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Modaraba: Definition, Types & Example

Understand

In Islamic Mode of Financing, the Modaraba is a partnership in which one partner (usually an Islamic Bank) provides finance and another partner utilizes his/her skills to carry out any business.The profit earned from the business is distributed at predetermined rate and the party who provides finance is called “Rabb-ul-Mal” (the Investor) whereas the “Modarib” (the Manager) is the party who comes with management skills to start the business.

Types of Modaraba

Restricted Modaraba or Mudarabah Al Muqayyadah restricts the the Mudarib (the Manager) as specified by “Rabb-ul-Mal” (the Investor) to start the business whereas, in unrestricted Modaraba or Modaraba Al Mutalqah, the Mudarib (the Manager) has choice to start business whatever he/she deems fit, however, the Mudarib is not authorized to keep another partner and invest own capital into that particular Modarabah without the consent of Rab-ul Maal.

A Hypothetical Example

Mr. A is a qualified professional accountant, having 20 years of professional experience in the textile sector. He wants to start his own textile manufacturing unit but does not have enough cash resources, for this, he contacts a local Islamic financial institution which offers Modaraba Al Mutalqah in which the Mudarib, in this case, Mr. A can start business of his own choice with predetermined profit rates.

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