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IMPORTANCE OF ISLAMIC SYSTEM IN MANAGING A BUSINESS

ISLAMIC BUSINESS MANAGEMENT

Islamic banking/finance is gaining more popularity in these few years, where we can see more

international people are starting to trust this method of banking/finance

US and UK are starting to incorporate Islamic laws/methods in their banking/finance system

Some western universities are also starting to offer courses in Islamic banking/finance/business

management

IMPORTANCE OF ISLAMIC SYSTEM IN MANAGING A BUSINESS


Islam has set clear procedures to follow

Financial crisis 2008/2009 made a way for Islamic finance to develop

Due to oil bloom, Muslim countries are becoming the most affluent consumers

Level of foreign investment in Muslim countries is increasing

BASIC ISLAMIC RULES IN CONDUCTING BUSINESSES


HALAL/ permissible/ can be done

WAJIB/ Duty (Must be done)

MANDOOB/ Likeable (Not compulsory, but it is nice, if you can do it)

MAKHRUH/ Not preferable (If you do it, it is not sinful, but it is better, if you

don’t do it)



MUSHTABEH/ Doubted

If you are not sure about some business decisions that you want to make, think very carefully about it

and if you have still have doubt, then don’t do it



HARAM/ Not allowed in Islam

Something that is forbidden in Islamic rules

ISLAMIC MARKETING MIX


5Ps Marketing Mix

Islamic marketing principles combine a value-maximization concept with the principle of justice

for wider welfare of the society

Which means that these principles are aiming to increase the living standards of people through

commercial pursuits It is forbidden to exploit customers in any way

This is because, such actions are considered to be alienating the concepts of brotherhood/equality



5Ps Marketing Mix (PRODUCT)

Should be lawful

Must be deliverable

Need of identification of extra cost-added

Production process has to be guided by the criteria of the value and impact of product upon the whole

society



5Ps Marketing Mix (PRICE)

Not allowed in giving high retail price

Not allowed to charge a price without altering the quality/quantity of product

Unethical lapses in pricing are considered to be sinful



5Ps Marketing Mix (PROMOTION)

It is unethical for salesmen to over-praise his products and attribute to them qualities which they

don’t possess Avoid false/misleading advertising

Avoid misleading sales tactics Avoid sales promotions that use deception

Do not use sexual, emotional appeal in advertisingDo not use suggestive language and behaviour, do

not use women in advertising



5Ps Marketing Mix (PLACE)

Not manipulating the availability of product for the purpose of exploitation

Not using coercion in marketing

Not exerting undue influence



5Ps Marketing Mix (PEOPLE)

Emphasizes the importance of free and independent judgment on the part of the customer

A customer’s right to acquire products/services’ information is his right and is indicative of the status

given to him by Islam

ISLAMIC BANKING


Description

The whole practice of Islamic finance is based on models that do not involve interest (RIBA)

As a general rule, they involve the carrying out of investment and/or the purchase of goods, services

and assets

ISLAMIC BANKING


MAJOR MODES OF FINANCING USED BY ISLAMIC BANKS

First method is depending on profit and loss sharing and includes Mudarabah and Mushakarah

Second method is involving the sales of goods and services on credit and leads to indebtness

(Mudarabah, Ijarah, Salam and Istisna)

ISLAMIC BANKING


MUDARABAH (PASSIVE PARTNERSHIP)

Contact between two parties

The investment comes from first partner- Rabb-ul-mal

Management and work is an exclusive responsibility of Mudarib

Profit is distributed between two parties

ISLAMIC BANKING


MUDARABAH (PASSIVE PARTNERSHIP)

Financial loss is incurred by capital owner

Investment manager cannot guarantee any profit generation

AL-MUDARABAH AL MUQAYYADAH (restricted mudarabah)

AL-MUDARABAH AL-MUTLAQAH (unrestricted mudarabah)


In case of loss, all loss will be borne by rabb-ul-mal and mudarib would not able to get anything

Capital must be in the form of cash

Percentage of profit sharing must be agreed upon akad

Contract can be cancelled anytime

Business transactions must be halal

MUDARABAH

RULES

ISLAMIC BANKING


MUSHARAKAH (ACTIVE PARTNERSHIP)

Quite similar to musharakah

Differences are according to: participation in management, capital provision, profit and loss

sharing


Concept of Wakalah

Percentage of profit sharing should be agreed upon during akad

Capital must be in the form of cash

Deal can be cancelled

Losses should be divided equally

Business transactions must be halal

MUSHARAKAH

RULES


DIFFERENCE BETWEEN MUDARABAH AND MUSHARAKAH

MUDARABAH MUSHARAKAH

Investment is the sole responsibility of rabb-ul-mal

Investment comes from all partners

Members have no right in the management as it is carried

out only by the mudarib

All partners can manage their business and can work for it

The loss is suffered by rabb-ul-mal

All partners share the loss

All goods purchased by mudarib are solely owned by rabb-ul-mal and mudarib can

earn his share in the profit only in case he sells the

goods profitability

All assets become jointly owned by all of them

according to the proportion of their investment

A kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred and

sells it to another person by adding some profit

Murabahah is not a loan given on interest

PROFIT RATE + ACTUAL COST = PRICE (to customers)

