ah mudarbah, diminishing musharkah

8/8/2019 ah Mudarbah, Diminishing Musharkah

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Equity Based Modes of Financing

Faraz Younus Bandukda

November 9, 2010


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Islamic Modes of Financing

Equity based

Shirka (Musharakah)

Diminishing Musharakah

Mudaraba

Trade based

Murabaha

Salam

Istisna

Istijrar

Services or Rental based

Ijarah

Wakala


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What is Musharakah

Basically a kind ofpartnership in which the partnersjoin

togetherwith different contributions for the common

objective of undertaking business and trade in accordance

with the principles of Shariah

Means relationship established under a contractby the

mutual consent of the parties forsharing of profits and

losses, arising from a joint enterprise or venture.

Literal meaning Sharing

Root of the word in Arabic is Shirkah.


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What is Shirkah

In Islamic jurisprudence - Sharing

From Quranic verse

Now send one of you with this silver (coin) of yours to the city, then lethim see which of them has purest food, so let him bring you provision

from it, and let him behave with gentleness, and by no means make your

case known to any one . (Kahaf 19)

From Hadith-e-Qudsi

Allah Subhan-o-Tallah has declared that He will become a partner in a

business between two Mushariks until they indulge in cheating or breach

of trust (Khayanah)

Ibn-e-Qudama has expressed that there is Ijma (consensus)

on validity of Shirkah.


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Types Shirkah

Shirkat-ul-Milk

Joint ownership of two or more persons in a particular

property without any commercial intention.

Optional two or more persons purchase asset jointly

Compulsory comes into operation without any effort/action

(automatically)

Shirkat-ul-Aqd

Joint venture of two or more persons with commercial

intention. Partnership effected by a mutual contract.


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Shirkat-ul-Milk

May use mutually or jointly

May set turns in days Profit and Loss will be shared as per the ratio of capital /

ownership

Every partner can sell or lease his share to other partneras

well as 3rd

person Permission of other partner is required forleasing

Other partner maypromise to buy (unilateral) the share of

other one at any cost Market price, Pre-agreed price, face

value


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Shirkat-ul-Aqd

Further divided into three kinds

Shirkat-ul-Amwaal (Partnership in capital)

all the partners invest some Capital into a Commercial enterprise

Shirkat-ul-Aamaal (Partnership in service)

all the partners jointly undertake to render some services

the fee charged from them is distributed according to an agreed ratio.

loss is also shared as per the agreed ratio of profit distribution

Shirkat-ul-Wojooh (Partnership in goodwill)partners have no investment at all.

All they do is that they purchase the commodities on a deferred price

and sell them at spot.

profit so earned is distributed between them at an agreed ratio.


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Shirkat-ul-Aqd

All three are further divided into two types:

Shirkat-Al-Mufawada (Capital and labor at par)

All partners share capital, management,profit, and riskin absolute equals.

It is a necessary condition for all four categories to be shared amongst the

partners;

Every partner who shares equally is a Trustee, Guarantor and Agent on

behalf of the other partners.

Shirkat-ul-AinanA more common type of Shirkat-ul-Aqd

where equality in capital, management or liability might be equal in

one case but not in all respect meaning either profit is equal but not

labor or vice versa- (Equality is not necessary)


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Basic rules of Musharakah

Partners must be sane & mature and be able of entering into a

contract.

The contract must take place with free consent of the parties

without any fraud or misrepresentation.

The rate of profit sharing should be determined: The share of

each partner in the profit earned should be identified at the time

of the contract. If however, the ratio is not determined before

hand the contract becomes void (Fasid). Therefore identifying

the profit share is necessary.


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Capital

Investments come from all partners/shareholders

All assets of Musharakah are jointly owned in proportion to the

capital of each partner.

All partners must contribute their capital in terms of money orspecies at an agreed valuation.

Quantified (Maloom)

Specified (Mutaaiyan)

Not necessarily be merged

Not necessarily be in liquid form


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Profits

shall be distributed in the ratio proportion mutually agreed in the

contract

It is not allowed to fix a lump sum amount for any of the partners,

or any rate of profit tied up with his capital

Different ratios can be decided.Capping and limit on different rang

of may also be set.

The ratio of sleeping partnercannot exceed the ratio of investment

Ratio of profit not ratio of capital

A management fee can be paid to the partner managing the

Musharakah provided the agreement for the payment of such fee is

independent of the Musharakah agreement.

Excess profit ratio can be given to other partner as Hiba


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Losses

are shared by all partners in proportion to their capital.


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Management

Every partner can manage

One may be working and other one may be sleeping


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Termination of Musharakah

Every partner has a right to terminate the Musharakah at any time

after giving his partner a notice to this effect, whereby the

Musharakah will come to an end.

