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P R E S E N T E R S
M U H A M M A D F A I S A L S H A I K H
M U H A M M A D Z E E S H A N
M U H A M M A D A F A Q
MUDARBAH & MUSHARKAH
AS A MODE OF FINANCING
MUDARABAH
What is Mudarabah?
 Kind of partnership
 One person gives money to another for investing
 Investor ------> Rab-bul-Maal Or Mudarabi
 Fund Utilizer -------> Mudarib
 Rabbul Maal---------> No Right in Management
Mudarabah v/s Musharakah
1. Investment
2. Participation in Management
3. Loss Share
 In Partnership
 Rabbul Maal
 Mudarib
4. Liability
5. Appreciation in the value of the assets
Types of Mudarabah
 Al Muqayyadah ( Restricted Mudarabah)
 Al Mutlaqah ( Un-Restricted Mudarabah)
Profit Distribution in Mudarbah
At the Beginning :
 Definite Profit Ratio agreed by Mutual Consent
 No Particular Proportion has been prescribed by the
Shariah
 May agree on different ratio of Profit 40 % Mubarib,
60% Rabbul Maal or viseversa
Lump sum Amount of Profit Not Allowed:
Capital ---------------> Rs. 100,000
Profit ----------------> Rs. 10,000 of the Mudarib
Profit 2 --------------> 20 % of Capital of Rabbul Maal
Profit Distribution in Mudarbah
 Loss in Some Transactions and others in Profit
Offset the Loss First
Remainder Distributed
Termination of Mudarabah
 Can be terminated at any time
 Give Notice to other Party
Asset in form of Cash ---------> Distribute according
to the agreed Ratio
Asset in other Form ------------> Mudarib may sell it
liquidate them , Distribute it
Combination of
Musharakah & Mudarabah
 In Mudarabah, Fund Provider -----> Rabbul Maal
 Mudarib add Capital, if agreed with Mudarabi
Combination:
Rabbul Maal -------------------> Rs. 100,000
Mudarib Add Own -------------> Rs. 50,ooo
Profit Distribution Mudarabi:
 Certain Percentage of Profit as Mubarib
 Another Percentage of Profit as Sharik
MUDARBAH & MUSHARKAH
AS A MODE OF FINANCING
PROJECT FINANCING
PROJECT FINANCING
 “Financer want to finance whole project”
 Mudarabah & Musharakah both easily adopted
Musharakah:
 Investment comes from both sides
 Management both responsibility
Combination:
 Management responsibility of one party
 Investment comes from both
PROJECT FINANCING
Withdraw One Party from Musharakah
 Other party want to continue
 Purchase the shares.
Financial Institution
 Don’t want remain partner forever
 Sale of share as one unit is lack of liquidity
 Financer divide into smaller unit and may sell it
SECURITIZATION OF
MUSHARAKAH
SECURITIZATION OF MUSHARAKAH
 Big Project , Huge Amount Required
 Limited No. of people cannot afford to finance
Musharakah Certificate:
 Each certificate represent his proportion of
ownership in the asset of musharakah.
