Islamic Banking Manual

Learn Islamic Banking with BankIslami
Base Version
January 2006
BankIslami Pakistan Limited
INTR !"#TI N
This Study pack is about introducing Islamic banking. If this is the first time you are reading about Islamic Banking, then you have arrived at just the right place. Why? It is because in our opinion, this is the most simplified te t on Islamic banking ever !ritten so far. It !ill take you through the concepts of Islamic Banking in a seamless manner, so much so that after going through this Study pack, you !ill !onder !hy people al!ays told you Islamic Banking is tough.... Within BankIslami, "## employees are e pected to pass the test based on this book before they are allo!ed client contact or confirmation of services. "s it is the $I%ST step in our training process, it is important that you grasp the concepts introduced in this book for an effective &roduct level training. The fundamental precept of the book is that Islamic Banking can be learned by self study, albeit in a structured manner. If you are ne! to Islamic Banking it !ill add to your kno!ledge !hich !ould be appro imately e'ual to () hours of !orkshop training. If you happen to have !orked in Islamic Banking before, !e hope it !ill refresh your kno!ledge. In !riting this study pack, !e have attempted to adhere to five basic principles !hich sets it apart from other material that is available. $irstly, the discussion is object focused. We are more interested in telling you !hat is a *urabahah, ho! it can be structured and !hat should be avoided instead of telling you the evolution of *urabahah and various opinions about its permissibility in different schools of thoughts. Secondly, the entire discussion is backed up !ith e amples and !here appropriate graphical illustrations. Thirdly, the accompanied +, contains an e-ui. based on multiple/choice 'uestions to ensure you have actually learned the concepts. $ourthly, !e cut no corners in telling you !hat you need to kno! even at the risk of complicating the discussion. $ifthly, e cept for the first three chapters, !hich must be read in se'uence, it is modular, i.e. you can pick any chapter and read it. We have also included *odel "greements so that you can actually see ho! the kno!ledge you have gained is used in the practical !orld. $ %T "&' T$I& &T"!( P)#*+
This book, as !e e plained earlier, is primarily meant for those !ho are ne! to Islamic banking. It makes no distinction of !hether they are *uslims or not. 0aving said that, !e believe, Islamic Banking can only be learned meaningfully if the basic system of Islamic la! and jurisprudence is e plained. This in turn re'uires some discussion about -uran, Sunnah, 0adith and the esteem and conte t in !hich they are held by *uslims. It is only !hen you understand the importance of a commandment in -uran and !hat is subject to interpretation and !hat is not, then you !ill be able to understand the true spirit of Islamic Banking. Importantly, it !ill make your interaction !ith prospects and customers more meaningful. This Study pack is designed for anyone and everyone !ho is interested in learning about Islamic Banking. To make it easier to grasp, it is divided into nine 123 different +hapters. 4ach chapter is divided into different Sessions. We suggest you read one Session at a time. Some of the Sessions are long and you may split them into t!o or more sittings. 5ou are encouraged to re/!ork the calculations !here they are provided specially in the *urabahah section. The accompanied +, contains e-ui. carrying *+-s that are dra!n from each chapter and tests all vital concepts introduced. *odel agreements do not form part of the testing material. 4ach chapter can be scored separately in addition to over all score. We suggest you take the e-ui. after completing each chapter.
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,"RT$'R )&&I&T)N#'+ Improvement is a continuous process. We need your assistance and suggestions in improving this study pack. &lease send your suggestions to either myself or to Sheba * 9han at she-a.khan/-ankislami.com.0k. Issues relating to Shariah can be referred to either *ufti Irshad "hmad at irshad.ahmed/-ankislami.com.0k or *uhammad $aisal Shaikh at 1aisal.shaik/-ankislami.com.0k. 7ur thanks to the team that produced this Study &ack. Sheba led the team assisted ably by 6a.ia and "yesha. "n!ar $aroo'ui, $aisal and *ufti Irshad !rote most of the material. "sad !orked on the +,. *ohammad Shah.ad ensured the book is produced in a 'uality manner. To all of them !e e press our gratitude. " !ord of ackno!ledgment about our shareholders as !ell !ho have provided us !ith e emplary support. +hief :ustice1%3 *ahboob "hmad 1+hairman of the Board, representing :S+#3 for emphasi.ing on training and development, *r. "hmed %anderee !hose commitment to Islamic Banking is a source of inspiration to all of us and ,ubai Bank for agreeing to share the cost and making valuable suggestions. Thank you very much. This study pack also makes a statement about !hat BankIslami is / an Islamic Bank !ith very high product authenticity, yet very contemporary. 9eep it up at all times; 0asan " Bilgrami +47
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#ontents at a 2lance
#ha0ter 3 1 Islamic 'conomic &ystem &ession 4+ %hat is &hariah5 ,efine Shariah Sources of Shariah ,efine $i'h &ession 2+ 'ssentials o1 Islamic 'conomics What are the objectives of Islamic 4conomics? 0o! Islamic economics compares !ith +apitalism Socialism? What is the concept of !ealth in Islam? 0o! the !ealth is distributed in Islam? &ession 6+ 'conomic )cti7ities in Islam The importance of %isk and &rofit sharing Why is trade permissible? Why is investment in business permissible? 2 Ri-a and its Prohi-ition 8 )rguments and Rationale 1or its Prohi-ition &ession 4+ Ri-a What is %iba? What the 0oly book -uran says about %iba? &rohibition of %iba in 0adith &ession 2+ #ommon arguments in su00ort o1 commercial interest "ns!er to the arguments given in support of +ommercial interest &ession 6+ 2harar What is <harar? What are the different types of <harar? Which businesses are haram? 6 #ha0ter 6 9 Islamic &ales #ontract &ession 4+ Islamic Law o1 #ontracts Islamic #a! of +ontracts 4ssential element of a valid contract Types of contracts in Islami =2 =2 (( => => =? 14 11 11 12 9 9 9 6 6 7 7 1 3 5 Name o1 #ha0ter Page 3
+ontents at a <lance
&ession 2+ &ale What is sale? Basic elements of Islamic sale contract Types of sale &ession 6+ *hiyar What is 9hiyar? Types of 9hiyar What is I'ala? &ession :+ )gent +oncept of "gent 1Wakeel3 %ights and 7bligations of the "gent : #ha0ter : 9 ;ura-ahah &ession 4+ Introduction ,efine *urabahah &ayment options in *urabahah &ession 2+ ;ura-aha '<0lained 9no! the rules of *urabahah $actors that distinguished from the other interest based modes 9no! ho! a *urabahah transaction takes places Take practical steps in construction a *urabahah transaction #earn the limitatins of *urabahah mode &ession 6+ Pro1it calculation #earn ho! profit is calculated in *urabahah Benchmarking to a prevailing benchmark &rocess flo! of a Sample *urabahah Transaction &ession :+ ;ura-ahah Risks %isks for Banks in *urabahah Securities in *urabahah = #ha0ter = 9 &alam &ession 4+ Introduction What is Salam? Its definition, purpose and rules. %ules of Calid Salam contract +omparing Salam and *urabahah &arallel Salam? A? A) A2 A2 AA AB @2 A= A= @@ @A @B @B @? @= @= (2 (2 (? (? (? (@ (@ (>
&ession 2+ $ow to use &alam &rocess flo! of Salam %isks in Salam and ho! they can be mitigated What are the common mistakes in e ecuting Salam 6 #ha0ter 6 9 Istisna &ession 4+ Introduction What is Istisna'? *ain features of Istisna? 0o! Istisna differ from Salam? &ession 2+ Parallel Istisna What is parallel Istisna'? What is the process flo! in Istisna'? What is the scope of Istisna'? > #ha0ter > 9 I?arah @LeasingA &ession 4+ What is Ijarah? Important features and basic rules of Ijarah. ,istinguishing factors of Ijarah. &ession 2+ What is the difference bet!een +onventional #ease and Ijarah? ,ifferent types of leases &ession 6+ What is the process flo! of Ijarah? 0o! profit is calculated in Ijarah. What are the risks in Ijarah? >> >> >? >@ >B B2 B2 B2 B> B> B? B@ B@ BB B= B= B(
#ha0ter B 9 ;udara-ah &ession 4+ Introduction What is Mudarabah? What are the types of Mudarabah? What are the rules of Mudarabah? What are some issues in Mudarabah? &ession 2+ "ses o1 ;udara-ah ,eposits E 0o! does the Bank !ork as a Mudarib? Investments E 0o! does the Bank !ork as a Rabb-ul-maal? ?( ?( >2 >2 ?D ?=
&rofit and #oss ,istribution in *udaraba &ession 6+ Process 1low o1 Risks What is the process flo! of Mudarabah? What are the risks in Mudarabah ? Where Mudarabah can be used by Islamic Banks?
