Islamic banking modes of financing
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Transcript of Islamic banking modes of financing
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Zubair MughalChief Executive Officer
AlHuda : Centre of Islamic Banking & Economics
Regional HeadTakaful Pakistan Limited
Editor in Chief.Islamic Banking and Finance News , True Banking.
Mode of Financing in Islam
PRODUCT TREE
Islamic Banking Modes
Trade Based Modes
Partnership Based Modes
Rental Based Modes
Musharaka(Joint Venture Profit Sharing )
Mudaraba( Trustee Profit Sharing)
Murabaha(Cost Plus Profit Sale)
Musawama(Bargain sale )
Salam(Commodity Sale)
Istisna(Sale on Order)
Ijarah ( Leasing )
Diminishing Musharaka( Transfer of Ownership)
Partnership Based Modes of Financing
Musharakah
Characteristics All parties share in the capital All parties share profits as well as
losses Profits are distributed as per agreed
ratio Loss is borne by the parties as per
capital ratio Every partner is agent of other
MUSHARAKAH
PARTNER A PARTNER BVENTURERs.1000 Rs.1000
PROFIT Rs. 100
LOSSRs.100
Rs. 60 Rs. 40
Rs. 50 Rs. 50
May be in any agreed ratio
Must be according tocapital ratio
Mudarabah One partner (Rab al Mal) contributes
capital and the other (Mudarib) contributes his skills or services to the venture
Venture may for a fixed period or purpose
Both share profit in pre-agreed ratio Loss is borne by Rab al Mal only,
Mudarib loses his services
MUDARABAH
RABBUL MAL MUDARIBVENTURE
SERVICESCAPITAL
PROFIT
LOSS
40 %60 %
ALL MONETORY LOSS LOSS OF SERVICES
Trade Based Modes of Islamic Banking
Basic Rules of Bai ( Buying & Selling )
Existence of Product/Commodity
Ownership of Product/Commodity
Possession of Product/Commodity
Basic Rules of Bai
Unconditional basis
Product have value/Price.
Bai on Such product which is permissible in Islam.
Basic Rules of Bai
Product Must be Identify, clear with all demanding Qualities.
Not based on any incident, struggle etc
Price must be clearly identified.
Bai (Buying & Selling)
Basic Kinds of Bai
Kinds of Bai
Bai Musawamah Bai Murabaha Bai Surf Bai Salam Bai Istisna’ Bai Urboon
Basic Kinds of Bai
Bai Eenna Bai Touliya Bai Wadhia
Bai
There are three basic type of Bai’s which are using in Islamic Banking as the mode of financing in Pakistan
Murabahah Salam Istisna’
Murabahah
Basically, it’s not a mode of financing but a source to avoid interest Dealing
It’s not a type of loan, but a deal (Bai) Murabahah can be used as source of
financing when client needs funds to purchase any product/Machinery etc.
Murabahah
Sharing of Risk of loss differentiate Murabahah from the interest category
Product Must be bought from third party for avoid buy back transaction
Roll over is not Valid in Murabahah If actual cost can not be identified
then Murabahah deal not possible.
Step by step Murabaha financing
1. Client and bank sign an agreement to
enter into Murabaha.
Murabaha
Agreement to Murabaha
Islamic Bank
Client
2. Client appointed as agent to
purchase goods on bank’s behalf
Murabaha
Step by step Murabaha financing
Agency
Agreement
Bank ClientAgreement to
Murabaha
3. Bank gives money to client for purchase of goods.
Murabaha
Step by step Murabaha financing
Agreement to Murabaha
Agency Agreement
Disbursement to the client
Islamic Bank Bank Client
MurabahaMurabahaGENERAL MECHANICS
CUSTOMERISLAMIC
BANK
AgreementVENDOR
•
The customer approaches the Bank with the request for financing
The Bank purchases and receives title of ownership from the vendor
The Bank makes payment to the vendor
The Bank transfers the title over to the customer upon payment
The customer makes payment up-front or on a deferred basis
•
The customer approaches the Bank with the request for financing
The Bank purchases and receives title of ownership from the vendor
The Bank makes payment to the vendor
The Bank transfers the title over to the customer upon payment
The customer makes payment up-front or on a deferred basis
Murabahah Calculation Exercise
Murabahah Price Calculation:Purchase of poultry feed stock Murabahah Facility: 180 Days Payment: Six monthly
installments Rate of Profit: 10% p.a. Murabahah transaction: Rs. 50,000 Securities: Personal surety or
Pledge of feed stock, etc.
Bai
Important NoteFollowing 3 Basic Rules of Bai are
exceptional for Salam & Istisna’
Existence of Product/Commodity Ownership of Product/Commodity Possession of Product/Commodity
Salam
Pay 100% amount in Advance. Product must be quantified,
identified and Measured with quality.
Date of delivery, Time, Place must be mentioned clearly in advance.
Salam is not valid for a specific farm/land/garden.
Istisna’
Not necessary to pay the 100% amount in advance Like Bai salam.
Price must be decided on beginning of the contract.
Qualities, features of that product must be clearly identified.
Bai
Differences Between Istisna and Salam
Differences Between Istisna and Salam
Istisna deal with manufacturing items, but Salam could or could not be manufacutred, but salam ideal of agriculture sector.
In salam advance payment is necessary, but in Istisna’ its not.
Differences Between Istisna and Salam
Date, time of delivery the necessary part of Bai Salam, But in Istisna, it is not the part of the deal.
In Bai salam, it can be cancelled one sided, but in Istisna, it could be cancelled, if production is not started yet.
Type of Bai according to Quality
Bai Salah Bai Fasid Bai Batil Bai Maqoof
Type of Bai according to Quality
Bai Majool Bai Muqayaddah Bai Mu’ajal
Thank you