 Negotiable Instruments
 Buy or Sale in Secondary Market
SECURITIZATION OF MUSHARAKAH
NOT ALLOWED Certificate Trading other than Par Value
 Assets are in Liquid Form
 Cash , Receivables or Advances due
Example:
No. of Share -------------------------> 100 Shares
Value of Share ------------------------> 01 Million
Total Worth of Project --------------> Rs. 100 Million
 Nothing Purchased by this Money
 Not Allowed Sale other than Par Value
 Money Exchange with Money, excess side ----------> Riba
SECURITIZATION OF MUSHARAKAH
Example:
Musharkah Project
Non - Liquid Assets ----------> 40%
Liquid Assets -----------> 60 %
Face Value of Share ------------> Rs. 100
If Sold Higher Price
Sold Price -------------------> Rs. 110
It Represents:
Liquid Assets ------------------> Rs. 60
Non – Liquid Assets ----------> Rs. 50 ( Previous was Rs. 40 )
SECURITIZATION OF MUSHARAKAH
 Sold Less than Rs. 60 Not Allowed
 Rs. 60 Liquid Assets ( Cash , Receivables etc)
 Money Exchange with Money,
 Low / High side ----> Riba
Financing of a single Transaction
Financing of a single Transaction
 Mudarabah & Musharakah both may be Used
Import Financing :
 Letter of Credit( L/C )
without Any Margin ---------> Mudarabah
With Some Margin ------------> Combination
Expiry of Term
 Imported good are not sold
 Importer may himself purchase the share of Financer
 Pre-Agreed Price or Market Price
Financing of a single Transaction
Export Financing :
 Exported has a specific order from abroad
 Export goods Price is known
 Easily Calculate Expected Profit
Finance on the basis of Mudarabah & Musharakah
Pre-Agreed Ratio of Profit on Export Bill
In Order to Secure Financer Himself , Put Condition:
 Export goods with Full Conformity, will be responsibility of exporter
 If Some Disturbance found, exporter will be responsible only
( Mudarabah )
 If Some Disturbance found other than Negligence, All Partners bear the
Loss ( Musharakah )
SHARING GROSS PROFIT ONLY
SHARING GROSS PROFIT ONLY
 Financing on the basis of Musharakah
Problem:
 Difficult to valuate All Assets & Depreciation /
Appreciation Cost
Solution 1 :
 Pay Agreed Rent to Client of All fixed assets
(Machinery , Building ) from Musharakah fund
 Remain distribute , according to agreed Ratio
SHARING GROSS PROFIT ONLY
Solution 2 :
 Gross Profit will be distributed
 Higher Profit Ratio of Client
 Gross Profit Means Only Direct Expenses will be
deducted from the Sales ( Material, Labor, Electricity
)
RUNNING MUSHARKAH ACCOUNT
ON THE BASIS OF DAILY
PRODUCTS
RUNNING MUSHARKAH ACCOUNT
Musharakah:
 Opening Running A/c
 Deposit & Withdraw Amount any time
 Profit on Average Balance
Musharakah Rulings:
 % for Management
 % for Investor
 Loss , same as investment proportion
 Average Balance per day --------------> Profit
RUNNING MUSHARKAH
ACCOUNT
Argument:
Why share Profit when other Party, during a period had no Money
invested in the Business ?
Example :
A & B Agreed ----------------> Musharakah
Each Contribute --------------> Rs. 50,000
When A didn’t invest his money into Join Pool
Earn Profit --------------> Rs. 10,000 on Rs. 50,000
Distribute --------------> Agreed Ratio
Musharakah Contract Made:
 Subsequent Transaction effected
 Regardless, Whose Money Utilized
WORKING CAPITAL FINANCE
WORKING CAPITAL FINANCE
Musharakah:
 Contribute in Cash or Non-liquid
 Value of Business Assets ---------> Working partner
Profit :
 On the Basis of Value of Business
 Exceed Profit of working Partner ( 70% 30%)
Termination or Expiry:
 Purchase share of Financer
OBJECTIONS ON MUSHARAKAH
FINANCING
Risk of Loss:
Argument:
“Musharakah is more likely to pass on losses of the
business to the bank . This loss will be passed on to
depositors “
Answer:
 Study the feasibility
 If Business is not profitable, Refuse it
 Diversified Musharakah Portfolio
DISHONESTY
 Argument:
 not paying any return to the financiers
 Claim that it has suffered a loss
Solution:
1. well designed system of auditing
2. Profit on the basis of gross margins only
3. Punitive Step: Unable to avail any facility from the
Bank.
Secrecy of the Business:
 it may disclose the secrets of the business to the
financier,
Solution
 may put a condition that the financier will not
interfere with the
 management affairs, and he will not disclose any
information about the business to any
 person without prior permission of the client.
Client’s Unwillingness to Share Profits:
 clients are not willing to share with the banks the actual
profits of their business.
 passed on to the tax authorities and Clients’ tax
liability increases.
