Interest free Financing

Finance:Finance is an art and science of managing money. Interest:In islam interest is known as RIBA. It means any return of money on money - whether the interest is fixed or floating, simple or compounded, and at whatever the rate. Riba is strictly prohibited in the Islamic tradition. Interest free financing (Islamic Banking) It is a fundamental concept derived from the Islamic form of banking. It operates with the primitive professional and ethical standards that exclude the Muslims from paying or receiving any kind of interest "Quaid's concept of Islamic Banking [Opening Ceremony of The State
Bank of Pakistan on July 1, 1948]

We must work our destiny in our own way and present to the works an economic system based on true Islamic concept of equality of manhood and social justice Islamic Banking Institution means Islamic commercial banks, Islamic banking subsidiaries and Islamic banking branches of conventional banks licensed by State Bank of Pakistan. In the Islamic banking the bank does not deal in cash but trading with the customer.

Islamic Banking Institutions may offer the following Shariahcompliant modes of banking and finance and products based on these modes. Participatory Modes: Mudaraba Musharaka Diminishing Musharaka Equity Participation in the form of shares in a corporate entity Trading Modes: Ijarah or Ijarah wa Iqtina Murabaha Musawamah Salam Istisna Tawarruq Debt Based Modes: Qard Other Modes: Wakalah Assignment of Debt Kafalah

Participatory Modes: Murabaha:

Murabaha means a sale of goods by a person to another under an arrangement whereby the seller is obliged to disclose to the buyer the cost of goods sold either on cash basis or deferred payment basis and a margin of profit included in the sale price of goods agreed to be sold. Murabaha may be transacted in both tangible and intangible assets. Murabaha shall not be transacted in respect of any debt instrument including receivables. Being a sale transaction, it is essential that the commodities which are the subject of sale in a Murabaha transaction, must be existing, owned by the seller and in his physical or constructive possession. Therefore, it is necessary that the seller must have assumed the risks of ownership before selling the commodities to the buyer/customer. Murabaha, like any other sale, requires an offer and acceptance which will include certainty of price, place of delivery, and date on which the price, if deferred, will be paid. In a Murabaha transaction, the appointment of an agent, if any, the purchase of goods by or for and on behalf of the IBI and the ultimate sale of such goods to the customer shall all be transactions independent of each other and shall be so separately documented. An agreement to sell, however, may embody all the aforesaid events and transactions and can be entered into at the time of inception of relationship. The agent would first purchase the commodity on behalf of his principal i.e. financier and take its possession as such. Thereafter, the customer would purchase the commodity from the financier, through an offer and acceptance. According to Sharia it is sufficient in respect of the condition of possession that the supplier from whom the IBI has purchased the item,vgives possession to the IBI or its agent in such a manner that subject matter of the sale

comes under the risk of the IBI. In other words, the commodity will remain in the risk of the financer during the period of purchase of the commodity by the agent and its ultimate sale to the customer and its possession by him.

Musawamah
Musawamah is a general kind of sale in which price of the commodity to be traded is stipulated between seller and the buyer without any reference to the price paid or cost incurred by the former. Thus it is different from Murabaha in respect of pricing formula. Unlike Murabaha, seller in Musawamah is not obliged to reveal his cost. All other conditions relevant to Murabaha are valid for Musawamah as well. Musawamah can be used where the seller is not in a position to ascertain precisely the costs of commodities that he is offering to sell.

Ijarah (Leasing)
Ijarah is a contract whereby the owner of an asset, other than consumables, transfers its usufruct to another person for an agreed period for an agreed consideration. In Ijarah/leasing, the corpus of leased commodity remains in the ownership of the lessor and only its usufruct is transferred to the lessee. Any thing which cannot be used without consuming the same cannot be leased out like money, edibles, fuel, etc. Only such assets which are owned by the lessor can be leased out except that a sub-lease is effected by the lessee with the express permission of the lessor. iii) Until such time that assets to be leased are delivered to the lessee, lease rentals do not become due and payable. iv) During the entire term of the lease, the lessor must retain title to the assets, and bear all risks and rewards pertaining to ownership. However, if any damage or loss is caused to the leased assets due to the fault or negligence of the lessee, the consequences thereof shall be borne by the lessee. The consequences arising from non-customary use of the asset without mutual agreement will also

be borne by the lessee. The lessee is also responsible for all risks and consequences in relation to third party liability, arising from or incidental to operation or use of the leased assets.

Salam
Salam (advance payment against deferred delivery of goods) means a kind of sale whereby the seller undertakes to supply specific goods to a buyer at a future date in consideration of a price fully paid in advance at the time the contract of sale is made. . The buyer shall pay the price in full to the seller at the time of effecting the sale. Otherwise, it will be tantamount to a sale of debt against debt, which is expressly prohibited in Shariah. The specifications, quality and quantity of the commodity must be determined to avoid any ambiguity which could become a cause of dispute. Date and place of delivery must be agreed upon but can be changed with mutual consent of the parties.