?@ ?A ?A ?B
#ha0ter C 9 ;usharakah &ession 4+ Introduction What is Musharakah? Types of Shirkah &ession 2+ RulesD security and termination +haracteristics and rules of Musharakah %ights and obligations of partners in Musharakah Security in *usharakah 0o! a *usharakah can be terminated? What are the *usharaka? differences bet!een interest/based financing and )D )= )= )= )( ?? ??
&ession 6+ !iminishing Musharakah What is ,iminishing Musharakah? Step/by/step procedure of ,iminishing Musharakah Where *usharakah can be used as a *ode of $inancing? )@ )A )B
#ha0ter 4+
Islamic 'conomic &ystem
#ha0ter 4+ Islamic 'conomic &ystem
&ession 4+ %hat is &hariah5

&ession #hecklist ". ,efine Shariah B. Sources of Shariah +. ,efine $i'h
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*ost people believe that Shariah and Islamic #a! are similar. This can be misleading as Shariah is far more comprehensive. 1see Table " on ne t page3
Shariah e plains and takes care of all aspects of spiritual, political, social, domestic
and private life of an individual.

Shariah is in principle meant for all *uslims, but also applies to a certain e tent to
people living inside a *uslim society.

The regulations of Shariah can be divided into t!o groupsF %egulations on !orship and ritual duties %egulations of judicial and political nature !hich also include economic activities.
Throughout this document, !e !ill be referring to Shariah regulations governing the economic activities !ith a specific reference to Islamic Banking and $inance
Chapter 1: Islamic Economic System
Ta-le )
ISLAM a panoramic view
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There are t!o sources of Shariah. =3 (3 4A &rimary sources ,erived Sources PRI;)R( & "R#'& @aA EurFanD The -ook o1 )llah
The <lorious -urGan is the Book of "llah, Who has promised to safeguard its purity from any violation. It gives main beliefs, principles and !ide/ranging directives of "llah. It is incumbent on each and every person !ho seeks the dignity of this !orld and the bliss of the 0ereafter, to regulate his life according to it. 8nlike all other !ritings, scriptures and books, this is a uni'ue book as it is the Word of "llah in its purest form as it is preserved in the same form as it !as revealed to the prophet *ohammed 1S"W3. It has an eternal message and universal relevance. 4very *uslim is re'uired to implement its commandments. Its contents are not confined to a particular theme or style, but contain the basis of an entire system of life, encompassing a !hole spectrum of issues that range from specific articles of faith and commandments to general moral teachings, rights and obligations, crime and punishment, personal and public la!, and a host of other private, social and economic concerns. These issues are discussed in a variety of !ays, such as direct stipulations, reminders of "llahGs favors on 0is creation, admonitions, and rebukes. Stories of past communities and civili.ations are narrated, follo!ed by the lessons to be learned from their actions and subse'uent fate. The -urGan has a number of uni'ue characteristics, some of !hich are as follo!sF
It is the actual Word of "llah, revealed for the benefit of all mankind. "llah saysF
HIt is 0e Who sent do!n the criterion 1$ur'an3 to 0is servant, that it may be an admonition to all creaturesH 1"l/$ur'anF =3.
It is complete and comprehensive. The "lmighty saysF H6othing have We
omitted from the BookH 1"l/"nIamF @)3, and H"nd We have sent do!n to thee the Book e plaining all thingsH 1"n/6ahlF )23.
It is a theoretical and a practical Book, not only morali.ing but also specifically
defines the permissible and the forbidden. The importance of understanding the message of the -urGan and seeking "llahGs pleasure and re!ard is obvious from -urGan itself and the sayings of holy prophet 1peace and blessings be upon him3.
It is "llahGs eternal miracle revealed to &rophet *uhammad 1peace and
blessings be upon him3 for all succeeding generations. In response to those !ho doubt the origin of the -urGan, "llah the "lmighty has challenged the most articulate "rabs to produce a !hole book, ten chapters, or even one solitary chapter that can be remotely comparable to the -urGan. But to this day, no one has succeeded in meeting the challenge of the "lmighty.
It contains a complete code that provides guidance for all areas of life, !hether
spiritual, intellectual, political, social, or economic. It is a code that has no boundaries of time, place or nationF "llah saysF HCerily this -urGan does guide to that !hich is the most rightH 1"l/IsraaGF 23.

"llah, the "lmighty, has taken upon 0imself the duty of preserving the -urGan
forever in its entirety. It has been preserved so !ell, both in memory and in !riting. The "rabic te t !e have today is identical to the te t that !as revealed to the &rophet 1peace and blessings be upon him3 dot to dot and dash to dash. 6ot even a single letter has yielded to corruption during the passage of centuries, and so it !ill remain for ever, by the order of "llah. @-A &unnah G )hadith
The -urGan is the !ord of "llah !hich !as revealed to &rophet *uhammad 1peace and blessings be upon him3 and preserved both verbally and in !riting by his +ompanions. "part from the -urGan, !hatever the &rophet uttered or did !as also preserved by the +ompanions. The !ord JSunnahK includes the sayings of the &rophet 1peace and blessings be upon him3 kno!n commonly as J0adithsK 1i.e., sayings3, his practices, and actions of his companions !hich gained his approval. Both the -urGan and the Sunnah fall under a common title JWahyK 1revelation or inspiration3L the difference bet!een the t!o is that the -urGan is a direct revelation so the !ords are of "llah, !hich are recited 1*atlu!3 in the formal prayer 1Salah3 !hile the Sunnah is indirect revelation in the sense that the !ords are not from "llah. 0oly prophet 1Sall/"llahu alayhi !a Sallam3 said many directions he received from "llah in his o!n !ords, these are not recited 1J<hair *atlu!K3 in the formal prayers. "hadith act for -uranic teachings and directives as JinterpreterK Je plainerM and JelaboratorK. "dadith also stand for further e plaining the teachings of 0oly -urGan or !hat the 0oly &rophet said on matters !hich are not elaborated in the 0oly -urGan. 2A !'RIV'! & "R#'& @aA I?maFa 8 &cholarly #onsensus
Ijma has been technically defined as the consensus of the jurists of a certain period over a religious matter. It in fact signifies the importance of delegated legislation to the *uslim community. Ijma is considered a sufficient evidence for action because the &rophet of Islam said, H*uslim 1majority or main body3 !ill never agree on a !rong mailerH. *uslims are unanimous on this that the agreement of the scholars of Islam on any religious matter is a source of la! in Islam. @-A Eiyas 8 )nalogy
-iyas is the fourth important source of Islamic la!, -iyas or analogy is resorted to in respect of problems about !hich there is no specific or clear provision in the -urGan or the Sunnah of the &rophet. To deal !ith such issues the scholars have derived la!s and principles through analogical deduction on the basis of the provisions of the -urGan and the Sunnah on some similar situation. +ontrary to its appearance, it is not an easy procedure. The Islamic scholars have developed detailed principles of analogical deductions or -iyas in the books of Islamic jurisprudence.
