islamic modes of finance

�ع� �ي �ب ال ه� الل �ح�ل� و�أ�ا ب الر� م� و�ح�ر�

(2:275)

Group Members

Hassan Jan Habib

Ammad Nadeem

M. Raza Zaidi

Farhan Ahmad

Islamic Modes of

Financing

Agenda

• Introduction

• Islamic Principles of Transactions• History• Islamic Financial Instruments

• Conclusion

Introduction

• According to Islamic Principles• Framework of Islamic finance • Shariah Compliance Framework

Islamic Principles of Transactions

�ا ب الر� م� و�ح�ر� �ع� �ي �ب ال ه� الل �ح�ل� و�أ

Allah has permitted trade and has forbidden riba

(2:275)

Cont’d

• “O you who believe, fear Allah and give up what remains [due to you] of interest if you should be believers”. [ Al-Quran: 2-278 ]

• And if you do not, then be informed of a war [against you] from Allah and His Messenger but if you repent, you may have your principle – “Thus” to no wrong nor are you wronged”. [ Al-Quran: 2-279 ]

Cont’d

• From Jabir (R.A) “ The Prophet (PBUH) cursed the receiver, the payer of interest, the one who records it and the two witnesses of the transaction and said: They are all alike (in guilt)

• [Reported by Muslim, Tirmidhi and Ahmad]

Cont’d

History

History Cont’d

History Cont’d

Current Position:

• More than 500 Financial Institutions• Including 300 Banks• With Average growth of 14% per year• Estimated assets worth $1 trillion• Over 70 counties worldwide

Islamic Modes of Financing

The real and ideal instruments of Financing in Shari’ah are:

Musharakah Mudarabah

Cont’d

Other modes include:MurabahaIjarahSalam Istisna

Mushaarakah

• “Mushaarakah” literally means sharing• It is derived from “shirkah” which means

“being a partner”• Joint enterprise formed for conducting

business• Profit & loss

Rules of Mushaarakah

• Assets of Mushaarakah are jointly owned in proportion to the capital of each partner.

• loss [by general consensus] is always subject to the ratio of investment.

Cont’d

Ratio of profit:Must be equal to ratio of investment - Imam

Malik & Imam Shaafi‘eeDoes not have to be equal – Imam AhmadMay differ, except that a sleeping partner

cannot share the profit more than the percentage of his capital – Imam Abu Hanifah

Management of Mushaarakah

• Each partner has a right to take part in Mushaarakah management.

• The partners may appoint a managing partner by mutual consent.

• One or more of the partners may decide not to work for the Mushaarakah and work as a sleeping partner.

Cont’d

• If one or more partners choose to become nonworking or sleeping partners, the ratio of their profit cannot exceed the ratio of their capital investment.

• Any partner can liquidate his shares and leave the partnership according to the contract or by mutual consent of other Partners.

Mudaraba

• An arrangement in which two entities are involved MudaribRabbulmal

Cont’d

• Mudarib who runs the business can be a natural person, a group of persons, or a legal entity and a corporate body.

• Rabbulmal (Investor) shall provide his investment in money or species

Cont’d

• Conduct of business shall be carried out exclusively by the Mudarib within the framework of mandate given in the Mudaraba agreement

• The profit shall be divided in strict proportion agreed at the time of contract

Cont’d

• Financial losses of the Mudaraba shall be borne solely by the Rabbulmal, unless it is proved that the Mudarib has been guilty

• The loss, if any, shall be shared in proportion to the capital of the parties.

Cont’d

• The liability of Rabbulmal is limited to his investment unless otherwise specified in the Mudaraba contract

• Mudaraba may be of various types• The Mudarib can invest his funds in the

business of the Mudaraba with the permission of Rabbulmal

Murabaha

By:

Ammad Nadeem

Roll# 19

Murabaha

• Particular kind of sale and not a mode of financing in its origin

• Transaction is done on a “cost plus profit” basis

• i.e. the seller discloses the cost to the buyer and adds a certain profit to it to arrive at the final selling price

ISLAMIC SALE

• DEFINITION OF SALE

– exchange of a thing of value with another thing

of value with mutual consent.

– the sale of a commodity in exchange of cash.

SOLD GOOD OR SUBJECT MATTER ( Mube’e )

• Existing• Valuable• Usable• Capable of ownership/title• Capable of delivery/possession• Specific & Quantified• Seller must have title & risk

CONTRACT IN ISLAM

CONTRACT

SUBJECT MATTER

CONTRACTORSWORDING OF

CONTRACT

• Specified • Quantified

• Non-restricted• Sane• Mature

• Present• Unconditional• Non-contingent

31

Step by Step Murabaha

32

Stage One (a) for Murabaha financing

1. Client approach the bank for facility

through Murabaha.

1- Promise stage

Facility approved

Bank Client

33

Stage One (b) for Murabaha financing

1. Client and bank sign an agreement to

enter into Murabaha.

Cont’d

Murabaha Facility

Agreement

MOU

Bank Client

34

Stage One (c) for Murabaha financing

. Client submit the purchase requisition

to the bank.

