1. Riba Free Mode of Financing
Modaraba,
Participation between
Money and Ability
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2. Modaraba – Qarad – Commenda
Three names with an ancient
background of transactions used for
economic activities classified as
business activities under a contract of
“Money and Ability”
The owner of money, the financier is called
Rab-Al-Maal
The worker is called
Modarib
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3. Commenda
It is a pre-Islamic word from Italy
Qarad
This word generally found in
Imam Malik’s & 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.
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4. Fuqaha define Modaraba
It is a partnership contract between two parties,
persons to person, organizations to person or
Organization with organization in which ONE
brings the Capital, the Other shares his Time
Skill, Experience & Goodwill in the respective
business field for a specified project or
transaction.
On the maturity, profit is divided according to
the agreement, which will either be equal or
Pre Agreed Ratio of Net Earned Profit.
In the loss Financier looses Capital Investment &
Modarib loses Time, Efforts & Reputation
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5. Historical Perspective
The history of Modaraba reveals that the
business under the concept of Commenda
was in practice in the medieval period
before the rise of Islam, emerging from the
Italian city of Rome, which was the centre
for trade & culture in the Christian world.
City of Rome
Always a centre of attraction for
Art, Culture, Business & Lifestyle
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6. When Christian traders entered the Arab
world, they chose Capital of Iraq, the City
Baghdad for business.
Baghdad was the centre of Trade, Education
& Culture.
Business community of Iraq acknowledged
Commenda as business practice & started
accepting the system & its mechanism.
Later Scholars & Jurists polish the system in
the Iraqi business practices by bringing it
into a legal framework.
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7. In Iraq Commenda change to Qarad
Through Iraqi caravans Qarad entered in Arab &
Persian world & eventually Qarad penetrated to
the locations where Islam reached, either
through traders or by Muslim conquerors.
Credit goes to Islam in the developing a proper
shape to the concept of Commenda and cover
the technique of Qarad and named it as
Modaraba.
Islam puts restriction to all Riba involvement in
Modaraba Transaction.
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8. Sunnah and Ijma.
The Prophet Mohammad (Peace Be Upon Him) left
On a trading trip to Syria & used Modaraba method
For a participation contract with Hazrat Al Khatija on
pre-agreed Terms and Conditions
Hazrat Al Khadija was the first recognized Women
Entrepreneur & Financier who financed the
Transactions before she entered married to the Prophet
Mohammad (Peace Be Upon Him).
Therefore,
Modaraba is treated as Sunnah
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9. Islamic Jurisprudence
Modaraba is a contract between persons,
between persons and institutions, and between
institutions, through which finances are given
for trading or manufacturing purpose.
Profit sharing is agreed upon beforehand at a
predetermined Ratio.
In case of loss, the Rab-al-Maal loses financing &
Modarib loses his time, efforts and talent.
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10. Permission and Restrictions
Modaraba on the basis of fixed return or wages
Is not allowed. Reason is the unknown salary for an
Unknown activity.
Al KASSANI says Modaraba becomes invalid if it is
On the basis of Wages as it involves an unknown
Salary for an unknown amount of work. Wage is
Only allowed in accordance with the teachings of
The Holy Quran, Sunnah and the Ijma against
Human effort as in employment..
In Taymiya & Ibne Ghazi agrees to
Al Kassani
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11. Rab-al-Maal (the financier) does not have to take
an active part in the daily operations as in the case of
employment
In case of loss in the Modaraba the Modarib is not
entitled to a fee, commission or profit and lose his
efforts, time and reputation does not result in the
transaction.
Rab-al-Maal has the right to investigate the cause
of loss.
In any negligence, misappropriation or a
purposeful mistake by the Modarib, financier can
claim the Principle Financing.
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12. 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.
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13. Money in Modaraba
The 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.
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14. In return for financing with a condition of
profit & loss sharing is the legitimate and
allowed by Shariah.
Paper Currency is the most suitable Capital
form of Modaraba and not the coin because it
establishes value that is easily traded and the
market value is infrequently changed
Prophet Muhammad (Peace Be Upon Him) a commodity
cannot be the capital of a Modaraba contract.
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15. 
The currency should be the currency of the
location of Modaraba execution.

Capital in coins other material is restricted
due to the involvement of material value
which is a commodity.

