CHAPTER# 6CHAPTER# 6ISLAMIC MODES OF ISLAMIC MODES OF

FINANCINGFINANCING

BYBY

KOKAB MANZOORKOKAB MANZOOR

CHAPTER`s OUTLINESCHAPTER`s OUTLINES

11 SHARAKAT( MUSHARAKAH)SHARAKAT( MUSHARAKAH)

22 MODARABAMODARABA

33 BAI-SALAMBAI-SALAM

44 BAI-MURABAHABAI-MURABAHA

55 BAI-MUAJJALBAI-MUAJJAL

66 IJARAIJARA

Introduction and ImportanceIntroduction and Importance

Business require large financial Business require large financial resources to carry out production resources to carry out production and related business operations. and related business operations. Such large scale monetary Such large scale monetary resources are sometimes beyond resources are sometimes beyond their own capacity. To obtain them their own capacity. To obtain them it is inevitable to seek the it is inevitable to seek the cooperation of other individuals or cooperation of other individuals or organizations.organizations.

Cont`d…Cont`d…

Islamic economics provides several Islamic economics provides several modes to secure such financial modes to secure such financial resources of which the following are resources of which the following are particularly noteworthy;particularly noteworthy;

11 Sharakat( Musharakah)Sharakat( Musharakah)

22 ModarbahModarbah 33 Bai-SalamBai-Salam

44 Bai-MurabahaBai-Murabaha 55 Bai-MuajjalBai-Muajjal

66 IjarahIjarah

11 MusharakahMusharakah Shirkah (partnership):

It literally means sharing. The sharing may be of money, labor, or anything else.

Shirkah (partnership): is defined as a contract between partners on both capital and profit.

11 MusharakahMusharakah

Musharakah (partnership) is actually participation of two or more persons in a certain business with defined amount of capital invested according to a contract for jointly carrying out a business and for sharing profit and loss in specified proportions

Kinds of PartnershipsKinds of Partnerships

1 Shirkat ul-milk (partnership of ownership):

It means joint ownership of two or more persons in a particular property.

This kind of Shirkah may come into existence in two different ways.

By the partners choice: Without the partners choice:

Kinds of PartnershipsKinds of Partnerships

2 Shirakal al-aqd (partnership of a contract): which means a partnership effect by a mutual contract.

This kind of Shirkah exists in three types:

Shirakal al-aqdShirakal al-aqd

Shirkal ul-amwal (partnership in trade):

Shirkat ul-A`mal (partnership in services):

Shirkal ul-wujooh (partnership in goodwill):

Basic Rules of Musharakah

A) Distribution of profit

1. The proportion of profit to be distributed between the partners must be agreed upon at the time of the effecting of the contract.

2. The ratio of profit for each partner must be determined in proportion to the actual profit accrued to the business, and not in proportion to the capital invested by him.

B ) Sharing of Loss

In the case of loss each partner shall suffer the loss exactly according to the ratio of his investment. If a partner has invested 40% of the capital, he must suffer 40% of the loss, not more, not less.

C ) The Nature of the Capital

Most of the Muslim jurists are of the opinion that the capital of a joint venture must be in monetary form, but in some cases part of it can be contributed in commodities.

2 2 MudarabahMudarabah The word Modarbah comes from the

Arabic root (Dharabahfi al ard), which means going and working to obtain livelihood.

The first partner is called “Mudarib,” (the manager) and the second partner is called “Rabb ul-mal.” (the one who invest money)

Mudharabah…..Mudharabah…..

Under Under mudharabahmudharabah, one party , one party provides capital and the other provides capital and the other utilizes it for business purposes utilizes it for business purposes under the agreement that profit under the agreement that profit from the business will be shared from the business will be shared according to a specified according to a specified proportion proportion

Types of MudarabahTypes of Mudarabah

a) Al-Mudarabah al-muqayyadah (restricted Modarbah):

b) Al Mudarabah al mutlaqah (unrestricted Modarbah):

Distribution of the Profit Distribution of the Profit

It is necessary for the validity of Mudarabah that the parties agree right at the beginning on a definite proportion of the actual profit to which each one of them is entitled. They can share the profit in equal proportions, and they can also allocate different proportions for the Rabb-ul-mal and the Mudarib.

Termination of MudarabahTermination of Mudarabah

The Mudarabah contract can be terminated at any time by either of the two parties. The only condition is for notice to be given to the other party.

