Modaraba -- a concept explained

In Islamic law, a mudaraba is a business setup in which one party (the sahib-e-maal) supplies capital for a venture while another party (the mudarib) contributes effort and skill. Per an agreement between the two parties, the profits of the venture are shared. During the early period of Islam, individuals and small groups were the parties in mudarabah arrangements. The system relied heavily on honesty and business integrity. Since business was simpler, it was feasible to see the results of each individual deal for accounting purposes. Modern business is more complex, and thus time periods rather than single transactions are the basis of accounting. To meet Pakistan's needs, mudarabas are being reshaped in the image of mutual funds. In an interest-free economy, the central bank would help control the volume of mudaraba financing, regulate the demand for mudaraba funds, allocate mudaraba funds to where they are most suitable, and deal with qualitative issues.