Modaraba

It is another form or mode of Islamic financing. it is more popular and practiced than musharaka. Modaraba can be defined as, " an agreement between the investor (Modarib) and the modaraba company allowing the company to carry out business with the invested amount and pay profit to the investor according to the ratio of the borrowed amount" Here the lender is the capitalist, individual, or the investor. The borrower is the business corporation operating on the modaraba principle. If the modaraba company ( the borrower) earns profit, it will pay prorata profit to the lender, In case of no profit, no loss the borrowed or lent amount will remain intact and hence no profit will bepaid to the lender. In this case, in fact, the borrower ( the modaraba company ) is the loser since its labor has gone wasted. In the third possible situation, the modaraba company ( the borrower) may suffer a loss. here the lender will lose the money to the maximum extent of his investment. The loss will be prorata to his lent amount. Hence, the lender is the loser.

Disadvantages of Musharaka

1. It is extremely difficult to change from the system of interest based economy to that of interest free.


2. Undue interference of the lender (e.g the bank) in the borrower's business will be in place.


3. Borrowers suspect that the lender will ever share their losses.


4. The lender will suspect that the borrower will underestimate profits.


5. There will remain mistrust between the lender and the borrower.


6. The borrower's financial secrets will get open to the lender, the fact which may harm the former's business.

Advantages of Musharaka

1. It is completely in accordance with the tenets of Islam


2. Interest which is haram id ridden of.


3. It facilitates the establishment of Islamic society.


4. Conscience of Muslim is satisfied and in peace.


5. Rampant inflation may be controlled.

MUSHARAKA

Musharaka refers to profit and loss sharing between the lender and the borrower completely doing away with the interest. It is an arrangement of financing in which parties offer funds, efforts, or/and skills. Profits are shared among them according to the rate agreed upon. In case of loss, only one party suffers it which is the investor. In Pakistan, the Musharaka Financing mode has been launched by commercial banks to meet their working capital requirements of the trade and industry. The banks carry out musharaka a functions out of profit and loss accounts (PLS) deposits.

The borrowers receive interest-free loan on the basis of equity participation and profit or loss from the bank or any other financial institution. The lending bank enjoys teh right of participation in the borrowers business to the limit of amount of loan. In other words, the borrower is liable to the bank (the lender) up to the limit of invested (i.e borrowed) amount. In case of profit (or loss) the lender will receive his prorate share or profit (or suffer a loss). The agreement between the investor and the company is referred to as Musharaka Investment agreement which stipulates that the operation of the musharaka will be carried out by the borrowing company. The bank as a trustee will watch, evaluate, and supervise the performance. 

Modes Of Operations

Islamic Banks employ their funds in the following interest free loans:

1. Modaraba        (Venture Capital or Project Finance)


2. Musharaka       (Partnership / Profit and Loss Sharing)


3. Leasing             (Financial Leasing)


4. Bai-Salam         ( Deferred Payments Sales)


5. Murahaba         (Financing on cost plus basis)


6. 
   

Basic Concept of MUSHARAKA & MUDARABA

ISLAMIC FINANCING AND BANKING

The structure of Islamic Banking and financing is raised on profit or loss basis completely alienating itself from interest or usury.In other words the system is a substitute for interest-based economy.

Islamic bank can be defined as a financial institution which operates in accordance with the principles of Shariah. It does not advance loans at interest, and rather shares all risks with borrowing business corporations or individuals.

Long-Term Institutional Investor

The following are the important long-term investor who buy corporate bonds.

1. Life Insurance Companies


2. Fire Insurance Corporations


3. Corporate Pension Fund


4. Saving and Loans Companies


5. Commercial Banks (with primary emphasis on liquidity)


6. Investment Companies


7. Religious, Educational and charitable funds


8. Mutual Savings Bank


9. Provident funds of the companies