Musharaka
Musharaka means relationship established under a contract by the mutual consent of the parities for sharing of profits and losses arising from a joint enterprise or venture. Investments come from all partners/shareholders hereinafter referred to as partners. Profits shall be distributed in the proportion mutually agreed in the contract. STATE BANK OF PAKISTAN ISLAMIC BANKING DEPARTMENT Instructions for Shariah Compliance in IBIs 11 If one or more partners choose to become non-working or silent partners, the ratio of their profit cannot exceed the ratio which their capital investment bears to the total capital investment in Musharaka.

Mudaraba

Mudaraba means an arrangement in which a person participates with his money (called Rabbulmal) and another with his efforts (called Mudarib) for sharing in profit from investment of these funds in an agreed manner. A Mudarib may be a natural person, a group of persons, or a legal entity and a corporate body. Rabbulmal shall provide his investment in money or species, other than receivables, at a mutually agreed valuation which shall be placed under the absolute disposal of the Mudarib. The conduct of business of Mudaraba shall be carried out exclusively by the Mudarib within the framework of mandate given in the Mudaraba agreement.

Mudaraba
Mudaraba means an arrangement in which a person participates with his money (called Rabbulmal) and another with his efforts (called Mudarib) for sharing in profit from investment of these funds in an agreed manner. A Mudarib may be a natural person, a group of persons, or a legal entity and a corporate body. Rabbulmal shall provide his investment in money or species, other than receivables, at a mutually agreed valuation which shall be placed under the absolute disposal of the Mudarib. The conduct of business of Mudaraba shall be carried out exclusively by the Mudarib within the framework of mandate given in the Mudaraba agreement.

Diminishing Musharaka (For Shrikatul-Milk)

Diminishing Musharaka (DM) is a form of co-ownership in which two or more persons share the ownership of a tangible asset in an agreed proportion and one of the co-owners undertakes to buy in periodic installments the proportionate share of the other co-owner until the title to such tangible asset is completely transferred to the purchasing co-owner. Diminishing Musharaka can be created only in tangible assets. Diminishing Musharaka shall be limited to the specified Asset(s) and not to the whole enterprise or business. A DM arrangement would consist of following three steps, i.e. o Creation of joint ownership between the co-owners. o Renting out by one co-owner the undivided share in the asset owned to the other co-owner; and o Selling in periodic installments by one co-owner his share to the other coowner(s) All other terms and conditions as are essential to co-ownership, Ijarah and sale shall be fulfilled in respect of different stages in the process of DM arrangement.

Qard:
Qard is a contract of loan between two parties in which borrower is required to pay back only the principal amount borrowed. The Qard shall be repayable on demand
Wakalah:

Wakalah is a contract of agency in which one person appoints another person to perform a certain task on his behalf on agreed terms and conditions, usually against a certain fee. A contract of Wakalah can take place only in respect of such acts which the principal is competent to perform himself, provided such act can be performed by the agent.

Kafalah:

Kafalah is a contract in which a third party becomes surety i.e. provides guarantee for the payment of debt on behalf of the debtor. It is a pledge given by a third party to a creditor to the effect that if the debtor defaults in payment of the debt, it will be paid by such third party as Kafeel i.e. Surety

Tawarruq:
Tawarruq literally means to liquidate. In the fiqhi term it is to sell a commodity at spot after its purchase on deferred basis. In practice, Tawarruq is an arrangement in which one party sells a commodity to the other party on deferred payment at cost plus profit. The other party, namely, the buyer, then sells the commodity to a third party on cash with a purpose of having access to liquidity.

Terms and Conditions by Meezan Bank

The customer must be the account holder of the bank. The bank will finance minimum of 15 to 20 million only. In ijarah, the bank keep the documents of car with himself till the installments completed. The period of installment is minimum one month. If the customer fails to pay the settled amount of the car, the bank will sale and block his car. After selling the car the bank recovers his amount. In diminishing musharakah the bank makes the long term financing. Bank mortgage that property as his security. There should be reference of at least two reputed accountholders by the customer. Minimum recovery period of installments is three months. After three months, that particular part of property is transferred to the customer for which he has made the payment. If he fails to made the installment, bank will take that property under his custody and sell it by auction.

The customer has to sign an agreement for particular financing.