Cont’d

purchase

requisition

/Promise to the

bank.

Bank Client

35

Client appointed as agent to

purchase goods on bank’s behalf

2- Agency stage

Agency

Agreement

Bank ClientAgreement to

Murabaha

36

. Bank gives money to supplier through

client’s account for purchase of goods.

Cont’d

Stage Two for Murabaha financing

Agreement to Murabaha

Agency Agreement

Disbursement to the Supplier

Islamic Bank Bank

Client

37

. Client purchases goods on bank’s behalf

and takes their possession.

3. Acquiring Possession

Stage three for Murabaha financing

Client purchases goods and takes possession

Transfer of Risk Vendor

Bank Client

38

. Client makes an offer to purchase the

goods from bank.

4. Execution of Murabaha

Stage four (a) for Murabaha financing

Offer to purchase

Bank Client

39

. Bank accepts the offer and sale

is concluded.

4. Execution of Murabaha

Stage four (b) for Murabaha financing

Murabaha Agreement

+ Transfer of Title

Bank Client

40

. Client pays agreed price to bank

according to an agreed schedule. Usually

on a deferred payment basis (Bai Muajjal)

Cont’d

Stage four (b) for Murabaha financing

Payment of Price Bank Client

Cont’d

• Transactions must be based on the purchase of goods from third party (ies) by the bank for sale to the client

• Buy-back arrangement is prohibited• Commodities already owned by the client

cannot become the subject of a Murabaha transaction between him and any financier

Cont’d

• In case of late payment or default by the client, he shall be liable to pay penalty as per contract

• Penalty will go to the charity fund constituted by the bank

IJARAH

By:

M Raza zaidi

Roll#35

Ijarah

o The term Ijarah (Leasing) in Arabic literally means to “give something on rent”.

o Ijarah contract is an agreement wherein a lessor (mu’ajjir) leases physical asset or property to a lessee (musta’jir) who receives the benefits associated with ownership of the asset against payment of predetermined rentals (ujrah) for a known time period called ijara period.

45

BASIC RULES OF IJARA

• Transferring of usufruct not ownership

To another person for an agreed price, at an agreed consideration.

• Subject of lease

Valuable, Identified and Quantified

• Consumable things cannot be leased out

Anything which cannot be used without consuming cannot be leased out; e.g., money, wheat etc.

BASIC RULES OF IJARA

All Liabilities of ownership are borne by lessor

Corpus of leased property remains in the ownership of the seller.

Period of lease

Must be determined in clear terms at the time of contract

Lease for specific purpose only

If no specific purpose is identified in the agreement, then it can be used for any purpose for which it is used in normal course

BASIC RULES OF IJARA

Lessee as Ameen

The lessee is liable to compensate the lessor for every harm to the leased asset caused by any misuse or negligence.

Lease of jointly owned property

Is permitted and rentals shall be distributed between all the joint owners according to the proportion of their respective shares in the property.

BASIC RULES OF IJARA

Determination of Rental

The rental must be determined at the time of contract for the whole period of lease.

The lessor cannot increase the rent unilaterally, and any agreement to this effect is void.

Cont’d

The lease period shall commence from the date on which the leased asset has been delivered to the lessee.

Rental will be charged when the Leased asset is handed over to the lessee.

Salam & Istisna

By:

Farhan Ahmad

Roll# 10

Salam

• Means advance payment against deferred delivery of goods at specific time and date.

• Allowed by Holly Profit (SAW) subject to certain conditions.

• To finance small formers and traders.• The specifications, quality and quantity of

the commodity must be determined to avoid any ambiguity which could become a cause of dispute

Conditions

• Full payment in advance.• Quality and quantity are specified exactly to

avoid any dispute.• Salam cannot be tied to the produce a

particular product of a particular farm, field or tree.

• Exact date and place of delivery must be specified.

As mode of Financing

• Used by Banks and financial institutions• Price may set at lower rate• Financial institutions may ask for security.• A penalty can be agreed in the Salam

contract for delay in delivery of the concerned commodity by the client

• That penalty shall be used for the purposes of charity

Istisna

• An exceptional mode of sale, at an agreed price.

• The buyer places an order to manufacture delivered at a future date.

• Arabic word which means asking someone to manufacture.

• Used by Islamic banks to finance constructions and manufacturing.

validity of Istisna’a

• Price of the goods to be manufactured must be fixed

• The specification of the commodity intended to be manufactured must be known and fully settled

Terms and conditions

• The purchaser is bound to accept the Goods, if according to specification

• Buyer shall not sale before taking possession

• In case of delayed delivery, the price of the commodity can be reduced and Penalty can also be charged

Conclusion

• Islam's teachings on the business ethic, wealth distribution, social and economic justice, and the role of the state.

• Equal emphasis on ethical, moral, social, and religious dimensions, to enhance equality and fairness

Cont’d

• Serious alternative for conventional banking.

• Asset backed financing.• Protects individual investors and financial

institutions from potential risks.