Finance For Managers

Presented To:Sir Dr.Saqib Sharif.

Presented by:Hira Ali(7724)

Durriya Hai(7568)Tehzeeb Tariq(7562)

Topic

Islamic Modes Of Financing

• Islamic modes of financing mean the way of supplying funds that is acceptable to Islam.

• There are three type of financing available under Islamic concept of funds supply

Rental-based mode of financing and

Participation-based of financing.Trade-based modes of financing;

Rental Based Mode Of Finance:

IJARA/LEASING:

•Ijara is an Arabic word used for leasing

•Leasing is an agreement that permits one party (the lessee) to use an asset or

property owned by another party (the lessor) for an agreed-upon price over a

fixed period of time.

• It is a form of asset finance which has the benefit of using assets without the

requirements of ownership.

CONDITIONS OF IJARA• Subject of Ijarah should be valuable, fully identified and quantified.• The period of Ijarah must be defined with clear boundaries.•In case of any harm due to misuse/ negligence of Ijarah asset lessee is liable to compensate lessor• Any harm or loss affecting Ijarah asset due to circumstances beyond control of the lessee will be borne by lessor.• The rent must be determined for whole period of Ijarah at the time of Ijarah contract• The lessor cannot increase the rent unilaterally

Participatory Modes Of Finance

•There are two participatory modes of finance:

Mudarba

Musharka

MUDARABAH• Mudarabah is partnership between

persons in which one partner gives money to another for investing in profitable avenues.

• The investor (fund provider/supplier) is called “Rabb-ul-Maal while the person who utilizes this fund (the fund manager) is called “Mudarib”;

• Mudarib is exclusively responsible for management of the business.

• Rabb-ul-Maal (fund supplier) does not have any right to interfere in business affairs.

MUDARABAH CONT...

Mechanism of Profit and Loss distribution:

• Losses in Mudaraba shall only be born by Rabb-ul-Mal and not by the Mudarib

• Mudarib will also suffer loss in shape of not receiving anything as profits

• The Mudarib shall only be responsible for losses if the loss happened due to his negligence and will full misconduct.

TYPES OF MUDARBAHATYPES OF MUDARBAHA::

There are two types of Mudarabah:• Restricted Mudarabah

• It is a kind of Mudarabah in which the capital provider restricts the Mudarib to perform business with certain restrictions.

• These restrictions may be for place ,particular type of investment or any other restriction.

• Unrestricted Mudarabah

• It is a kind of Mudarabah in which the capital provider (Rabbul Maal) does not put any restriction to the Mudarib.

MUSHARAKAH (PARTNERSHIP)

DEFINITION

A joint enterprise or partnership structure with profit/loss sharing implications that is used in Islamic finance instead of interest-bearing loans. 

Musharakah allows each party involved in a business to share in the profits and risks

STRUCTURES OF MUSHARAKAH

Permanent Musharaka

Temporary Musharaka;

Diminishing/declining Musharaka

•Permanent MusharakaPermanent Musharaka is a partnership of

permanent nature i.e. a going concern

•Temporary Musharaka;Musharakah can be for a limited time period,

after that it will be redeemed;Redemption of Musharakah will take place

through sale of shares from one partner to other partner or third person (in market/exchange);

•Diminishing/declining MusharakaA Musharakah in which a partner buys the share of the

other partner gradually until the ownership of the asset or property is completely transferred to second partner;

According to this concept, a financer (bank) and its client participate in a joint commercial enterprises or property or asset and the client gradually buys bank’s share.

Trade Base Mode Of Finance

• There are four kinds of Trade-based modes of financing which are very common.

MURABAHAHAMUSAWAMAHSALAMISTISNAA

MURABAHAH.MURABAHAH.

• Murabahah means selling a commodity or asset on disclosure of cost and profit.

• So the distinguishing feature of Murabahah from ordinary sale is that the seller is bound to discloses the cost and profit both to the buyer.

MUSAWAMAHMUSAWAMAH

• The difference is that the quoted price does not require any break-up of cost and profit

• All other details are same as for Murabahah

• The process flow is also same and the payment method may also be of same nature.

SALAM• Salam is a sale whereby the seller undertakes to supply some specific

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

paid at spot.

QUR’AN“O you who believe! When you deal

with each other in transactions involving future obligations in a fixed period of time, put them in writing”

[2:282]

HADITH

The Holy Prophet (PBUH) said:

“ Whoever wishes to enter into a contract of salam, he must effect the Salam

according to the specified measure and the specified weight and the specified date of

delivery.”

Conditions Of Salam Contract• First of all, it is necessary for the validity of

Salam that the buyer pays the price in full to the seller at the time of effecting the sale

• Salam can be affected in those commodities

only the quality and quantity of which can be specified exactly.

• Salam cannot be affected on a particular commodity or on a product of a particular field or farm.

• It is necessary that the quality of the commodity is fully specified

Conditions Cont…

• It is also necessary that the quantity of the commodity is agreed upon in unequal terms.

• The exact date and place of delivery must be

specified in the contract.

• Salam cannot be affected in respect of things which must be delivered at spot

Parallel Salam• Parallel Salam is not a kind of Salam;

• It is an arrangement by buyer to sell the commodity he purchased from some one

• The buyer can not sell the commodity before he takes the possession from seller in a Salam contract as we discussed earlier

• But the buyer may sell the commodity he bought it on Salam to another person on Salam basis

• Parallel Salam is allowed with a third party only

• The seller in the first contract cannot be made purchaser in the parallel contract of Salam

• It will be a buy-back arrangement, which is not permissible

ISTISNAA

• Istisnaa is an order from purchaser to a manufacturer to produce a specific good

for him against mutually agreed price and period for manufacturing and delivery.

Example

If we order a tailor to stitch for us according to my requirements

Essential Requirements For Istisnaa:

•Goods / commodities should require manufacturing

•Manufacturer (seller) must use his own material

•The commodity must be known and specified in terms of kind, type, quality and quantity.

Parallel Istisnaa:• It is parallel arrangement for an other Istisnaa'

transaction that follows first Istisnaa

• The second transaction is also an Istisnaa transaction in all manners and conditions

• This arrangement of two transaction has been introduced to reduce the risk of buyer (Bank) for holding the commodities/goods.

• In a Parallel Istisnaa' contract, the buyer enters into an another contract in which he is a seller to an another buyer