Terms and conditions by Bank al Falah

The customer must be the account holder of the bank. The bank does not provide such loan on utility bills. In musharakah the bank pays 70% and customer pays 30%. The payment made by bank (70% ) the customer pays as rent. No extra charges on early payment. Flexible repayment. No hidden cost. When the rent is completed the whole documents of the property is transferred to the customer. In ijarah, no rent before delivery of the car. No up front insurance premium. No up front registration charges. Competitive profit rates and security deposits. Fastest processing time. The bank need the written evidence for the particular financing.

Similarities between both the Meezan and Al Falah Bank

Many terms are same as both the banks follows the instructions of State Bank of Pakistan. In both cases the customer must be the accountholder of the bank. The property is transferred to the customer after the completion of installments. In case of failure by the customer, the bank takes the property in his custody and sell that property by an auction. The customer has to sign an agreement. In musharkah both the parties(bank and customer) participate

RIBA FREE LOAN SEEKER'S REGISTRATION FORM OF BANK AL FALAH

WORKING FOR WORLD PEACE AND PROSPERITY

Name: Father/Husband, Name: Mothers/Maiden Name: CNIC. # Email: Present Add:

Permanent Add: Ph: Res Off: Cell: Rented Residing Since :

Residence: Owned Company & Business Address: Loan Required for: (Give Detail)

How many loan and No of Credit Cards in which Application is defaulted TAKE ANYONE: WELL WISHER LOAN SEEKER Unskilled Give Detail: CANDIDATE Skilled

Monthly Income Monthly Expenses: Family Members: No of Children Having Education:

Recovery of Payment
Recovering amount given to a customer depends on the mode of financing utilized. If the mode of financing is Mudarabah or Musharakah then the loss to business would be as per financing ratio. But if the mode of financing is any kind of sale (Murabahah, Salam or Istisnaa') then the dues on customer are recoverable in full, no matter he suffers a loss or not. For example if Islamic bank sold an item to customer for Rs. 10,000/= and this thing destroyed after some month or its part went dysfunctional then this will be of the customer and not of the bank. It is very logical and we see it in our everyday routine life.

Source of Fatwa
Islamic banking rules and laws are based on rulings given by AAOIFI (Accounting and Auditing Organization of Islamic Financial Institution). AAOIFI is a shadow institution of Islamic Fiqh Academy in the sense that it adopts rulings and Fatwas issued by IFA (Islamic Fiqh Academy), Jeddah. The IFA consists of the prominent Ulema of 56 Islamic countries from all Fiqhs (Hanafi, Shafai'e, Maalikee and Hanbalee). They sit together and study almost all modern-day issues and issue a Fatwa that sometimes has touch of more than one Fiqh.

Agreement For Interest Free Loan of Meezan Bank

This AGREEMENT is made at _________________ this ___________________ day of ________________ 2001. BETWEEN _____________________________________ Limited, having its place of business at / resident of _______________________________ hereinafter referred to as the Client (which term shall wherever the context so requires or permits mean and include its successors-in-interest and assigns) of the ONE PART. AND __________________________________ Bank Limited (or financial institution), a duly incorporated banking company (or financial institution) having its registered office at ___________________ hereinafter referred as the Institution (which expression shall wherever the context so requires or permits mean and include the heirs, legal representatives and successors-in-interest and assigns) of the OTHER PART. WHEREAS the Institution has agreed to give an Interest Free Loan to the Client on terms and conditions hereinafter appearing. NOW, THEREFORE, THIS AGREEMENT WINTESSETH AS UNDER:1. The Institution hereby agrees to provide to the Client an Interest Free Loan (hereinafter referred to as the Loan) upto a maximum of Rs. ___________________ on the terms and conditions hereinafter contained. 2. The parties hereto hereby mutually agree and covenant as under:i. The Client undertake to repay the loan without any interest on or before ______________ . ii. In case the Client fails to perform as per provisions of this Agreement or any amount is required to be paid by the Client on a specified date and is not paid on that date, or any amount is payable by the Client under this Agreement within a specified period after the receipt of a demand from the Institution and is not paid by it within the specified period after the receipt of the demand and such amounts have to be recovered through litigation, a court may award solatium to the Institution to cover the expenses incurred in the recovery of its dues. 3. As security for repayment of the Institutions loan and/or all other sums payable as aforesaid the Client hereby agrees and undertake to give such security as may be acceptable to the Institution and the terms and conditions of which shall be such as the Institution may determine. IN WITNESS WHEREOF the Client and the Institution have executed this agreement on the day, month and year hereinabove mentioned. Witness 1. ________________________ 2. ________________________ CLIENT ________________________

Witness 1. ________________________ 2. ________________________

INSTITUTION ________________________

Prepared by;
Muhammad Ayaz Roll No. Nasir Nadeem Roll No. Faisal-ur-Rehman Shah Roll No. Muhammad Naeem Roll No. Muhammad Usman Sikandar Roll No. 292 294 302 304 312