Liabilities cannot be the capital of
Modaraba
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16. The commodity should not be exchanged
with another of the same quality and the
same quantity, it has to be bought through
a currency that acts as a medium of
exchange. Islamic economics does not treat
money as a commodity.
Capital of Modaraba should be deposited
in cash with the Modarib in full trust and
confidence till the maturity of the
Modaraba.
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17. Return on capital is not guaranteed.
Modaraba becomes invalid if the return of
Finance is guaranteed.
Quality and quantity should be of known and
Agreed between the two parties in the contract.
Ignorance leads to differences and disputes.
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18. Profit Sharing should be at maturity of the
transaction
Because part payment might exceed the share and
Any one of the two partners might devour all the
Profit.
Modaraba is only achieved through
Participation because of profit & loss sharing
Contract, based on justice and trust among the
Partners. It is not justice that all profit goes to
One and another suffers.
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19. Return of Principle
Capital that could be delayed purposely in
making more money is prohibited.
Capital cannot be rollover under same
Agreement.
Delay or roll over means Modarib might be
in a Monetary constraint and wish to keep
money for longer has to first end the
agreement and enter into fresh agreement
either with same terms or Additional mutually
agreed upon.
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20. It is like a commodity given to Modarib which
can Be used as a capital for the transaction.
All Fuqaha agreed that only capital should be in
the Form of cash as a Participation of Rab-al- Maal.
Cash Participation is the capital of Modaraba
and Remain with Modarib in trust.
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21. Essential conditions of
Modaraba mode of financing
Differentiating Modaraba financing and
Loan on Interest, that in the normal
banking and lending transaction, money is
made available to the borrower against a
guaranteed return of principle with excess
amount to the principle as pre-fixed.
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22. Collateral of various nature is the cover
against The lending that ultimately
liquidated in case of Loss by lender.
In Modaraba, profit and loss is the end of
the contract and the profit and loss sharing
is the key
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23. In the loss, Rab-al-Maal suffers the financial loss
and Modarib faces loss in time, effort and his
name.
Capital has to be surrendered to Modarib who is
free to utilize it in business mutually agreed
between Modarib and Rab-al-Maal.
According to Imam Ibn Hambal, this condition
Satisfies the Modarib for his free actions in regard
to Capital utilization and can take better way to
earn Best.
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24. Modarib is entitle for Modaraba
Management Fee out of Gross profit and
not from the Capital of Modaraba.
Modarib fee must be pre- Agreed and term
have to incorporate in the Agreement.
Rab-al-Maal cannot impose the amount
of Percentage of Management Fee.
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25. Rab-al-Maal interference in the working
Disrupts the connection between Capital
and
Modarib. But The cooperation of Rab-alMaal is accepted.
Ignorance and bias distribution the shore
of Profit invalidates the Modaraba.
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26. Net Profit has to be shared in agreeing Ratio
After deduction of pre-agreed Cost & Expenses
Including Modarib fee.
Capital Assets shall be the right of Modaraba
And shall be shared between Rab-al-Maal and
Modarib after Capital satisfied to Rab-al-Maal.
Modarib has no right to any share or fee as
Rab-al-Maal cannot claim his capital in case of
Loss.
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27. Classes of Modaraba
Modaraba can be classified as,
General Purpose and Specific purpose.
General Purpose Modaraba
It is not restricted to actively, partner and
place and mostly used between Modarib and
Rab-al-Maal in which Rab-al-Maal empowers,
Modarib to act, invest or activate capital for
earning profit.
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28. Specific Modaraba
It is limited by one or several aforementioned
restrictions.
Modaraba can be restricted to certain
conditions and has to commit for the noncompliance
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29. Multiple Modaraba
One Rab-al-Maal finance several Modarib at one
Time with different terms & conditions of contract.
Several Rab-al-Maal finance to one Modarib as
Group by Capital in Equity under Single agreement
Between Modarib and Rab-al-Mall either in group or
By proxy to single person in representation.
One Rab-al-Maal finance to several Modarib and
Each Modarib using the financing amount investing
In several transactions for specified period under
A single agreement.
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30. Modarib in person keep single agreement
at one Time.
Multiple agreement is not permitted.
Affairs of Modaraba must agreed in witting
Proper record, supported in documents
proof in operation in is the responsibility of
Modarib
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31. Modarib invest Capital by self or by making
Similar to contract with another person,
institute or
Organization without the permission of Rabal- Maal but keeping him in confidence.
Modarib status could be changed to Rab-alMaal and Rab-al-Maal could be Modarib too
With the condition of contract and agreement
In transaction.
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32. Banking & Financial Institutes
Banks can finance funds from their deposits on
below Modaraba in which Banks can be Modarib for
them Depositors & Rab-al-Maal to Modarib seeking
financing in two separate contracts.
The first contract with the Depositor as Modarib and
Second contract with Modarib eligible to be
financed.
The contracts can have different terms and different
Profit sharing.
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33. Both the contract should be matured to the
pre agreed the date and the bank cannot
payoff without realizing the profit of its
financing or from own source.
Banks can specify the purpose of Modaraba
to safeguard depositor’s capital.
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34. Bank can enter into a General Purpose Modaraba.
But in case of being a Rab-al-Maal it only enters into
Specific Modaraba Contract.
Banks are not permitted to ask for guarantee
Against the loss of capital, but participate in the
Transaction as partner by holding the assets of
Transaction excluding Capital.
Modaraba in consolidation with another mode of
Financing is permitted like Modaraba into Ijarah,
Morabaha, Havania, Musaqa or Mussaja.
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35. Modaraba Financing
An ideal way to finance
Project Financing
Working Capital
Bridge Financing
FIM: Finance against Imported Merchandise FIM
BMR: (Balancing Modernization & Replacement)
LMM: (Local Machine Manufacturing)
SME & E: Small Medium Entrepreneur & Enterprise
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36. Risk Factor
Modaraba is Small & Medium term financing having
Risk factor appraises on Medium & High Level.
Modarib Risk is higher than Rab-al-Maal due to the
Involvement of Time, Efforts, Experience
& Reputation which never recovers as money can be
recovered if the loss is Reported.
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37. Financing is made in absolute trust on skills,
Experience, reputation, capability and
feasibility of Modaraba transaction or
project.
Modaraba agreement is made only to the
transaction purely based free from all the
classifications and categories of the Riba.
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38. Summary



A profit-sharing agreement between two parties, in
which one provides the finance, and the other
provides entrepreneurial and management skills.
The profits are divided on a pre-determined ratio.
Losses are borne by the provider of capital and
Modarib lose its reputation, time and efforts.
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