In an Islamic country there is no place for the capital to be given on interest. Capital is to be combined with the skill and both are to work on profit and loss sharing basis. This arrangement in Halal business wherein capital is combined with the knowledge and skill is technically called modaraba.
Modaraba means: a business in which the subscriber participates with his money and another (manager madaraba) with his efforts and skills and shall include unit trusts and mutual funds by whatever name called.The profit earned during the year is distributed among the financiers and the entrepreneurs according to the agreed ration. In case of loss, it is shared among the financiers in proportion to the capital invested in the business.
If losses occur due to negligence of modarab (managing trustee) or there is a breech of the terms of agreement by him, then the losses will be borne to him. Modaraba is an effective device for rising of large amount of resources for productive purpose in place of joint stock companies. A modaraba is a legal person. It can sue and be sued in its name through the modaraba company. The government of Pakistan promulgated the modaraba companies and modaraba (floatation and control) Ordinance in 1980.