Solution:
clients need to be convinced and persuaded that borrowing
on interest is a cardinal sin,
The governments should also try to appreciate the fact that
if
rates of taxation are reasonable and if tax-payers are
convinced that they will benefit
THANK YOU

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Mudarbah & musharkah

  • 1. P R E S E N T E R S M U H A M M A D F A I S A L S H A I K H M U H A M M A D Z E E S H A N M U H A M M A D A F A Q MUDARBAH & MUSHARKAH AS A MODE OF FINANCING
  • 3. What is Mudarabah?  Kind of partnership  One person gives money to another for investing  Investor ------> Rab-bul-Maal Or Mudarabi  Fund Utilizer -------> Mudarib  Rabbul Maal---------> No Right in Management
  • 4. Mudarabah v/s Musharakah 1. Investment 2. Participation in Management 3. Loss Share  In Partnership  Rabbul Maal  Mudarib 4. Liability 5. Appreciation in the value of the assets
  • 5. Types of Mudarabah  Al Muqayyadah ( Restricted Mudarabah)  Al Mutlaqah ( Un-Restricted Mudarabah)
  • 6. Profit Distribution in Mudarbah At the Beginning :  Definite Profit Ratio agreed by Mutual Consent  No Particular Proportion has been prescribed by the Shariah  May agree on different ratio of Profit 40 % Mubarib, 60% Rabbul Maal or viseversa Lump sum Amount of Profit Not Allowed: Capital ---------------> Rs. 100,000 Profit ----------------> Rs. 10,000 of the Mudarib Profit 2 --------------> 20 % of Capital of Rabbul Maal
  • 7. Profit Distribution in Mudarbah  Loss in Some Transactions and others in Profit Offset the Loss First Remainder Distributed
  • 8. Termination of Mudarabah  Can be terminated at any time  Give Notice to other Party Asset in form of Cash ---------> Distribute according to the agreed Ratio Asset in other Form ------------> Mudarib may sell it liquidate them , Distribute it
  • 9. Combination of Musharakah & Mudarabah  In Mudarabah, Fund Provider -----> Rabbul Maal  Mudarib add Capital, if agreed with Mudarabi Combination: Rabbul Maal -------------------> Rs. 100,000 Mudarib Add Own -------------> Rs. 50,ooo Profit Distribution Mudarabi:  Certain Percentage of Profit as Mubarib  Another Percentage of Profit as Sharik
  • 10. MUDARBAH & MUSHARKAH AS A MODE OF FINANCING
  • 12. PROJECT FINANCING  “Financer want to finance whole project”  Mudarabah & Musharakah both easily adopted Musharakah:  Investment comes from both sides  Management both responsibility Combination:  Management responsibility of one party  Investment comes from both
  • 13. PROJECT FINANCING Withdraw One Party from Musharakah  Other party want to continue  Purchase the shares. Financial Institution  Don’t want remain partner forever  Sale of share as one unit is lack of liquidity  Financer divide into smaller unit and may sell it
  • 15. SECURITIZATION OF MUSHARAKAH  Big Project , Huge Amount Required  Limited No. of people cannot afford to finance Musharakah Certificate:  Each certificate represent his proportion of ownership in the asset of musharakah.  Negotiable Instruments  Buy or Sale in Secondary Market
  • 16. SECURITIZATION OF MUSHARAKAH NOT ALLOWED Certificate Trading other than Par Value  Assets are in Liquid Form  Cash , Receivables or Advances due Example: No. of Share -------------------------> 100 Shares Value of Share ------------------------> 01 Million Total Worth of Project --------------> Rs. 100 Million  Nothing Purchased by this Money  Not Allowed Sale other than Par Value  Money Exchange with Money, excess side ----------> Riba
  • 17. SECURITIZATION OF MUSHARAKAH Example: Musharkah Project Non - Liquid Assets ----------> 40% Liquid Assets -----------> 60 % Face Value of Share ------------> Rs. 100 If Sold Higher Price Sold Price -------------------> Rs. 110 It Represents: Liquid Assets ------------------> Rs. 60 Non – Liquid Assets ----------> Rs. 50 ( Previous was Rs. 40 )
