used in
  case of real loss
• IMFs 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

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192 Ahmad Block, New Garden Town, Lahore -
Pakistan. Ph (92-42) 35913096 - 98, Fax (92-42)
35913056 Email info_at_alhudacibe.com
www.alhudacibe.com