BankIslami Pakistan Limited #. %$)T I& ,IE$5 J$i'hK is utili.ation of both primary and derived sources of Shariah to get to a decision. It covers every aspect of life. It gives the final and binding rulings on any matter arising out of our daily lives. The comprehensive nature of Shariah is due to the belief that a complete and perfect legislation la! must provide all that is necessary for a personMs spiritual and physical !ell/being. Thus, Shariah provides a complete code of life and as any complete code of life, Shariah covers all possible actions of a *uslim. "ll directives of Shariah are divided 1in principle3 into five categoriesF obligatory, meritorious, permissible, reprehensible, and forbidden. The verdict of -urGan on a fe! topics has been discussed in different places in it, hence it is difficult for a common *uslim to kno! and understand the e act status of a particular issue. It is here !here the role of $i'h starts. J$i'hK means Munderstanding of detailsM and refers to the inferences dra!n by scholars. Shariah has certain la!s !hich are regarded as divinely ordained, concrete and timeless for all relevant situations 1for e ample, the ban against drinking li'uor as an into icant3. It also has certain la!s !hich are e tracted based on principles established by Islamic jurists 1Mujtahi un3. So Minterpretation of an Islamic rule and collecting all the directives and injunctions about it in one place and deciding itMs statusM is !hat $i'h adds. Therefore, it is easy to say that $i'h is !hat jurists have attempted for to interpret divine principles.
With a fast progressing !orld and innumerable steps taken by mankind since the
advent of Islam, ne! problems are cropping up every day and the Islamic Scholars have to supply ans!ers to these 'uestions. In this connection, mention must be made of an entity called JIslamic $i'h "cademyK based in :eddah, Saudi "rabia. This academy comprises of prominent Islamic scholars from all *uslim countries and relating to all Islamic schools of thought. They meet regularly and give rulings on the matters referred to them from all over the !orld. *ost of the practices prevalent in Islamic banking today have the approval of Islamic $i'h "cademy, :eddah. 1httpFNN!!!.fi'hacademy.org3.
&ession 2+ 'ssentials o1 Islamic 'conomics

&ession #hecklist ". What are the objectives of Islamic 4conomics? B. 0o! Islamic economics compares !ith +apitalism O Socialism? +. +oncept of Wealth in Islam ,. 0o! the !ealth is distributed in Islam?
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Islam considers economic activities of man as la!ful, meritorious and at times obligatory and necessary. 0o!ever, economic activities are not the basic problem and therefore economic progress is not the primary reason for human e istence. This sentence is the shortest differentiating point bet!een Islamic economic objectives and those in +apitalism O Socialism. 4conomic activities therefore should be conducted, keeping in vie! all the time thatF
These are la!ful and the !ealth is earned in MhalalM !ays, as prescribed by Shariah The !ealth is fairly distributed in all sectors of the society and not concentrated in a
fe! hands. B. # ;P)RI& N %IT$ #)PIT)LI&; )N! & #I)LI&; #et us briefly talk about the three economic models to better understand the Islamic system of economics. 4. +apitalism 2. Socialism 6. Islamic system 4. #a0italism
"s you may be a!are that this model encourages private o!nership and believes that a man is free to accumulate !ealth !ithout any restriction. *arket forces are the prime drivers of an economy. 4ven humanly/established la!s are not applicable. 2. &ocialism
7n the other hand, Socialism model lays do!n that everything belongs to the State and private o!nership is prohibited. 0ence, no one is allo!ed to accumulate !ealth for his o!n. Both capitalism and socialism in their purest form do not e ist any !here in the !orld. With the demise of the former 8SS%, socialism has faced a serious set back, though its diluted principles are practiced !orld over. +apitalism again in its diluted form is present around the !orld.
BankIslami Pakistan Limited 6. Islamic &ystem
Islam says that all !ealth primarily belongs to "llah and it is given to man in trust. 0e has to earn it under certain rules and share it !ith others through Pakat, Sada'at etc. &rivate o!nership is allo!ed as long as other tenants i.e. Pakat, Sada'at and prohibition of %iba are follo!ed. #. # N#'PT , %')LT$ IN I&L);
"ccording to IslamF
Wealth in all its possible forms is created by "llah. Therefore, primarily !ealth is the property of "llah. The right of property !hich a man possesses, has been delegated to him by "llah. It should be used in such a !ay that it ensures success in the !orld and hereafter. Since !ealth has been received from "llah, itMs use by man should also be subject to
the commandment of "llah.

"llah may command man to give a specified part of his !ealth to others. "llah may forbid use of !ealth in a particular !ay.
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#et us revie! the objectives of distribution of !ealth in Islam. 4. 'sta-lishment o1 a 0ractica-le 'conomic &ystem
By practicable economic system !e mean a system that does not deny private o!nership and deprive human being from their basic rights nor it supports control of fe! !ho have resources to ma imi.e their !ealth. Islam provides a system that has balanced economic instructions !hich do not deprive anyone from his rights nor it leaves some of them enjoying !ith resources in their hands. Islam accepts the follo!ing !ithin certain limitsF

#a!s of demand and supply *otive of personal profit *arket forces 6atural relation of employer and employee 'na-ling e7ery one to get what is right1ully due to him
2.
Islamic concept of deserving !ealth is that both, those !ho have participated in generating !ealth and those !ho could not participate in the generation, have rights in !ealth. -urGan Says in Surah "l *aMarij In their wealth there is known right for those who ask for it and those who have need for it (70; !- "#
BankIslami Pakistan Limited 6. 'radicating the concentration o1 wealth

&rohibition of hoarding, interest, gambling, , 8'ood $asidh 18nla!ful contracts3 and
<harar 1e cessive uncertainty3

4ncouragement of Sada'ah, #a!s of Inheritance and *ehar etc.
-urGan says in Surah "l 0ashrF So that this wealth should not be$ome $onfined onl% to the ri$h amongst %ou ("&'7#(
&ession 6+ 'conomic )cti7ities in Islam

&ession #hecklist ". The Importance of %isk and &rofit Sharing. B. Why is Trade permissible? +. Why is investment in business permissible?
"s in +apitalism and Socialism 1!here individuals or the state are left free to pursue economic activities !ithout any restriction3 Islam dra!s a clear line bet!een !hat is allo!ed or permissible 10alal3 and !hat is not allo!ed or impermissible 10aram3. In this section, !e !ill highlight both sets of these activities i.e. 0alal as !ell as 0aram ). T$' I;P RT)N#' Islamic economyA , RI&* )N! PR ,IT &$)RIN2 @essential element o1
Islam lays great stress on the fact that anybody !ho seeks a re!ard or earning from any activity must also bear the risk relating to that activity. Islam abhors that one party enjoys all benefits !hereas other takes on all the risks. It is for this reason that *odarabah 1Centure +apital3 and *usharakah 1&rofit O loss sharing3 are the primary financing modes. The aspect of risk sharing is actually the corner/stone of all economic activities in Islam. The absence of this element in any undertaking makes it not according to the tenets of Islam. "t the same time, only presence of risk does not make a transaction Shariah compliant. The underlying reason, rationale and motive has got be in accordance !ith the principles of Shariah. $or e ample putting money in $i ed ,eposits at fi ed rate of interest does not involve any risk sharing as return to depositor is almost guaranteed. B. TR)!' Trading is the most favoured economic activity in Islam as the elements of risk taking and profit sharing are prominently present. &lease bear in mind that care is to be taken in doing trade based activities as !ell because hoarding, e orbitant profits and cornering of market by a fe! are again undesirable. #. INV'&T;'NT IN B"&IN'&& This is a desirable activity but it should be noted that Islam re'uires that all such investments should be backed by assets. <eneration of assets is a basic necessity !hich is beneficial not only to the investor but to the society at large. !or e"ample# in$estments in %o$ernment Securities# &e'ence Sa$in( Certi'icates )&SCs* etc+ may not (enerate any assets as a su,stantial portion o' the procee s is to meet the re$enue e'icit o' the ,u (et+ - itionally the element o' .i,a ) iscusse later* is also not in accor ance /ith Shariah+ Investments in shares of companies, !hich are doing permissible business, are allo!ed as such investments form part of e'uity of the company thus ac'uiring the assets in that company. Similarly since Sukok are asset based, they are Shariah compliant.
