ah mudarbah, diminishing musharkah
TRANSCRIPT
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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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Basic rules of Musharakah
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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Basic rules of Musharakah
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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Basic rules of Musharakah
Losses
are shared by all partners in proportion to their capital.
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Basic rules of Musharakah
Management
Every partner can manage
One may be working and other one may be sleeping
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Basic rules of Musharakah
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