In this case, if the assets are in cash form, all of them will be

distributed pro rata between the partners. But if the assets are not

liquidated, the partners may agree either on the liquidation of the

assets, or on their distribution or partition between the partners as

they are.

One partner may purchase the shares of other if he wants tocontinue the business.

Condition of non liquidation share purchase.

.


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What is Mudarabah?

A kind ofpartnership in which onepartnergives money to

anotherfor investing in a commercial enterprise.

Rab-ul-maal a person who contributes investments and

acts as a sleeping partner

Mudarib a person who brings effort and acts as a working

partner

Ras-ul-maal Investment of partnership


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Proof of Mudarabah

Prophet Hazarat Muhammad peace be upon him travelled to

Damishk for selling goods of Hazarat Khadija (raziAllah

unha)


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Types of Mudaraba

Al Mudarabah Al Muqayyadah

Rabb-ul-Maal may specify a particular business or a particular

place for the mudarib

He shall invest the money in that particular business or place.


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Types of Mudaraba

Al Mudarabah Al Mutlaqah

(Unrestricted Mudarabah)

Rabb-ul-maal gives full freedom to Mudarib to undertake whatever

business he deems fit

However, he is not authorized to:

keep another Mudarib or a partner

mix his own investment in that particular Mudarabah without theconsent of Rabb-ul Maal

.


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Authority of Rab-ul-maal

Rabb-ul-Maal has authority to:

Oversee the Mudaribs activities and

Work with Mudarib if the Mudarib consents.


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Capacities of Mudarib

Ameen (Trustee): The money given by Rab-ul-maal (investor)

and the assets required therewith are held by him as a trust.

Wakeel (Agent): In purchasing goods for trade, he is an agent of

Rab-ul-maal.

Shareek (Partner): In case the enterprise earns a profit, he is a

partner of Rab-ul-maal who shares the profit in agreed ratio.

Zamin (Liable): If the enterprise suffers a loss due to his

negligence or misconduct, he is liable to compensate the loss.

Ajeer (Employee):If the Mudarabah becomes Void due to anyreason, the Mudarib is entitled to get a fee for his services.

.


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Capital of Mudarabah

may be eithercash or in kind.

If the capital is in kind, its valuation is necessary, without which

Mudarabah becomes void.


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Distribution of Profit

At the beginning of Mudarabah, parties must agree with the

profit distribution ratio.

They can share the profit at any ratio.

However in case the parties have entered into Mudarabah

without mentioning the exact proportions of the profit

Mudarabah becomes void (may differ on school of thought),


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Distribution of Profit

Apart from the agreed ration the Mudarib cannot claim any

periodical salary or a fee orremuneration for the work done by

him for the Mudarabah.

The Mudarib & Rabb-ul-Maal cannot allocate a lump sum

amount of profit for any party

They can not determine the share of any party at a specific rate

tied up with the capital.


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Distribution of Loss

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,

the remainder, if any, shall be distributed between the parties

according to the agreed ratio.


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Expenses of Mudarabah

Expenses directly linked with Mudarabah shall be covered from

Mudarabah.

Business Tour, Administrative Expenses, wages etc

Personal expenses of Mudarib shall not be covered from

Mudarabah.

Meals, clothing, conveyance, medical


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Termination of Mudarabah

Can be terminated any time by either of the two parties by

giving notice.

If Mudarabah was for a particular term, it will terminate at the

end of the term.

Termination of Mudarabah means that the Mudarib cannot

purchase new goods for the Mudarabah. However, he may sell

the existing goods that were purchased before termination.


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Distribution at Termination

If all assets of the Mudarabah are in cash form at the time of

termination, and some profit has been earned on the principal

amount, profit shall be distributed between the parties according

to the agreed ratio.

If the assets of Mudarabah are not in cash form, they will besold and liquidated so that the actual profit may be determined.

If there is a profit, it will be distributed between Mudarib and

Rab-ul-Maal.

Ifno profit is left, Mudarib will not get anything.


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Collective Mudarabah

means ajoint pool created by many investors and handled over

to a single Mudarib who is normally ajuristic person.

It creates two different relationships:

Relationship between investors, which is Shirkah or

Partnership.

Relationship of all the investors with mudarib, which is

mudarabah.


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Running Mudarabah

Investors come in and go out at different dates

Profits are calculated on daily product basis.

Redemption before maturity

If the assets of mudarabah are in illiquid form, aninvestormay redeem his share by selling it to the pool..

If the assets are in liquid form, a provisional amount

may be given to him subject to final settlement


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Use of Mudarabah / Musharakah

In project Financing

Mutual Funds

In Single Transactions

Export

Import

Manufacturing


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Diminishing Musharkah

Same as Musharkah with share purchase program

Major Financier sells his share and his profit claim

reduces

Basically used in AssetP

urchase and BusinessVenture Financing

ah mudarbah, diminishing musharkah

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