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#ha0ter 2+
Ri-a and its 0rohi-ition 9)rguments and rationale 1or its 0rohi-ition
12
#ha0ter 2 + Ri-a and its 0rohi-ition 9 )rguments and rationale 1or its 0rohi-ition
&ession 4+ Ri-a
&ession #hecklist ". What is %iba? B. What the 0oly Book -urMan says about %iba? +. &rohibition of %iba in 0adith
).
RIB) @INT'R'&TA 5ou must have often !ondered !hat the !ord M%ibaM actually means. %iba means any e cess compensation over and above the principal !hich is !ithout due consideration. It is a premium paid to the lender in return for his !aiting as a condition for the loan. In the !ords of &rophet 1S"WS3 J4very loan that dra!s interest is %ibaK. This is the biggest M0aramM element in Islam !hich relates to any economic activity.
B.
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* E"RH)N &)(& )B "T RIB)5
It is essential for you to kno! that %iba has strictly been prohibited in the 0oly -urMan. Belo!, !e have given verses from the -urMan !hich are revelations about %iba. 4. ,irst Re7elation a-out Ri-a in EurHan )*hat whi$h %ou give as interest to in$rease the +eo+les' wealth in$reases not with ,od; but that whi$h %ou give in $harit%- seeking the goodwill of ,od- multi+lies manifold(. 1Surah %ome, Cerse @23 2. &econd Re7elation a-out Ri-a in EurHan )/nd for their taking interest even though it was forbidden for them- and their wrongful a++ro+riation of other +eo+les mone%- and 0e have +re+ared for those among them who re1e$t faith a grievous +unishment . 1Surah al/6isaM, verse =>=3 6. Third Re7elation a-out Ri-a in EurHan )2elievers3 4o not swallow riba- doubled and redoubled- and be mindful of /llah so that %ou ma% attain true su$$ess. 1 "l Imran, "yat =@D3 5ou may have heard the argument that only compounding is 0aram 1prohibited3 in Islam. This verse directly rejects this argument.
Chapter 2 : .i,a an its prohi,ition 0 -r(uments an rationale 'or its prohi,ition
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BankIslami Pakistan Limited :. ,ourth Re7elation a-out Ri-a in EurHan )*hose who devour Riba shall rise u+ before /llah like men whom Shaitan has demented b% his tou$h; for the% $laim that trading is like usur%( 2ut /llah has +ermitted trading and forbidden usur%( 5e that re$eives an admonition from his Rabb and mends his wa%s ma% kee+ what he has alread% earned; his faith is in the hand of /llah( 2ut he that +a%s no heed shall be among the +eo+le of fire and shall remain in it forever.( )/llah destro%s riba and nourishes $harities( /nd /llah does not like an% sinful disbeliever( Surel%- those who believe and do good deeds- establish Salah and 6akah have their reward with their 7ord- and there is no fear for them-nor shall the% grieve.( )8 %ou who believe- 9ear /llah and give u+ what remains of %our demand for Interest- if %ou are indeed a believer( If %ou do not- then %ou are warned of the de$laration of war from /llah and 5is Messenger; 2ut if %ou turn ba$k %ou shall have %our +rin$i+al' 4eal not un1ustl% and %ou shall not be dealt with un1ustl%.( )/nd if there be one in miser%- then deferment till ease( /nd that %ou leave it as alms is far better for %ou- if %ou reall% know( /nd be fearful of a da% when %ou shall be returned to /llah- then ever%bod% shall be +aid- in full- what he has earned( /nd the% shall not be wronged.( 1Cerses of Surah "l Ba'arahF (?B/()=3 #. PR $IBITI N , RIB) IN $)!IT$
The 0oly &rophet 1S"W3 has also laid severe emphasis on avoiding %iba. Some of 0is sayings, i.e. M0adithsM, are given belo!L
$rom 0a.rat :abir Ibn/e/"bdullah 1%"3F The &rophet, 1S"WS3 cursed the receiver and the payer of interest, the one !ho records it and the !itnesses to the transaction and saidF HThey are all alike Qin guiltRK. 1*uslim, Tirmidhi and *usnad "hmad3 $rom 0a.rat "bu 0urayrah 1%"3F The &rophet, 1S"WS3, saidF H%iba has seventy segments, the least serious being e'uivalent to a man committing adultery !ith his o!n mother.H 1Ibn *ajah3 $rom 0a.rat "mr bin "l "as 1%"3F JWhen interest based dealing becomes common among people, they !ill start facing draught and shortage of food. "nd !hen bribery becomes norm among people they !ill live under constant fear of their enemyK. $rom 0a.rat "bu 0urayrah 1%"3 F The &rophet 1S"WS3, saidF HThere !ill certainly come a time for mankind !hen everyone !ill take %iba and if he does not do so, its dust !ill reach him.H 1"bu ,a!ud, Ibn *ajah3
To sum up, In the !ords of &rophet 1S"WS3
J4very loan that dra!s any premium is %ibaK. 1This 0adith is reported by 0a.rat 0arith ibn "bi 8samah in his *usnad3.
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BankIslami Pakistan Limited +onventional interest based transactions directly assist in concentration of !ealth in a fe! hands. +onsider the follo!ing transactionF =. (. 7ur friend 7mar happily places %s =DD !ith Bank "B+ at BS interest per annum, !hich means at the end of one year he gets an amount of %s. B. Bank "B+ gives the same %s =DD to $ancy industries on loan at =BS per annum and earns %s =B on that money, out of !hich only %s. B goes to 7mar 1the depositor3 and bank keeps %s =D. 6o! $ancy Industries manufactures goods !orth %s =DD. Then it adds %s =B 1!hich is the interest paid to the bank3 plus %s =D as its o!n profit. Thus the sale price jumps to %s. =(B and !hen 7mar purchases the goods from the shop, he has to pay %s =(B. So against %s B received as interest from the bank he has to pay %s. (B for the same %s. =DD. 0e is a loser by %s. (D.
5ou must no! compare that if the same transaction !ould have taken place on the basis of an Islamic mode of finance such as *udarabah N *usharakah. The scenario !ill be as follo!sF =. 7mar puts %s. =DD !ith BankIslami on *udarabah basis. They agree to share profits on )DF(D basis, i.e. )DS of the earned profit goes to 7mar and (DS goes to BankIslami. BankIslami invests the %s. =DD received from 7mar !ith $ancy Industries on *udarabah basis. They agree to share profits on )DF(D basis !hich means )DS of the profit goes to BankIslami and (DS to $ancy Industries. Since there is no cost of capital provided by the BankIslami to $ancy Industries, it does not have to pay any fi ed amount in the form of interest to the bank. $ancy Industries !ill only add their profit of =DS to the cost of goods and sell it at %s. ==D. 5ou must have noticed that this reduces the cost to 7mar. $ancy Industries makes a profit of %s. =D. &lease recall that they agreed to pay )DS of the profit to BankIslami . 0ence they pay %s. ) to the Bank !hich is )DS of the profit. 5ou !ould remember that BankIslami had also agreed to pay )DS of the profit to 7mar. 0ence BankIslami pays %s. >.AD to 7mar as his profit on investment. Since $ancy Industries sells the goods at %s. ==D in this case, !hen 7mar purchases the goods from the shop, he has to pay %s. ==D. 0e received %s. >.AD as profit on investment from BankIslami and he has to pay %s. =D as profit of $ancy Industries. 0e is out of pocket by only %s. @.>D, as against %s. (D in the other e ample.
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@.
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B. >.
We can say in short that 7mar has spent less and at the same time has avoided the evils of %iba 1Interest3.
15
&ession 2+ #ommon arguments in su00ort o1 #ommercial interest

&ession #hecklist ". "ns!ers to the arguments given in support of +ommercial interest.
