Umair Javed

What is Modarbah? How does Islamic

Banking system implement the Modarbah
in its functioning?
Definition and Meaning
The term Modarbah is derivation of Al-Zarb which can be translated as ‘to travel’. It is also associated
with word Zarb Fi al-ard, which refers to make lengthy journey across the earth. Both these terms are
coin concept of travelling b because labourer who join the modarba put his effort making product
providing through capital by financing party. Other two terms Qiraad and Miqarza are also used to refer
to Modabarah because capitalist put saving (cutting fraction from income) for Modarba contract. A
person who puts labour into business is known as Darib and he returns share of profit to Rab-al-Mal (the
person who provide finance)

Classification of Modarbah
There are two general categories in Modarbah contract

1- Whenever two people( Rab-al-Mal and Modarib) form contract of Modaraba to utilise the
capital to earn profit out it.
2- Sometimes more than two individuals form the contract of Modarbah. This could happen in
following ways.
i. Either more than one Rab-al-Mal(financier) or more than one Modarib(labourer)
enter in the contract
ii. Capital investment is made by one Rab-al-mal(financier) and more than labourers
(Modarib) work for product.
iii. Cartel could provide capital investment and business could be managed by one
individual.

Differentiating Modarbah from Musharakah

In Mudarbah, the rab-ul mal has no right to participate in the management which is carried out by the
mudarib only. While in Musharakah, all the partners can partners can participate in the management of
the business and can work for it. Secondly, investment in Musharkah comes from all the partners, while
in mudarbah, investment is the sole responsibility of rab-ul Mal. In Muusharkah all the partners share
the loss to extent of ratio of their investment while mudarbah the loss is borne by rab-ul-mal only.
Terms and Rules of Modarbah
1- Modarbah is built on trust. Whence capital enters into hands of Modarib, it remains with as
trust. Responsibility shall fall on Mudarib to protect and utilize the capital of Rab-ul-Mal.
However, he is also not liable to return capital in case it is lost, wasted and unable.
2- Role of Mudarib is as agent of Rab-ul-mal for working of business
3- Each party has to share profit on basis of pre-defined criterion.
4- If Mudarib fails to accept the provisions of Modaraba agreement. He is held accountable for
that, and capital should be returned to Rabl-ul-Mal
5- Capital should be invested in form of money, gold or silver. Modarbah is not allowed with traded
goods.
6- The whole amount should be clearly mentioned when entering in Modarbah contract.
7- Expected profit and share of profit must be fixed at time of contract.

Significance of Modarbah
Modarbah is used as natural contract throughout the ages of human history. It is most justified mode of
fiancé because it doesn’t exploit one party over other. Each party bear the burden of loss and profit is
distributed on pre-defined terms. It provides avenues for those who deosn’t own capital but are capable
of utilizing the capital for profit generation. It is beneficial for fianancier because their constraints of
physical or mental disability or lack of experience can be countered in good way.

Application of Modarbah in Modern Islamic System

Modern banking is unable to perform efficiently which is based on greed and lust. Due to inconsistencies
with Islamic inunctions, conventional banking system doesn’t provide acceptable way-forward for
Muslims. In this way, Modarbah could functioned efficiently in modern Islamic banking practices.

Investment through Modaraba

In Modarbah business, amount of profit is hsared by the bank and businessmen in fixed ratio. On the
hand, loss shall be absorbed by the capital creator which is bank.

Banks don’t meddle into affairs of business, however it bank has right to collect information about
expenditure planned by businessmen through Modarbah contract. Furthermore, it can also collect
information about its operation and investigate any irregularity.

Distribution of Profit
If only bank is involved with Mudaarib,, so profit shall be shared on basis half or according to stipulated
percentage or fixed ration, prior determined. If the Bank and the Businessmen have invested equal
amounts in Modarbah business, the bank shall receive 25% and businessman shall receive 75%
percentage of profit.

Bank’s Investment in managing business

If an applicant for Modarbah with a bank is already managing an industry, agricultural land, or trading
business, bank is well within its right to inquire about the capital already invested in the business, the
assets of the company and total assets after adding the bank’s investment
The property and assets of the business such as plant, building manufactured, goods and raw material
shall be valued at market price and the total shall be taken as the company’s assets excluding bank’s
investment. The procedure of valuing the assets of running business should be adopted by mutual
agreement between the bank and the Modarib.

Modarbah Account
The business loss be distributed over the gross capital and each amount holder shall bear the loss
accruing to his capital. At the end of each quarter every account holder shall receive statement of profit
and loss. The account holder shall have option to withdraw his capital from the bank at any time.