islamic modes of finance
TRANSCRIPT
�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
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Step by Step Murabaha
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Stage One (a) for Murabaha financing
1. Client approach the bank for facility
through Murabaha.
1- Promise stage
Facility approved
Bank Client
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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
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. 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
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. 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.
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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.