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)R2";'NT& IN &"PP RT
, # ;;'R#I)L INT'R'&T
6o!, !e are going to discuss some of these arguments belo! and !e are also giving rebuttals of these arguments. Believe us, you !ill be coming across these arguments every no! and then. <oing through the follo!ing pages !ill prepare you on ho! to deal !ith them effectively. )rgument 3 4+ #ommercial Interest is charged 1rom wealthy 0ersons whereas usury is charged 1rom the 0oor. It does not e<0loit the 0oor while consum0tion interest or usury e<0loits the 0oor. )nswer Calidity of a transaction 1like sale, leasing etc.3 is not based on the financial status of a party. #a! does not differentiate bet!een poor and !ealthy in crimes like bribery, theft etc. )rgument 3 2+ Ri-a @which is restricted in EurHanA is something di11erent 1rom what is 0re7alent in modern 1orm these days. The 0resent days interest was not in times o1 $oly Pro0het @&all8)llahu alayhi wa &allamA. )nswer 5ou may tell the arguer that !hen something is prohibited, all its general or specific forms are prohibited. $or e ample gambling, pork, li'uor and adultery are as 0aram no! as they !ere in :ahiliyyah 1The state of ignorance of the guidance from "llah3 days. "dditionally, there are tonnes of material available no! that proves that commercial interest !as also prevalent in the times of the 0oly &rophet 1S"W3. The $i'h "cademy :eddah has ruled that commercial interest is indeed the one that is prohibited and is therefore not allo!ed. It is one of the issues that is settled at the 7I+ level.
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BankIslami Pakistan Limited )rgument 3 6+ In a commercial loan the -orrower and the lender are -oth getting 0ro1it 9 the -orrower 1rom the amount he in7ests in the -usinessD and the lender in the sha0e o1 interest he recei7es 1rom the -orrower. There1oreD there is no in?ustice which is the -asis o1 0rohi-ition o1 Ri-a )nswer This is again a misconception about prohibition of interest. There is injustice in %iba because it means that profit of one party 1lender3 is confirmed !hereas profit of the other party 1borro!er3 is uncertain. Suppose a person borro!s money from a lender and invests in a business. #ater, the borro!er faces loss in the business due to some reason but he has to pay a fi ed and agreed amount of interest to the lender. The lender does not face any loss as he still received interest from the borro!er. This situation is unfair as the preferred Islamic principle of Jprofit and loss sharingK !as not practiced here. 5ou may also like to kno! that mere MconsentM or Mmutual benefitM of the parties does not make any transaction acceptable. $or a transaction to be !ithin four corner of Shariah, it has to be acceptable according to the principles of Shariah. )rgument 3 :+ In a commercial loan arrangementD there is 1ree consent o1 -othD the -orrower and the lender. In Ri-aD consent o1 the -orrower is not there since it is only the lender who is getting the e<cess. )nswer It is a gross misconception that many individuals think that the prohibition of interest is only related to situations !here the creditor 1lender3 is charging e ploitatively high rates of interest. They think that the only objective served by the prohibition of %iba is the avoidance of injustice in the sense of e ploitation of the poor debtor by the rich creditor. But this is not true. Islam considers %iba itself injustice, !hether it is bet!een poor and !ealthy or it is only bet!een !ealthy people. Secondly, as e plained above, mutual consent does not make an activity haram or halal. This is a common principle in every legal philosophy. So haram cannot be rendered halal by mutual consent of involving parties, for e ample adultery and many forbidden types of sale, etc, remain haram even !hen there is a mutual consent of both parties.
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&ession 6+ 2harar
&ession #hecklist ". What is ,harar? B. What are the different types of ,harar? +. Which businesses are haram?
). %$)T I& GHARAR5 #et us take a look at another element that Islam does no allo! to be practiced at all. It is called ,harar; ,harar simply means JriskK or Junnecessary ambiguityK or Je cessive uncertaintyK !hich makes a transaction a matter of dispute bet!een counter parties. $or e ample, the transaction of probable items !hose e istence or characteristics are not certain, thereby making the transaction similar to gambling. *any classical e amples of ,harar are provided e plicitly in the "hadith. They include the sale of fish in the pond N river N lake N sea, birds in the sky, an unborn calf in its motherMs !omb, a runa!ay animal, un/ripened fruits on the tree, etc. "ll such cases involve the sale of an item !hich may or may not e ist as !e cannot predict the future. In such circumstances, to mention but a fe!, the fish in the sea may never be caught, the calf may be still/born, and the fruits may never ripen. In all such cases, it is in the best interest of the trading parties to be very specific about !hat is being sold and for !hat price. We used the !ords JunnecessaryK and Je cessiveK to e plain an important concept. 8ncertainty and ambiguity are part of human life and because one can not be sure of an incident happening in future, so elimination of these elements completely from economic transactions is not possible but they can be minimi.ed up to a acceptable level as per Shariah. 5ou all must have faced some e perience some!here in your life that !henever e cessive element of uncertainty arose, it results in dispute bet!een parties. That is !hy such transaction are not allo!ed in Islam due to possible injustice !ith one of the parties. B. T(P'& , GHARAR
There are t!o types of ,hararL 4. Jahalah This type of ,harar means non/specification of a subject matter being sold e.g. selling of a !atch kept !ith other !atches, in such a !ay that the buyer does not e actly kno! the subject matter !hich means he does not kno! !hich specific !atch is being sold to him. "nother e ample could be selling of something in a bag. We are sure you !ill remember no! that any transaction that has an element of ,harar is not valid in Shariah.
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BankIslami Pakistan Limited &lease take note of the 0adith !hich is narrated by many books on the authority of M"bu 0urayra 1%"3 1translation of the version in Sahih *uslim3 thatF IThe Pro0het @&)%&A 0rohi-ited the 0e--le sale and the Gharar sale.J ,harar is strictly prohibited in Islam because of inherent injustice. 2. 2am-ling @EimarA+ Surely you must be kno!ing that gambling is another prohibited activity and is condemned in -urMan. It is considered haram because of huge element of ,harar. In this study pack !e are not going to deal !ith it. In present day society, the pri.es scheme e.g. &ri.e Bonds, lotteries, speculations etc. also fall under this category. #. %$I#$ B"&IN'&&'& )R' $)R);5 5ou !ould recall that !e talked about the fact that the importance of underlying business bing in compliance !ith Shariah. $ollo!ing is a brief list of activities that are considered not in compliance !ith ShariahF a3 b3 c3 d3 *anufacturing and trading of any thing considered 0aram by Islam like li'uor, drugs, pork products. "ny business that involves obscenity like casinos, night clubs, pornography etc. Business dealing in money lending on interest. Business promoting indecency like prostitution, film making, dance and music promoting institutions etc. etc.
We emphasi.e again that any kind of involvement in the above mentioned businesses is prohibited by all means.4ven employment in such businesses is not allo!ed.
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#ha0ter 6+
Islamic &ales #ontract
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#ha0ter 6 9 Islamic &ales #ontract
&ession 4+ Islamic law o1 contracts

&ession #hecklist
". Islamic la!s of +ontracts B. 4ssential elements of a Calid +ontract +. Types of +ontracts in Islam
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I&L);I# L)%& , R # NTR)#T& Islamic commercial la!, kno!n as 9i:h Muammalat in Islamic legal term, !hich constitutes an important branch of la!, dealing !ith issues of contracts and the legal effects arising from a contract. +ontract in Islamic la! is a comple legal discipline in both its jurisprudential and practical function. "lso contract covers a variety of dealings and transactions to meet the needs of the society. Issues of commercial transactions, unlike devotional issues i.e. MIbadatM, are bound to change due to the changing circumstances and situations of both the object and subject of the transactions.
B.
'&&'NTI)L 'L';'NT& =. (. @. A. 4.
, ) V)LI! # NTR)#T
+ontractors E &arties to a +ontract Subject *atter E <oods N commodities N services +onsideration / +ompensation Wordings of +ontract #ontractors The parties to a contract should beF a3 #egally competent to enter into a contract i.e. they should be legally allo!ed to undertake the transaction. b3 *ature, !hich is measured largely by t!o aspects, namely prudence andNor puberty as revealed in the -uranF ;<rove or+hans till the% rea$h the marriageable age; then if %ou find them of sound 1udgment- deliver over unto them their fortune;(1Surah "n 6isa, Cerse B3 c3 #astly, they should be in sound mind !hile undertaking the transaction.