  • 18. SECURITIZATION OF MUSHARAKAH  Sold Less than Rs. 60 Not Allowed  Rs. 60 Liquid Assets ( Cash , Receivables etc)  Money Exchange with Money,  Low / High side ----> Riba
  • 19. Financing of a single Transaction
  • 20. Financing of a single Transaction  Mudarabah & Musharakah both may be Used Import Financing :  Letter of Credit( L/C ) without Any Margin ---------> Mudarabah With Some Margin ------------> Combination Expiry of Term  Imported good are not sold  Importer may himself purchase the share of Financer  Pre-Agreed Price or Market Price
  • 21. Financing of a single Transaction Export Financing :  Exported has a specific order from abroad  Export goods Price is known  Easily Calculate Expected Profit Finance on the basis of Mudarabah & Musharakah Pre-Agreed Ratio of Profit on Export Bill In Order to Secure Financer Himself , Put Condition:  Export goods with Full Conformity, will be responsibility of exporter  If Some Disturbance found, exporter will be responsible only ( Mudarabah )  If Some Disturbance found other than Negligence, All Partners bear the Loss ( Musharakah )
  • 23. SHARING GROSS PROFIT ONLY  Financing on the basis of Musharakah Problem:  Difficult to valuate All Assets & Depreciation / Appreciation Cost Solution 1 :  Pay Agreed Rent to Client of All fixed assets (Machinery , Building ) from Musharakah fund  Remain distribute , according to agreed Ratio
  • 24. SHARING GROSS PROFIT ONLY Solution 2 :  Gross Profit will be distributed  Higher Profit Ratio of Client  Gross Profit Means Only Direct Expenses will be deducted from the Sales ( Material, Labor, Electricity )
  • 25. RUNNING MUSHARKAH ACCOUNT ON THE BASIS OF DAILY PRODUCTS
  • 26. RUNNING MUSHARKAH ACCOUNT Musharakah:  Opening Running A/c  Deposit & Withdraw Amount any time  Profit on Average Balance Musharakah Rulings:  % for Management  % for Investor  Loss , same as investment proportion  Average Balance per day --------------> Profit
  • 27. RUNNING MUSHARKAH ACCOUNT Argument: Why share Profit when other Party, during a period had no Money invested in the Business ? Example : A & B Agreed ----------------> Musharakah Each Contribute --------------> Rs. 50,000 When A didn’t invest his money into Join Pool Earn Profit --------------> Rs. 10,000 on Rs. 50,000 Distribute --------------> Agreed Ratio Musharakah Contract Made:  Subsequent Transaction effected  Regardless, Whose Money Utilized
  • 29. WORKING CAPITAL FINANCE Musharakah:  Contribute in Cash or Non-liquid  Value of Business Assets ---------> Working partner Profit :  On the Basis of Value of Business  Exceed Profit of working Partner ( 70% 30%) Termination or Expiry:  Purchase share of Financer
  • 31. Risk of Loss: Argument: “Musharakah is more likely to pass on losses of the business to the bank . This loss will be passed on to depositors “ Answer:  Study the feasibility  If Business is not profitable, Refuse it  Diversified Musharakah Portfolio
  • 32. DISHONESTY  Argument:  not paying any return to the financiers  Claim that it has suffered a loss Solution: 1. well designed system of auditing 2. Profit on the basis of gross margins only 3. Punitive Step: Unable to avail any facility from the Bank.
  • 33. Secrecy of the Business:  it may disclose the secrets of the business to the financier, Solution  may put a condition that the financier will not interfere with the  management affairs, and he will not disclose any information about the business to any  person without prior permission of the client.
  • 34. Client’s Unwillingness to Share Profits:  clients are not willing to share with the banks the actual profits of their business.  passed on to the tax authorities and Clients’ tax liability increases. Solution: clients need to be convinced and persuaded that borrowing on interest is a cardinal sin, The governments should also try to appreciate the fact that if rates of taxation are reasonable and if tax-payers are convinced that they will benefit