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 but practically, the unrestricted way of Mudaraba is suitable for Mudaraba companies and banks because in case of unrestricted Mudaraba, the management (Mudarib) would be free to run the business.
Due to effective and efficient practices of Mudaraba companies and Islamic banks, the mode of Mudaraba has been recognized as the best alternative for interest based investment and deposit structure. Now, the people have the opportunity to invest in the businesses of Mudaraba companies and banks and earn Halal profit without any hesitation. The Mudaraba companies and Islamic banks utilize the investment of Rabb ul Maal in different Shariah-complaint profitable business activities i.e. Murabaha, Ijarah, Diminishing Musharaka, Salam, Istisna and investment in Shariah complaint shares and securities etc.
It is evident that both Mudaraba companies and Islamic banks are intermediary financial institutions in the society that accept deposits and investments from the people and further offer different Shariah complaint financing services to individual and commercial avenues.
Now, as the prevalent Islamic financial system has showed its viability and significance in the regional and global financial markets, we can think greater suggest with respect to utilization of mode of Mudaraba in the better interest of the socio-economic scenario of the society and may lead towards the implementation of ideal Islamic welfare society. What can be done in this regard? The Mudaraba companies and Islamic banks may provide financing on the basis of Mudaraba. In this way, the Mudaraba companies and Islamic banks would act as Rabb ul Maal and the customer would act as Mudarib. The investment may be made in the whole business of the customer or in the specified business unit according to the needs of the customer and financial possibilities. The implementation and practice in this way may definitely bring the change in the socio-economic scenario as the arrangement would be based upon profit and loss sharing mechanism.
In the prevalent financing scenario, the financial institutions provide financing mostly on the sale and rental based modes in which profit and rent would be taken from the customers. In the conventional financing, the interest is charged upon the financing facilities. Therefore, the cost of interest in conventional financing and cost of profit and rent in Islamic financing lead the inclusion of these costs in the manufactured items and the end consumer pays this cost in the society and in this is the major cause of inflation in the economy. There is no doubt that the prevalent Islamic financing is all Halal but this is the reality that the prevalent sale and rental based Islamic modes cannot bring socio-economic revolution in the society that Islam desires. In case of Mudaraba based financing, this type of costs do not exist and inflation may decrease to the certain extent.
This is also the fact that there are various difficulties in the Mudaraba based financing and it would be very different mechanism as compared to acceptance of Mudaraba based deposits and investments for financial institutions. The major difficulty is the moral hazard as the financial institution would depend upon the financial figures of the business in which the investment has been made.
Therefore, there is a threat of representing wrong financial facts and figures from the customer. The Islamic financial institutions do the necessary financial scrutiny procedures before extending financing to the customers but in case of Mudaraba financing, this scrutiny is not enough for financial security. In addition to strict scrutiny before disbursement, there is a need of continuous security till the maturity of the financing period.
Need of regulations
To cater this issue, the regulatory authorities i.e. Securities and Exchange Commission of Pakistan (SECP) and State Bank of Pakistan (SBP) should formulate prudential regulations for prudent and safe Mudaraba financing. For this purpose, the regulatory authorities, financial institutions, economic and financial experts and other stake holders should collectively think about these matters. The regulations are required specially for monitoring and risk management as Islamic financial institutions may monitor the activities of the business in a prudent way. Beside these, the creation of Mudaraba and liquidation of Mudaraba also need particular laws and regulations for Islamic financial institutions.
Keeping in view the above mentioned discussion, there is a need to think in this regard as it may meet the real objective of Islamic financial institutions i.e. to implement the Islamic economic system that may make the society a welfare society.
The author is a Team Leader — Training & Development Unit, Shariah Compliance Department, National Bank of Pakistan