Chapter 3 0 Islamic Sales Contract
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BankIslami Pakistan Limited 2. &u-?ect ;atter Islamic la! stresses about the Subject matter of a contract in the follo!ing mattersF a. )-ility to !eli7er+ ,elivery, on the other hand, indicates that the object must be capable of certain delivery. The classical jurists therefore prohibit the sale of a camel !hich has fled, a bird in the air or a fish in !ater. There are t!o kinds of ,eliveryF
&hysical delivery N &hysical &ossessionF &hysically delivering a thing means giving it to other party by hand so that he has the asset !ith him physically. +onstructive possessionF ,elivery of goods in a manner !here other party 1to !hom the goods are delivered3 takes no physical delivery of the commodity. Instead, the commodity has come into his control and all the rights and liabilities of the commodity are passed on to him including the risk of its destruction.
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Law1ulness+ #a!fulness re'uires that the object should be la!ful, that is something !hich is legally permissible to be traded in. "lso inherent in the la!fulness of the object is the condition that the object should be legally o!ned by the parties to a contract. '<istence+ The issues of e istence pre/supposes that the object of a contract should be in e istence at the time of contract. Thus, it is illegal, for e ample, to sell fetus or something else that does not e ist. Precise determination G s0eci1ication G Kuanti1ication+ $inally, the subject matter of a contract 1commoditiesN goodsN services3 should be determined so precisely and clearly that the element of ambiguity and any uncertainty is graded do!n up to the natural level.
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#onsideration "s far as consideration is concerned, !e mean price N rent N fare or any other compensation given in e change of something. Islamic la! allo!s it to be a monetary price as !ell as non/monetary e change. 6on/monetary !ould mean that it could be a commodity given in e change like in the barter system. Islamic prohibition against uncertainty re'uires that the consideration should be in e istence and determined at the time of the contract and cannot be left to be determined on a later date nor can it be left subject to the determination by a third party. In summaryF a. &0eci1ication+ The consideration should be very specifically defined in terms of medium and currency. Euanti1ication+ The consideration should also be very specifically defined in terms of 'uantity and details.
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BankIslami Pakistan Limited c. )-ility to deli7er+ ,elivery, on the other hand, indicates that the object should be capable of certain delivery. $or e ample selling against a currency that is not used in the market is not acceptable unless other!ise agreed. 11er L )cce0tance
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%ordings o1 #ontract 8
" contract is completed !hen offer from one party and acceptance from other match. 4 pression of both offer and acceptance could be, according to Islamic la! of contract, verbally e pressed like in Me press contractsM or implied e pression !hich has been described as Mcontract by conductM or Mimplied contractM. 0o!ever, Islamic la! of contract re'uires that the offer and acceptance should be jointly connected !ith no unnatural gap bet!een offer and acceptance. We mean by unnatural gap, any delay that does not usually occur bet!een offer and acceptance in such types of transactions. The session in !hich offer and acceptance takes place is called *ajlis "l/"'d in Islamic la!. To clarify the concept, assume that "li 1buyer3 and 8mair 1seller3 are bargaining for a cell phone at =DFDD "*. "fter all discussions and bargaining 8mair 1seller3 offered that the price of the cellphone !ould not be less than %s B,DDD "li 1buyer3 leaves the shop and does not buy the cellphone. "fter @ hours he comes back and asks 8mair 1seller3 to give him the cellphone. The seller 18mair3 has the right of not selling the cellphone on the price he had demanded reason being the fact that no contract !as made in the morning and by his conduct "li had !ithdra!n from the negotiations. The re'uirements for !ordings of a contract are given belo!F a. "se o1 0resent tense+ This means that the !ords should reflect a contract that is being contracted in present not in future. Non8contingent+ The effectiveness of a contract is not contingent upon any event in future. This is also true for the compensation of the contract. The follo!ing e ample is made to illustrate the conceptF 7n =Dth :anuary 9halid 1seller3 sells a &+ to 0ammad 1buyer3 !ith the condition that the sale !ould be completed if he 19halid3 !ins the tennis match on =Bth :anuary. "s sale has been attributed to an event in future it !ould not be allo!ed. "nconditional+ This is another re'uirement that should be kept in mind. "s discussed, according to Islamic la!, a contract should not be conditional. The basic purpose of the prohibition of conditional clauses is to avoid any conflict that may occur bet!een parties to a contract by clearly specifying every detail of a transaction as !ell as the responsibilities of the parties to the transaction. Such rules are normally violated through conditions !hich are kno!n as Jconditions !hich are against the contractK. 9eeping in vie! modern business practices, the issue needs to be understood in detail. It is hoped the follo!ing rules !ill help clarify the concept. Rule No. 4+ " condition, !hich is not against the basic objective of the transaction i.e sale, is a valid condition. $or e ample a condition of free delivery to buyerGs premises.
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BankIslami Pakistan Limited Rule No. 2+ " condition, !hich seems to be against the basic objective of the contract, but it is in the market practice and its voidness is not proved !ith the clear injunctions of the 0oly -uran and Sunnah is a valid condition. $or e ample, a condition that the seller !ill provide five/year guarantee and one year free service. Rule No. 6+ " condition that is against the basic objective of the contract and not in market practice and in favor of one of the contractors or subject matter, is a void condition. $or e ample if "hmed sells a car to Basheer !ith a condition that he !ill use it on a fi ed date every month. Rule No. :+ " condition !hich is against the basic objective of the contract, not in the market practice and not in favor of any contractor is not a void condition. $or e ample if both "hmed and Basheer decide to give to charity a certain percentage of both subject matter and consideration upon completion of sale. #. T(P'& , # NTR)#T& IN I&L);
+ontracts can be categori.ed under t!o broad headingsF =. (. 4. +ompensation +ontract 18'ood *ua!adha3 6on compensatory or voluntary contracts 18'ood <hair *ua!adha3 #om0ensation #ontract @"Kood ;uawadhaA These contracts are meant for financial activities and some compensation is given to the other party. These are sales contract, purchase contract, rent agreements etc. "n important element of these contracts is that they become void if a void conditions is put in as e plained in the above discussion. +are should be taken that no void condition becomes part of the contract. 2. Non com0ensatory or 7oluntary contracts @"Kood 2hair ;uawadhaA+ These are not meant for financial activities, instead, they are for social services and are non/remunerative. "n e ample of such contracts is a loan contract 1-ard3 that is non/remunerative. These contracts do not become void if a void condition is included instead, the void condition itself becomes ineffective.
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&ession 2+ &ale
&ession #hecklist ". What is a Sale? B. Basic elements of Islamic Sale contract +. Types of Sale
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%$)T I& &)L' @B)IA5 Sale is also a kind of contract. #et us start !ith the definition of sale 1Bai3F JSaleK is defined in Shariah as the e change of a thing of value 1the asset3 !ith another thing of value 1money3 !ith mutual consent. Islamic Sales +ontracts are a type of +ompensation +ontract 18'ood *ua!adha3.
B.
Basic 'lements o1 Islamic &ales #ontract We have discussed earlier the basic rules of contract. 6o! coming to the application of these rules to a sale contract, it is essential for you to remember that there are four elements !hich should be present in an Islamic sales contract. These areF =. (. @. A. +ontract E offer from one and acceptance from other 1"'d3 Subject matter E goods N commodities to be sold 1*abeMe3 &rice E any thing given as consideration 1Thaman3 &ossession or delivery 1-ab.a3
5ou may learn them as +S&&. #et us discuss these elements in detailF 4. #ontract or transaction " sale contract must have the follo!ing three essentialsF a. 11er and )cce0tance @oral or im0liedA In simple !ords, one person proposes to either sell his commodity to another person or buy from him. J"cceptanceK means that the person !ho has been offered gives his approval of the proposal. "s discussed above, if buyer takes goods from the seller !ith an implied understanding that payment !ould be according to !hat is !ritten on the goods it !ould be an Mimplied saleM since there is no oral communication bet!een them. Implied sale can be of t!o typesF i. Implied +redit Sale E in !hich buyer takes goods from the seller !ith an implied understanding that payment !ould be made later e.g. settlement of the bill at the end of the month. 1milk, ne!spaper etc.3.
