Importance of Mudaraba in present financial scenario.

Byline: MUHAMMAD ZEESHAN FARRUKH

The importance of partnership modes in the Islamic financial scenario is not deniable. The ideal modes for Islamic finance practices are Mudaraba and Musharaka. The both of the two have their own benefits and consequences for economics and finance.

As far as Mudaraba is concerned, Mudaraba is the unique way of financing mode in which one party invests in the business, which is called as Rabb ul Maal, and the other party manages the business, which is called as Mudarib. In this way, this is a unique blend of investment and management keeping in view the Shariah guidelines in this respect. The Rabb ul Maal and Mudarib may agree upon the ratio of profit say 60:40 or otherwise but the loss must be borne by the Rabb ul Maal if there would be not any negligence of the Mudarib with respect to business activities. The Rabb ul Maal may also invest in the business besides investment and take their share in the profit as per their ratio of investment in the business.

There are two types of Mudaraba i.e. Restricted and Unrestricted Mudaraba. In case of restricted Mudaraba, the Rabb ul Maal restricts Mudarib by imposing conditions for the business. In this case, the Mudarib must follow the instructions of Rabb ul Maal otherwise in case of any adverse circumstances due to violation of instructions; the Mudarib would be liable for any loss and damages. On the contrary, in case of Unrestricted Mudaraba, the Rabb ul Maal does not impose any restrictions and conditions for running the business and relies upon the Mudarib in this respect.

In Pakistan, this mode is being widely used in the economic and financial scenario. There are 27 Mudaraba companies in Pakistan. The investment of the public i.e. Rabb ul Maal would be invested in Shariah compliant avenues under the guidelines and regulations of Securities and Exchange Commission of Pakistan.

As far as Islamic Banking is concerned, the whole deposit management is based upon the mode of Mudaraba. Likewise conventional banking, Islamic banks also accept deposits as current, saving and term deposit accounts. The current account is offered on the basis of Qard upon which no profit and free services are offered. The saving and term deposit accounts are offered on the basis of Mudaraba upon which the profit is distributed according to the specified profit ratio and Shariah compliant pool management mechanism.

The investment may be accepted as both Restricted and Unrestricted ways...