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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