ISLAMIC BANKING


MURABAHAH (SALES CONTRACT AT A PROFIT MARK UP)


Sellers have to mention the actual cost of the products that they want to sell

Subject of sale must exist at the time of sale Subject matter should be in the ownership of seller at

the time of sale Sales must be instant and absolute

Certainty of price is necessary Agreement can be cancelled

MURABAHAH

RULES

Rental of assets and properties The one who gives the permission to rent the

product is MU’AJIR The lesse (tenant, occupant, renter)- MUSTA’JIR

Rent is called UJRAH Products that are being rented- MA’JUR

Ijarah is not a mode of financing in its origin It is a normal business activity like sale

ISLAMIC BANKING


IJARAH (LEASE/ RENTING) Pajakan atau sewa pajak


Subject of lease must have a valuable use It is necessary for a valid contract of lease that the

corpus (physical product) of the leased property remains in the ownership of the seller

Costs of properties’ cleanliness and safety should be incurred by lessee

Period of lease must be determined in clear terms The lessor cannot increase the rent unilaterally

IJARAH

RULES


VALUABLE (can be used by society)

PRODUCTS CAN BE USED BY MUSTA’JIR (renter)

PRODUCTS THAT ARE LAWFUL (halal)

PRODUCTS CAN BE USED (and not damaged)

IJARAH

CHARACTERISTICS OF PRODUCTS THAT CAN BE LEASED


IJARAH

Difference between Ijarah and Interest

IJARAH INTEREST (RIBA)

•Suppose you have a $100,000 in cash

•You purchase a home and pay cash for the home

•You rent the home to a tenant for $500 per month

• At the end of the year, you have collected $500 X 12 or

$6000 in rent• That $6,000 in rent is a 6%

return for your $100,000 investment

• Starting with the same $100,000 cash

• You give someone the money• They proceed to purchase the same home with those funds• They pay you the same $500

per month, or 6% a year for use of the money

• This is basically rent on money

Based on the system of ‘Tabarru’

Objective of takaful is to pay a defined loss from a defined fund

Can be used to cover- properties, vehicles, goods, valuables, health, accidents and life

Principal- co-operation in protecting people against unexpected disaster and accidents

ISLAMIC BANKING


TAKAFUL (Insurance)


Must be performed with utmost sincerity

Schemes should be clearly defined and explained

Deal between Takaful companies and participants is called as

al-Mudarabah

Takaful companies- Mudarib, Takaful participants- Sahib-ul-mal

Members would be acknowledged about their rights

TAKAFUL

RULES


Aimed to be protection scheme for certain goods like Fire Takaful, Motor Takaful, Accident Takaful, etc

Done through the collection of money (contributed by Takaful participants)

This collection of money will be used to pay compensation

It can also be used to invest

TAKAFUL

GENERAL TAKAFUL


Amount of contributed money will be used to help any participants who are dealing with deaths,

accidents

Remaining money can be used for investment

Participants of family takaful have the right to gain the profit from the investment

TAKAFUL

FAMILY/ LIFE TAKAFUL


Contributions must be invested purely in Shariah-compliant assets

Sukuk market offers access to an asset class which shares some properties with conventional bonds and

others with equity stock

Investors the receive a regular income based on a target rate of return

But, income is not guaranteed

SYARIAH-COMPLIANT ASSETS


Provides the same facilities as conventional insurance companies but within a structure that

remains Shariah-compliant and specifically tailored to the particulars of Takaful market

Allows Takaful funds to share risk among multiple Takaful pools

Fund receives contributions from each participating Takaful fund and distributes back surplus arising from

investment

When fund goes into deficit then operator is required to make an interest-free loan to the fund to

eliminate this shortfall

RETAKAFUL


SALAM

Sale whereby seller undertakes to supply some specific goods to buyer at a future date in exchange of

an advanced price fully paid at a spot

Beneficial to seller as he receives the price in advance and it is beneficial to buyer as well (as price

in Salam is lower than price in spot sales)


RULES OF SALAM

Buyers pays the price in full to the seller at the time of effecting the sale

Can be affected in those commodities only the quality and quantity of which can be specified exactly

Cannot be affected on a particular commodity or on a product of a particular field/farm (delivery becomes

uncertain)

Quality and quantity of commodity are fully specified


ISTISNA’A

A contract of exchange with deferred delivery (specified to made-to-order items)

Manufacturer must obtain his own raw materials

Delivery date need not to be fixed in advance

Full advance payment is not required

Contract can be cancelled


RULES OF ISTISNA’A

Nature and quality of item must be specified

Manufacturer must make a commitment to produce the item as described

Payment can be made in one lump sum or in instalments and at any time up to after the time of

delivery

Manufacturer is responsible for the sourcing of inputs to the production process


MUSWAMA (negotiated –price sale)

Selling of commodity at an agreed upon price irrespective of the original purchase price

Seller is not required to disclose to buyer what the cost price was

Both seller and buyer try to transact at the best price possible

Usually occurs when it is difficult to determine what the cost of a particular good/service was


RULES OF MUSWAMA

Assets must be in existence and in the seller’s possession at the time of sale

Sales must be immediate

Assets must be of value and usable

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