islamic banking orientation by ehsan waquar ahmad

8/14/2019 Islamic Banking Orientation by Ehsan Waquar Ahmad

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Mufti Ehsan Waquar AhmadMember Shariah Committee/ Manager Shariah ComplianceEmirates Global Islamic Bank LimitedShawwal 16, 1428 - October 29, 2007


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Objective of this Session The participants develop an understanding of the

fundamental reasons for practicing Islamic Banking:

Prohibition of Riba

Prohibition of Gharar

Encouragement of Healthy Trade and Business

Islamic Modes of Financing


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Definitions of Riba & Gharar Riba means any excess compensation over and above

the principal without due consideration, merely againsttime.

Gharar is any element in a financial contract whichleads to ambiguity or uncertainty like in gambling,speculation

Healthy Trade is something where every individual has

a chance of participation in real economical activitywithout corrupting the society.


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Wisdom behind the Prohibition of Riba &

GhararExploitation of the needy

Concentration of wealth in few hands

Creation of monopolies

Development of Classes among the inhabitants of thesociety

Development of greed, selfishness and anxiety

Ultimately leading to injustice, oppression, moral disordersand economical instability


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Islamic Sale ContractA valid sale requires certain elements and conditions

Contract Buyer and Seller Offer & Acceptance

Non Contingent Immediate

Subject matter Ownership/Possession Worthy Specific

Price Quantified

Possession Physical or Constructive


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Islamic Financial Modes Islamic Financial modes can be divided into two main

types

I. Investment Mode

i. Musharaka

ii. Mudaraba

II.

Trade Modei. Murabaha & Musawama

ii. Ijara

iii. Salam

iv. Istisn'a


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Islamic Financial ModesInvesting Modes

In these modes investment and management is carriedout either by one or more partners

Profit sharing is done on a pre agreed ratio but loss has toborne by the investors as per their participating ratio.

There are minimum restriction and maximum freedom.

The credit risk is high therefore banks avoid participatingin these modes.


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Islamic Financial ModesTrading Modes

Under these modes an asset, services or its usufruct istraded between the contractors

The basic concept of sale is applied however littleadjustment are made according to the need whilefollowing the guidelines of Shariah.

Extreme care is needed. Any error may lead to surrenderentire income into charity.

The risk as compared is lower, which attracts banks in itsparticipation.


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MusharakaShirkah

Shirkat-ul-Milk Shirkat-ul-Aqd

Shirkat-ul-Amwal Shirkat-ul-AamaalOptional Enforced Shirkat-ul-Wujooh


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MusharakahThere are two types of Shirkah

I. Shirkat-ul-Milk

Joint ownership of two or more persons in a particular property

i. Optional;jointly purchased land

ii. Enforced; property jointly owned through inheritance

II. Shirkat-ul-Aqd

Joint partnership through mutual contract

i. Shirkat-ul-Amwal; participating capital in an enterpriseii. Shirkat-ul-Aamaal; rendering services jointly

iii. Shirkat-ul-Wujooh; sharing Goodwill together


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Few basics of Musharakah1. Management of Musharakah

All or any one as managing partner.

Anyone or few can become sleeping partner

2. Profit & Loss Distribution Any ratioof profit

Loss as per participation

3. Capital Any form

Valuation of commodities4. Termination

Any partner can terminate

Asset redemption; liquid and non-liquid

Option for heirs to continue


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Musharakah as a Mode of Finance Project Financing

Working Capital

Running Financing

Saving & Term Deposits


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Areas of Musharakah

Asset side Financing

Short/medium/long-term financing

Project Financing

Small & Medium enterprises set up financing

Import financing

Import bills drawn under import letters of credit

Inland bills drawn under inland letters of credit

Bridge financing

LC with margin

Export financing (Pre-shipment financing)

Working capital financing


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Areas of MusharakahLiability Side Financing

For saving and investment accounts

Term finance certificates and Certificate of investment

Securitization for large projects


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Mudarabah

Mudarabah

A partnership with one investor and another manager

There are two types of Mudharabah

1. Restricted

2. Unrestricted


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Few basics of Mudarabah1. Management of Mudarabah

Only one as managing partner Mudarib.

