CHAPTER TWO المضاربة N ATURE AND CASE STUDIES ON M UDARABA F INANCING F ORMS 1

(2/1) Mudaraba Meaning : معنى المضاربة Mudaraba is a form of joint verture capital finacing between two parties, the first provides capital, the second provides labour (efforts). In case of a profit, it is distributed between the parties as agreed between them. in case of loss, the capital provider would charge it, the labour losses his effort. 2

(2/2) Shari'a Principles of Mudaraba : الضوابط الشرعية للمضاربة Shari'a principles (Law) of Mudaraba are : 3

1. The capital is provided by the first partner, who is called Rab-e-Mal رب المال (the capital provider). He is not entitled to share in management. 2. The manager is appointed to manage the Mudaraba Business. He is called El- Mudarab, Rab-El-Amal. رب العمل 4

3. The capital can be in sort of cash, or assets which can be valued in monetary terms without suspicion or doubt. 4. Profits generated from Mudaraba are not realized untill capital is fully maintained. 5

5. Profit is divided between the partners according to the common rate due to each partner. No gurantee for each of giving them a minimum profit. 6. Loss is charged to the capital provider, the Mudarib المضارب has lost his effort. The Mudarib may be held liable for losses in case of carelessness الإهمال and inattentiveness التعدي, and negligence التقصير. 6

7. The accounts of Mudaraba should be checked by an experienced Auditor or by the Capital provider, as settled down in the contract. 7

(2/3) Mudaraba rocedures as implemented by Islamic Banks : If a client (Applicent) has the desire to joint- venture with an Islamic Bank in the form of Mudaraba, the following procedures should be carried out: 8

1.The Business-man (the client) procedes a request to the Islamic Bank requiring capital through Mudaraba Financing Form, attaching some documents: such as : the Feasibility Study. 2.The Islamic bank would study and evaluate the request according Shari'a principles & Investment Critieria, and other Technical Rules. 9

3. In the case of accepting the request, the client would provide some sort of Guarantee, Documents against willful, negligence, carelessness and so on. 4. After that, Mudaraba financing Contract is settled dowin and signed by both partners. 10

5.The Islamic Bank should provide the Capital, and the Modarib would manage the activities as sellted down at the contract. 6.Every period, or at the end of the Mudaraba activities, the financial statements is prepared, which sow the results of affairs (profit or loss) which is distributed as settled down reflect) in the contract. 11

7.At the end of the Mudaraba activities, the liquidation accounts are prepared which declaire the distribution of profit and loss and the share of each part. 8.The Mudaraba Contract could be renewed for another period, if the two parts wish and confirm this desire. 12

(2/4) Case studies on Mudaraba financing form : 13

Case (1): A Mudaraba contract is settled down between an Islamic bank and aClient,as follows : the Islamic Bank provides capital of S.R., and the client provides his efforts. the subject activity of the Mudaraba is Trading in foods, for one year. profit is divided as : 60% for the Islamic Bank, 40% for the client. 14

the result of activities was as follows : Sales Income S.R. Purchases Costs S.R Mudaraba Expenses S.R According to the provious data and information, the income statement is prepared as shown at the following page. 15

Case (2) : If in the previous case the Sales income was , in this case, the Mudaraba activity results would be a loss of S.R. the Bank would cahrage it, because the Mudarib has done his best. According to the previous new Data and information the Mudaraba Income statement is prepared as shown below.: 16

CHAPTER THREE المشــاركة Nature and case studies on Musharaka Financing Forms 17

(3/1)Musharaka Meaning : معنى المشاركة It Means : participation of two or more partners with defined amounts of capital and efforts, they carried out the activities according to Shari'a Principles. Profit & Loss may be shared proportionately according to the agreement settle down in the contract. There are two main kinds of Musharaka : Fixed and Decreasing. 18

(3/2) Shari'a Principles of Musharaka : الضوابط الشرعية للمشاركة Shari'a principles (Law) of Musharaka are : 1.The defined amount of capital provided by each party should be in case or assets which can be valued in monetary terms without suspicion or doubt. 2.Management of Musharaka affairs are implemented (carried out) by all partners or by one of them as agreed. 19

3.Musharaka could have a separate entity from their owners. 4.Profits generated from Musharaka are not realized until capital is fully maintained 5.Profits may be distributed proportionately according to the shared capital provided by each partner or by other proporation which takes into the consideration the efforts. 20

6.Losses should always be distributed proporationately according to the shared capital provided by each partner. 7.Guarantee of capital or profits should not be given from a partner to another. 8.The partner who manages the project may be allowed a management Fee defined in advance in the contract. 21

9.Each partner have access to the books and records of the Musharaka project at any time. 10.Musharaka documents, records, books, accounts, statements and reports should be audited by partners or by Athorised Auditor. 11.Musharaka contract is normally for a fixed period, with an option to renew it to another period if the partners wish and conferm this desire. 22

(3/3) Musharaka procedures as implemented by Islamic Banks. If a Business-man (client) has the desire to participate with an Islamic Bank in the form of Musharaka, the procedures to be followed are the same in the case of Musharaka mentioned before in chapter two. they are summarized as follows. 23

1.proceeding a request for financing through Musharaka form, the client may provide some documents ordered by the Bank. 2.the Islamic Bank would study the request and the other documents, and collect data about the financial position of the client. 24

3.the client would provide Guarantee against carelessness, willful, negligence and bad behavior. 4.writing (settling down) and signing the contract by partners. 5.Capital is paid by each partner. 25

6.Musharaka project is carried-out according to the principles, policies, plans and projects shown at the feasibility study. 7.Preparing financial statements every period to show the results of affairs and the financial position of the project. 26

8.Profit distribution after accepting and confirming the financial statements. 9.Losses may be deffered to another period, if partners accept this desire. 10.At the end of the Musharaka period settled down in the contract, liquidation accounts are prepared and finishing the Musharaka contract. 27

11.The Musharaka contract could be renewed for another period if the partners wish and confirm this desire. 28