Modaraba is a business in which one person participates with his money and another person with his knowledge and skill. If there is a profit in business, it will be distributed according the agreed ratio on other hand if there is a loss it will become by the financier.
The person who participate in the business with skill is called Modaraba.
FEATURES OF MODARABA :-
1. It is an agreement, in which one party provides managerial skill and other party provides capital funds to carry on the business.
2. Profit is shared according the agreed ratio.
3. It may be "Multiple Purpose" for special purpose.
4. This business must be governed by the "Modaraba companies Modaraba rules, 1981.
5. According to the modaraba rules at least 10% shares are compulsory for the party who provides managerial skill.
6. A company which is registered as a modaraba company can float a modaraba.
7. For the floating of modaraba. Company must obtain the permission from the registrar and controller.
8. A clearance certificate is also obtained from the Religious board that business is not against the Islamic Laws.
9. Each modaraba company has to appoint the charted accountant, as auditor who will certify the accounts and objectives of modaraba.
It means an arrangement of business, in which all the parties contribute the funds. In this business profit is shared in pre agreed proportion by the parties according to their ratio of capital contributed.
Banks have been permitted for investment on the basis of sharing in the profit and loss. So musharika is a temporary agreement between bank and a party for providing working capital with the conditions that the profit will be shared at the agreed ratio but loss will be shared in strict proportion of the actual fund invested. All the limited companies are eligible to participate in musharika. The entire management of the musharika business shall remain in the hands of the borrowing party. The bank will evaluate the performance of the business only.
FEATURES OF THE MUSHARIKA :-
1. Relationship :-
In case of Musharika the relationship between banks and other party is that of debtor and creditor according the ordinance 1980.
2. Profit And Loss Determination :-
In Musharika business profit is determined after taking in to consideration the various other factors besides the capital like political and economic conditions. Bank can not claim the profit on equal footing.
3. Bank Investment :-
In case of Musharika bank invests the capital. It does not lend the money to the other party.
4. Working Capital :-
In this case investment shall be used only for the financing requirements of working capital.
5. Security :-
To ensure safety of the capital the bank shall in its own right may obtain adequate security from the party. The securities shall be kept fully insured at the party cost.
6. Power Of Sanction :-
In case of first time the power for approving working capital finance under Musharika system shall rest with the head office only.
7. Case Of Loss :-
In case of loss bank also shares with other partner in proportion to their respective share in capital of the venture.
8. Payment Of Profit :-
An estimate of anticipated profit or projected rate of profit is provided by the other party to the bank when it enters into Musharika. It pays the share of profit to the bank made during a quarter in agreed proportion.
9. Right Of Bank :-
If customer fails to provide the accounts to the bank than bank has a right to debit the customer, his share of profit according the anticipated rate of profit.