POLITEKNIK

PS303 (ISLAMIC PRODUCT & SERVICES)

CHAPTER 4 :USES OF FUND

1. THE PRINCIPLES OF ISLAMIC FINANCING

2. THE TYPES OF ASSET FINANCING AND EQUITY FINANCING

3. THE FEATURES OF OTHER TYPES OF ISLAMIC FINANCING

4. THE FEATURES OF SECURITIES FORINVESTMENT

5. THE FEATURES OF INTERBANK PLACEMENT

THE FEATURES OF ISLAMIC BANKING USES OF FUNDS

THE PRINCIPLES OF ISLAMIC FINANCING

1. Avoidance of transaction involving Riba (interest based / usury) Gharar (risk and uncertainty) Maysir (gambling) Prohibited comodities Goods of no use to people Cooperation (ta'awun) to the matter of sin (ithm) and aggression ('udwan) unjust enrichment (akl mal bil batil)

2. Avoidance of contracts that do not satisfy the conditions of the particular contract.

THE TYPES OF ASSET FINANCING AND EQUITY

FINANCING

ASSET FINANCING

DEFINITION

Literally : Deferred payment sale

Technically: Sale contract in which the payment of the price is deferred and payable at a certain particular time in the future

Also known as Bal Muajjal or Bai Taqsit

1. BAI' BITHAMAN AJIL

PILLARS OF BBA

Seller

Sighah

Price

Goods

Buyer

OBJECTIVE OF BBA

1. To provide financing for potential buyers who could not afford to pay cash in advance an enable them to perform their daily responsibilities and obligation without any financial hardship or difficulties.

2. To facilitate and support the smooth flow of transaction in the business society by providing flexible modes of payment especially through credit payment.

APPLICATION OF BBA

1. Financing a customer to purchase commodities:- houses, land, motor vehicles, customer goods, shares, education packages and other asset-based financing activities.

2. Refinancing of assets for purpose of redemption, construction, renovation, project financing, bridging facilities, end-financing, contract financing etc.

Vendor

The Bank Customer

1. Customer identifies the asset to be acquired

2. Bank purchase the asset from vendor at RM90,000 (Bank's Purchase Price)

3. Bank sells the asset to the customer at RM90,000 plus margin RM 30,000 (Bank's Selling Price =

RM120,000)

4. The customer pays the RM120,000 by instalments based on the agreed period

DEFINITION

Literally: Increase (ribh) in capital or profit of tranding

Technically: Sale of commodity for the price at which the seller has purchased it, with the addition of stated profit known to both the buyer and seller

i. Cost price is known ii. Profit is known

2. MURABAHAH

PILLARS OF MURABAHAH

Seller

Goods

Customer

Price

Sighah

Supplier ofGoods/Comodities Customer

Bank

1. Bank appoint Customer as its agent

2. Purchase Order

3. Settles the purchase price

5. Sells goods on deferred payment

basis 6. Settles the Bank's selling

price on installment basis

4. Supplies goods to customer

DEFINITION

Literally: Give something on rent

Technically

: A particular property is transferred to another person in exchange for a rent claimed from him/her

3. IJARAH

PILLARS OF IJARAH

Lessor & Lessee

Asset / Equipment

Benefit / usage

Price / rent

Contract (Sighah)

Bank(Lessor)

Customer(Lessee)

Vendor

3. The Bank leases the asset/equipment with montly rental of RM235.00 for 36

months

4. Customer pay the monyhly rental

1. Purchase car2. The Bank purchase the asset/equipmentat

RM70,000

CLASSIFICATION OF IJARAH

IJARAH

IJARAH MUNTAHIA BITAMLEEK

AL-IJARAHTHUMMA AL-BAI'

Ijarah Muntahia Bitamleek or Ijarah Wa Iqtina is a form of lease contract that offers the lessee an option to own the asset at the end of the lease period

Ijarah Muntahia Bitamleek can be in the following formsa. by way of gift,b. token price or pre-determined price,c. equivalent price, ord. gradual transfer of share holding

IJARAH MUNTAHIA BITAMLEEK

Ijarah Thumma Al-Bai' is one of the categories of lease, which ends with the sale of the asset, where the legal title of the leased asset will be transferred to the customer upon full settlement or early settlement of the contract value.

Ijarah Thumma Al-Bai' consist of two different contracts

- Contract of leasing or Ijarah

- Contract of sale or Bai'

AL-IJARAH THUMMA AL-BAI'

DEFINITION

Literally: Sale on order

Technically: Contractual agreement with manufacture to produce items with specified description at a determined price, and manufacture from his own material with his own effort

4. ISTISNA

PILLARS OF ISTISNA

Mustasni'

Sani

Ra's al-Mal

Sighah

Masnu'

APPLICATION OF ISTISNA

Financing to construct a house, fixed asset

Project financing, property financing

EQUITY FINANCING

DEFINITION

A contract where the owner of capital entrusts his funds to an entreprenuer who contribute skills in a business and the profit generated is to be shared between them.

the capital provider cannot interfere in the management of the project, but still he has the right to undertaken the follow-up and supervision task.

both parties agrees through negotiation on the ratio of the distribution of the profits generated from the project.

in case of loss, the loss is borne by capital provider.

1. MUDHARABAH FINANCING

PILLARS OF MUDHARABAH

Owner of Capital& Entreprenuer

Capital

Sighah

Project

Profit

ESSENTIAL ELEMENTS AND NECESSARY CONDITIONS

• Owner of Capital & Entrepreneur– capable of accepting responsibility– not restricted from dealing in business transaction– not forced to enter the contract.

• Capital – money only ; not a debt– specific amount – paid to entreprenuer

• Project – must be Halal in nature according to Shariah– Managed by entrepreneur

• Profit– shared according to agreement in fraction, ratio or precentage; not in absolute

amount– loss borne by the owner of capital only

APPLICATION OF MUDHARABAH

Application in savings account, current account and investmen accounts.

Financing side: for single transaction such as day-to-day needs of small traders, or single export or import activity.

Long term investment, such s building an airport, real estates, highway, etc.

DEFINITION

A general partnership whereby two or more parties enter into a contract to exploit their labor and capital jointly and to share the profits or losses of the partnership

The liability of the partnership is normally unlimited

All the asset are jointly owned

2. MUSHARAKAH FINANCING

PILLARS OF MUSHARAKAH FINANCING

Shareholders or Partnership

Profit

Capital

Project

DEFINITION

A contract of partnership between financier and customer to own an asset in which one of the partners give the right to the other partner to buy his equity share of the asset either by one lump sum payment or several payments based on agreed conditions

Also known as dimishing musharakah partnership

3. MUSHARAKAH MUTANAQISAH

APPLICATION OF MUSHARAKAH MUTANAQISAH

Home financing Agriculture Machinery and implements financing Storage facility construction / shaeds Transport vehicles