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What is Mudarabah and its Types

What is Mudarabah ?

            In an Islamic system, there is no place for the capital to be given on interest. Capital is to be combined with skill and both are to work on profit and loss sharing basis. This arrangement in Halal business wherein capital is combined with knowledge and skill is technically called mudarabah .

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Definition of Mudarabah 

            Mudarabah means a business in which the subscriber (Zarib) participates with his money and another (Modarab) with his efforts or skill or both his efforts and skill and shall include Unit trust and Mutual funds by whatever named called.
          The profit earned during the year is distributed among the financiers and the entrepreneurs according to the agreed ratio.
           In case of loss, it is shared among the financers in proportion to the capital invested in the business. If losses occur dueto the negligence of modarab (managing trustee ) or there is a branch of the terms of agreement by him, then the losses will also be borne by him.
          Mudarabah is an effective device for raising of large amount resources for productive purpose in place of joint stock companies.
           A mudarabah is a legal person. It can sue and be sued in its name through the mudarabah (Floatation and control) Ordinance in 1980.

The main features of this are as under;
Registration of Mudarabah Companies.

1. A company is registered as” mudarabah Company”. The main conditions of eligibility for registration as mudarabah Company are as under.
a. It should be a company (private or public sector) registered under companies’ ordinance or any other law in force.
b. If a company undertakes floatation and management of mudarabah , then its paid up capital should not be less than Rs.5 Million.
c. The promoters of the company should have knowledge and skill for carrying on the business.
d. The office bearers of the company should not be insolvent, convicted of fraud by the court or involved in a breach of trust.

Condition for Mudarabah Companies:

The mudarabah company shall not engage in any business of the same nature in competition with the mudarabah floated by it. The mudarabah company shall subscribe in each mudarabah floated by it not less than ten percent of the total amount offered for subscription.
The directors and officers of the mudarabah company or their relatives shall not take loans from mudarabah fund or against its security.

The mudarabah company shall provide
a. Profit and loss account
b. Balance sheet
c. Auditors and the company’s report to mudarabah certificate holders within 6 months of the close of the accounting period.

Religious Board for Mudarabah Companies:

A religious board comprising of three persons.
• 2 religious scholars and 1 judge of High Court has been setup.
• The board will give clearance to each mudarabah that the economic activity undertaken is permissible under Shariah and Halal.

         Each mudarabah is to appoint chartered accountants duly approved by the Registrar. The chartered accountant shall certify the accounts and also the objective or purpose for which the mudarabah is setup.

Types of Mudarabah

      Mudarabah, as listed on Stock Exchanges, are multipurpose and multidimensional. The broad categories of mudarabah s are.
1. Finance
2. Advisory
3. Investment management services
4. Under writing
5. Venture capital
6. Leasing
7. Investment
8. Resources Mobilization

The growth of Mudarabah .

In order to mobilize savings and to meet the credit demand, the following incentives were given to mudarabah s.
1. If a mudarabah distributes 90% of its profits among its certificate holders, it will enjoy a total tax exemption.
2. A mudarabah certificate holder is now brought equal to share holder.
3. mudarabah is now included in the definition of a company for the purpose of I.T Ordinance 1970.

Cancellation of Registration of Mudarabah Company:

           According to the modarab ordinance 1980, the registrar can cancel the registration of any company by following the procedure stated below.
“Where the registrant is of the opinion that a mudarabah company has contravened or has failed to comply with provision of the ordinance or the rules or with any direction or given there under, he may, if he considers necessary in the public interest so to do, by order in writing”

Appointment of Administrator:
           After the cancellation of the registration of a Modarab company on the above grounds, an administrator may be appointed to take over and manage the mudarabah in Place of the mudarabah Company for such period as the Registrar may specify.

About the author

Salman Qureshi

Salman Qureshi is an Accountant by profession & he loves to write on Commerce & Management Sciences Subject to assist Students. Hope you guys will like his effort.

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