If all the assets of the Mudarabah are in cash form at the time of termination, and some profit has been earned on the principal amount, it shall be distributed between the parties according to the agreed ratio.

Cont`d…Cont`d…

If the assets of the Mudarabah are not in cash form, the Mudarib shall be given an opportunity to sell and liquidate them, so that the actual profit may be determined.

3 3 BAI-SALAMBAI-SALAM

DEFINITIONDEFINITION Seller agrees to supply specific Seller agrees to supply specific

goods to the buyer at a future goods to the buyer at a future date in exchange of an advanced date in exchange of an advanced price fully paid at spot.price fully paid at spot.

Price is in cash but the supply of Price is in cash but the supply of goods is deferred.goods is deferred.

Purpose of SalamPurpose of Salam

To meet the needs of small farmers who need money to grow their crops and to feed their family up to the time of harvest.

To meet the need of working capital. To meet the needs of liquidity

problem. To meet the need of traders for

import and export business.

Benefits Benefits

Salam is beneficial to the seller, because he receives the price in advance, and it is beneficial to the buyer also, because normally the price in salam used to be lower then the price in spot sales.

4 4 Bai MurabahaBai Murabaha

Murabaha is a particular kind of sale where the seller discloses its cost and profit charged thereon.

The price in this sale can be both on spot and deferred.

MurabahaMurabaha

Involve purchase of commodities from third parties (through a bank as an agent of the fund) and reselling the same to the bank on deferred basis

Profit between the bank and the fund is comparable to returns from money market instruments

Difference b/w Salam & Difference b/w Salam & MurabahaMurabaha

SalamSalam purchased goods

are defferred, price is paid on spot.

In Salam price has to be paid in full in advance

MurabahaMurabaha purchased

goods are delivered at spot, price may be either on spot or differed.

price may be on spot or differed

Difference b/w Salam & Difference b/w Salam & Murabaha Murabaha

SalamSalam It can not be executed in

the particular commodity but commodity is specified by specifications.

It cannot be effected in respect of things, which must be delivered at spot. e.g Salam b/w wheat barley

.

MurabahaMurabaha

It is executed in particular commodity.

It can be executed in those things.

5 5 Ijarah (hire)Ijarah (hire) Definition of Aqd al-Ijarah:

It is a contract on using the benefits or services in return for compensation.

Ijarah (hire)Ijarah (hire)The term Ijarah is used for two different

situations:

1. It means to employ the services of a person on wages given to him as a consideration for his hired services.

The employer is called Mustajir, the employee is called Ajir

CONT`D..CONT`D..

2. Relates to the usufructs (right to use of a property) of assets and properties

Ijarah in this sense means to transfer the usufruct of a particular property to another person in exchange for a rent claimed from him. 

Conditions of Ijarah (Islamic Conditions of Ijarah (Islamic Leasing)Leasing)

The commencement of leaseThe commencement of lease Rent should be charged after the Rent should be charged after the

delivery of the leased asset to the delivery of the leased asset to the lesseelessee

Expenses consequent to ownership Expenses consequent to ownership to the lessorto the lessor

Lessee as AmeenLessee as Ameen Penalty for late payment of RentPenalty for late payment of Rent Termination of LeaseTermination of Lease

66 Bai Mu’ajjalBai Mu’ajjal (Sale on Deferred Payment Basis)(Sale on Deferred Payment Basis)

A sale in which the parties agree that the payment of price shall be deferred.

Shariah orders for Bai MuajjalShariah orders for Bai Muajjal

1 Item on sale must be owned in physical by seller.

2 Seller has right to ask for mortgage

3 Seller has right to take profit of that sold item if he bears the risk.

4 Possession of sold item must be transferred to purchaser at once.

5 The deferred price may be more than cash but it will be fixed at the time of sale.

Cont`d…Cont`d…

6 If the commodity is sold on installments, the seller may put a condition on the buyer that if he fails to pay any installment on its due date, the remaining installments will become due immediately.

7 In order to secure the payment of price the seller may ask the buyer to for a any kind of security. E.g mortgage or a lien etc.

Cont`d…Cont`d…

8 The buyer can also be asked to sign a promissory note or a bill of exchange but the note or the bill cannot be sold to a third party at a price different from its face value.

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