The investor is the Rub-ul-Maal

Investor cannot work but only if the Mudarib agrees

2. Profit & Loss Distribution Any ratioof profit

Loss borne by the investor only while the manager get noremuneration

3. Capital Any form

Appreciation of assets benefit the investor only

4. Termination Any partner can terminate


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Mudarabah as a Mode of Finance

Bank Deposits

Banks Investments


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Ijarah

Ijarah

A similar meaning to that of lease. Can be a rentalcontract of any asset or its usufruct or services for adefined period against any agreed remuneration.

A sale of usufruct takes place between the contractors.

As the title remains with the lessor therefore no chargesregarding ownership will be transferred to the lessee.


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Few basics of Ijarah1. Subject Matter of Ijarah

Valuable, identifiable and quantifiable.

Definite time period

2. Liabilities of Ijarah Lessee is responsible for any damages caused due to negligence

Routine maintenance is lessees responsibility

3. Compensation against Ijarah Any amount fixed or floating can be fixed.

Rental can be tied up with bench marks

Rental cannot be altered without mutual consents

4. Termination Any breach of term by the lessee enable the lessor to terminate the

contractor can terminate


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MurabahaMurabaha is a particular kind of sale where the cost is

disclosed to the seller and a known profit is charged

This is the only difference from Musawamah

Banks usually do not deal in commodities therefore anagent is appointed.

Remember the points for a valid sale agreement


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Few basics of MurabahahMurabaha contract requires certain documentation &

procedures

Documentation

Main Murabaha Finance Agreement Agency Agreement

Purchase Requisition

Payment Schedule

Offer & Acceptance Form Roll over in Murabaha is not possible

Defaults and Rebates


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Few basics of Murabahah Subject Matter in Murabaha

Ownership/Possession

Intrinsic utility

Halal utility Physical Verification of Purchases

Direct Payment

Incase of default in Murabaha

Sells commodity in the market & recovers the price No opportunity cost

Incase of shortfall recover from the customer


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Areas of Murabaha

Short/Medium/Long term finance for: Raw Material

Inventory

Equipment

Import financing

Export financing (Pre-shipment)

Consumer goods financing

House financing

Vehicle financing

Land financing Inter bank lending/borrowing with conventional bank (Commodity

Murabaha)


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SalamThere are two exceptions in a sale contract:

1. Salam

2. Istisn'a

The exception is that the subject matter does not exist at the time

of sale

Salam is a type of sale against full advance paymentat a future supply date.

Benefits seller; advance payment

Benefits buyer; lower price


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Few basics of SalamSalam contracts requires certain conditions

Cannot be of a peculiar property

Must be zat-ul-amthal

Particular and specific Quantified by weight, measurement or count

Exact date and place of delivery

Normally available in market at delivery time

No pre arranged buy back agreement

Parallel Salam allowed but with a third party

Defaults can be charged from the supplier


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Areas of Salam

Agricultural financing Inventory financing

Export financing

Operational cost management

Working capital financing


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IstisnaThis is the second exceptional sale contract where the

subject matter does not exist.

It relates to goods which needs manufacturing

The commodity must be known and specific to anextent where there is no ambiguity or confusion witha fixed price and may be on a deferred payment

If the goods does not conform to the specification or

the delivery is delayed, the buyer can refuse toaccept goods

Other conditions are similar to Salam


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Areas of Istisna

House financing (Construction & Renovation)

Financing of Plant/factory/building (Construction &Renovation)

Booking of Apartment

BOT arrangements

Note:

They can either enter into a parallel Istisna with a third party or hire the servicesof a contractor.

That parallel Istisna must have no linkage with the original Istisna contract.

islamic banking orientation by ehsan waquar ahmad

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