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BankIslami Pakistan Limited ii. 0and/to/0and Sale/4 change of money !ith goods !ithout uttering I1abo-=obool as per procedure adopted in our daily life. $or e ample taking a packet of biscuits that has a tag of price of %s. (D from a shelf and giving shopkeeper %s. (D. -. #ounter 0arties @Buyer and &ellerA In order, for a contract to be valid, it is important that the Buyer and Seller are legally eligible for conducting such transactions, hence, they should beF i. SaneF They are mentally sound at the time of contract. ii. *atureF Should be adult. *inors can only enter into an agreement if they understand the nature of the transaction. c. #onditions o1 contract+ i. 6on/contingent saleF The contract of Sale should be non/contingent !hich means it is not dependent on any condition or event in future. ii. 8nconditional saleF "s !e discussed, being a contract, a sale transaction should be unconditional. " conditional sale can only be allo!ed according to the criteria discussed above i.e. the conditions !hich are not against the contract. iii. Sale should be immediateF Sale must be instant and absolute. " sale attributed to a future date or a sale contingent on a future event is void. This is one of the reasons !hy future contracts are not acceptable in Shariah. 2. &u-?ect ;atter or &old 2ood &lease recall the re'uirements of subject matter of a contract. In a sale transaction the follo!ing conditions should be presentF a. '<isting+ The subject matter of a sale must e ist at the time of sale. Thus a thing !hich has not yet come into e istence cannot be sold. If a non/e istent thing has been sold, even !ith mutual consent, the sale is void. Valua-le+ The subject of sale must be a property of value. Islam consider 0aram things as un/valuable like li'uor, pork etc. Thus a thing that has no value cannot be sold or purchased. #a0a-le o1 ownershi0Gtitle+ The subject matter should not be a thing !hich is not capable of o!nershipNtitle e.g. Selling of a portion of land from area that is regarded as a property of general public. #a0a-le o1 deli7ery G 0ossession+ It means the subject matter 1goods N commodities3 should not be in a condition in !hich it cannot be delivered or possessed.
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BankIslami Pakistan Limited e. &0eci1ic L Kuanti1ied+ It means the subject matter should specifically be kno!n and identified either by pointing or by detailed specification that can distinguish it from other things !hich are not sold. $or e ample, pointing one car among hundred of cars, or specifying its color, make, engine number and other details. Title and risk o1 seller to the goods+ The subject matter of sale should be in the o!nership of the seller at the time of sale. The meaning of o!nership is to have rights to the goods as !ell as bearing the risk. Therefore selling something before ac'uiring its o!nership and risk is not allo!ed. This particular condition makes short sale unacceptable in Islam.
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6.
Price The detailed discussion on the issue may give you some rules for price. The price of the goods should beF a. -. Euanti1ied The measuring unit of the price should be kno!n e.g !eight, currency etc. &0eci1ied L certain $or a sale to be valid, the price should be ascertained and specified e.g. the total amount. If the price is uncertain, the sale is void.
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!eli7ery or 0ossession 4arly discussion on o!nership of the subject matter dra!s some clear guidelines regarding the possession by seller and delivery to the buyer. The subject matter 1goods N commodity3 of sale should be in the physical or constructive possession of the seller !hen he sells it to another person. &ossession can be held in t!o !aysF a. -. Physical Possession+ It means the seller has the asset !ith him physically. #onstructi7e 0ossession+ This refers to a situation !here the buyer has not taken the physical delivery of the commodity, yet the commodity has come into his control and all the rights and liabilities of the commodity are passed on to him including the risk of its destruction. , &)L'
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T(P'&
,iscussed above !as a procedure for a valid sale transaction. "ccording to this discussion a sale can be valid or invalid in nature. 0ence, there are four kinds of saleF 4. Valid @&ahihA " valid sale is in !hich all the four follo!ing elements of sale contract are presentF +ontract Subject *atter &rice &ossession N ,elivery
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BankIslami Pakistan Limited 2. Void @BaatilA Sale !ill be void if any one of the conditions of Moffer and acceptanceM, Mconditions of Buyer O SellerM, and Msold goods conditionsM are not complied !ith. In a void sale, the buyer does not have title to subject matter and seller does not have title to price. Both subject matter and price cannot be used la!fully. The produce of both shall be unla!ful. !e1ecti7e @,asidA Sale remain intact but !ill be void due to defect if the Mconditions of contractM, Msold good conditionsM and Mconditions of priceM are not complied !ith. 0o!ever, if the defect is rectified the sale !ill become valid. In a $asid sale, the buyer should not possess the subject matter. If possessed !ith the consent of the seller, title or o!nership !ill pass to the buyer but usage of subject matter !ill be impermissible. 0e must return it to the seller if the defect is not removed. Valid -ut disliked @;akroohA Sale is valid but not liked in Shariah. " fe! e amples areF Sale after :uma ".an E violation of commandment of "llah to attend :umah prayer !ithout delay. Sale of hoarded goods E unethical and prohibited business practice. Sale by intervention of a third party !hile t!o parties are negotiating.
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&ession 6+ *hiyar
#hecklist ". What is 9hiyar? B. Types of 9hiyar +. What is I'ala?
). %$)T I& *$I()R 5 The term khi%ar refers to the option or right of the buyer or seller to cancel a contract of sale. B. T(P'& , *$I()R
There are five types of khi%ars or options available in a sale contract !hich are as follo!sF =. >hi%ar-e-Shart 17ptional condition3F "t the time of sale Buyer or Seller can put a condition that the buyer has an option to cancel the sale !ithin specified days. e.g. money back guarantee !ithin one month of Sale. Specification of the days is necessary for this >hi%ar. Within this period, the buyer has the right to cancel N dissolve the sale !ithout any reason or as per specified condition. (. >hi%ar-e-Roi%%at 17ption of canceling contract after inspecting goods3F In this, the buyer has the option that the goods can be returned after inspection if found contrary to !hat !as specified in the contract. 9hiyar/e/"ib 17ption of canceling contract if a defect is found3F In this type, the goods can be returned if found defective. It is the responsibility of the seller to supply goods free of error N defect or point out the defect to the buyer. In no !ay is he allo!ed to cover the defect of the goods !hich !ill constitute a fraud. >hi%ar-e-0asf @7ption of canceling contract if goods are not of specified 'uality3F Where the goods are sold by specifying a certain 'uality by the seller and that is absent in the goods. >hi%ar-e-,haban 17ption of canceling contract if price is more or less than the market price3F Where the seller sells the goods at a price !hich is far e pensive than the market price, the buyer has the right to return it to the seller.
@.
A.
B.
31
#.
IE)L) @#)N#'LL)TI N
, &)L' # NTR)#TA
I:alaF Is act of cancellation of a sale contract !here both parties freely consent to cancel the contract i.e. each party !ill give back the consideration 1money and subject matter3 received by them. &rincipally speaking, neither the buyer nor the seller has the sole right to cancel the contract after its e ecution. 0o!ever !e often see that the buyer !ants to cancel the contract after buying goodsL similarly, seller sometime !ishes to reverse the sale transaction. In such cases it is necessary that any one !ho !ants to cancel the contract should get the consent of the other. This mutual agreement bet!een buyer and seller to cancel the contract is called I'ala. The price of the goods being returned under I:ala !ill remain unchanged.
32
&ession+ : )gent
&ession #hecklist ". +oncept of "gent 1Wakeel3 B. %ights and 7bligations of the "gent
). # N#'PT , )2'NT @%)*''LA
5ou must have noted in earlier sessions that the Islamic sale contract is valid only !hen the goods to be sold are in possession of the seller, i.e. these have been purchased or produced by him first. Ideally the financier or the Bank should purchase the goods itself directly from the supplier or through a third person appointed by it as employee before selling it to the customer. 0o!ever, in e ceptional cases, !here direct purchase from the supplier is not practical, the Bank makes the customer its "gent to buy the goods on its behalf. In all such situations a formal "gency "greement must be signed bet!een the t!o parties outlining the rights and obligations of the agent. B. RI2$T& )N! 4. 2. BLI2)TI N& , T$' )2'NT
The "gent is bound to act and perform as per specifications and guidelines given by the &rincipal or financier. "s long as the "gent complies !ith the instructions of the &rincipal, all his actions !ill be construed as coming from the &rincipal himself and the latter cannot diso!n these actions. 0o!ever if the "gent e ceeds or breaks the mandate given to him, he is fully accountable for his actions and may have to compensate the &rincipal for any damage caused by such unauthori.ed action. "gent can be any person capable of e ecuting a transaction including the customer himself. The "gent may receive funds in advance from the &rincipal for making purchases. In case the "gent fails to purchase the goods, he is bound to refund the amount to the principal if received in advance. $rom the moment the "gent purchases the goods, all risks relating to o!nership !ill be !ith the &rincipal until such time the goods are sold to an outside party. If the customer is also the "gent, he !ill take over the risk !hen the Sale "greement is signed and o!nership transfers to him from the &rincipal. "t that time his role as "gent !ill come to an end. The "gency "greement can be canceled by either party, by giving a notice as specified in the agreement. Till such time that the notice of cancellation reaches the "gent, all actions taken by him !ill be binding on the &rincipal.
6. :. =. 6.
>.
33
BankIslami Pakistan Limited ). "gent is entitled to a fee for his efforts and this must be clearly mentioned in the "gency "greement. In case the customer himself becomes an "gent, such fee is usually not charged. "gency contract !ould become more clear to you after you study the ne t chapter !hich is *urabahah. We recommend that you go through this concept again after reading *urabahah or !here "gentMs role is discussed.
34
#ha0ter :+
;ura-ahah
35
#ha0ter :+ Murabahah
&ession 4+ Introduction
&ession #hecklist ". ,efine Murabahah B. &ayment options in Murabahah
Before beginning, !e !ant you to be clear on the !ord Murabahah itself. *any people call it *urMrabba some call it *arMhaba !hile a fe! call it *uraba. The actual !ord is Murabahah as given above.
). !',INITI N+
Murabahah is a sale in !hich costs and profits are disclosed to the end customer. $or e ample Shahid is selling a car to "li on Murabahah basis for %s. (DD,DDD !hich he has purchased for %s. =)D,DDD. 6o!, if Shahid tells "li the cost he incurred for ac'uiring the car i.e. %s. =)D,DDD, this sale is called Murabahah; $or more e planation consider *aria !ho !ent to a je!eller to buy a gold necklace for her !edding. She selected a beautiful necklace !orth %s. BD,DDD. *aria !as surprised and asked the je!eller !hy such a delicate necklace costs %s. BD,DDD. The je!eller told her precisely that the actual cost of gold used in making that necklace !as %s. @(,DDD. <em stones !orth %s. >,DDD !ere used to beautify the necklace, %s. ?,DDD !ere being charged for labour %s. B,DDD !ere the :e!ellerMs profit. If *aria agrees that a profit of %s. B,DDD !ill be composite of total cost of necklace !hich is %s. BD,DDD, this transaction !ould be called a Murabahah. Murabahah is a sale bet!een a Buyer and a Seller in !hich the seller e pressly tells the purchaser ho! much cost he has incurred and ho! much profit he is taking in addition to the cost. That is !hy Murabahah is also called Mcost/plusM transaction. Thus buyer is fully a!are of cost and profit the seller is taking in the sale.
Chapter 4: Mura,ahah
36
BankIslami Pakistan Limited B. P)(;'NT , PRI#'+
,ifferent methods for payment of price of things purchased are present under Murabahah. The price can beF a3 b3
cA
&rompt N on spot. ,eferred 1to be paid in full on a particular date in future3. ,eferred !ith installments 1e'ual or une'ual installments of price to be paid during a particular period in future3.
&ayment methods break Murabahah into three typesF =. Murabahah !ith spot payment of price, called Murabahah *uMajjalah( (. Murabahah !ith deferred payment of price, called Murabahah *u!ajjalah. @. Murabahah !ith payment of price in installments during a certain periods is also called Murabahah *uMajjalah.
37
&ession 2+ Murabahah e<0lained

&ession #hecklist
". 9no! the %ules of Murabahah B. $actors that distinguish Murabahah from other interest based modes +. 9no! ho! a Murabahah transaction takes place? ,. Take practical steps in constructing a Murabahah transaction 4. #earn the limitations of Murabahah mode #et us go through the rules of ;ura-arah first before !e move on to other things
). R"L'& , R MURABAHAH It is no! 'uite clear from !hatever has been discussed previously that Murabahah is a particular kind of sale, therefore, all the rules and regulations that govern trading activities are applicable in Murabahah as !ell. Therefore the rules that are vital in trading should be kept in mind for Murabahah transaction as !ell. 5ou are e pected to learn by heart the follo!ing si important conditionsF aide/memoire F 4S7& E $% 4. '<istence o1 goods "t the time of sale, the goods !hich are being sold must be in e istence. We can say that anything that may not e ist at the time of sale cannot be sold. Its non/ e istence at the time of sale that makes the transaction void. &0eci1ication and Identi1ication o1 goods Murabahah can be done of only those things !hich can be specified, identified and 'uantified. It cannot be done of anything !hich is not clearly specified, e.g. an apple in a bo !hich is unkno!n to one party. Thus goods to be sold must be specifically kno!n and identified to the buyer. $or e ample, if a buyer is buying dates from a vendor, he should kno! the 'uantity, type and 'uality of dates !hich he is about to buy. wnershi0 o1 goods If the Bank is seller, the goods that are being sold should be in the o!nership of the Bank at the time of sale. Sale of goods that are not in the o!nership of the seller is void.
2.
6.
38
BankIslami Pakistan Limited :. Possession o1 goods The goods must be in physical or constructive possession of the Bank !hile selling it to another person. +onstructive possession means a situation !here the possessor has not taken physical delivery of the commodity yet, but it has come into his control. In such a case, all rights and liabilities of the commodity are passed on to him including the risk of its destruction. This means that the Bank being a seller !ill be responsible for any damages as it is the holder of all rights and liabilities. ,inaliMation o1 sale &lease note that Murabahah must be instant and absolute and it should not be dependent on anything in future. Thus a Murabahah associated to a future date i.e. a Murabahah to be finali.ed on a future date or a Murabahah contingent on a future event is void. $or e ample if a person sells a car on Murabahah basis !ith a condition that the sale !ill be finali.ed if a ne! ta policy is announced, !ill not be an acceptable Murabahah transaction. Risk o1 goods Though point @ e plains the obligations of o!nership, there e ists a common misconception about this aspect. 7ne significant sign of o!nership is that after purchase of the goods the Bank must bear risk of goods until those are actually sold and delivered to the customer. In other !ords, after purchase of the goods but before selling of those to customer, the Bank shall bear the conse'uences of any damage or defect. $or e ample, =DD bales of +otton are purchased by the Bank for a customer. 8nfortunately the !hole consignment caught fire !hile the consignment !as still under o!nership of the Bank. In this case the Bank !ill bear the loss as the o!nership !as yet not passed on to the customer.
=.
6.
B.
%$)T ;)*'& ) MURABAHAH !I,,'R'NT ,R ; INT'R'&T8B)&'! ,IN)N#IN25 We !ould like to emphasi.e on the basic difference before going into details. The foremost point to remember is that Murabahah is a sale and not merely a loan advanced to a customer. There are some misconceptions about Murabahah that it came into e istence by merely replacing the !ord of HinterestH by the !ord HprofitH or Hmark/upH. 0o!ever, the fact is very different from this, let us repeat, Murabahah is a sale. "ny transaction !hich is not structured as a sale can not be a valid Murabahah. 0ere are some points that make this clearF 4. Murabahah is only a mode to escape from HinterestH and not an ideal instrument for achieving the real economic Islamic objectives. Islamic economic system aims for proper distribution of !ealth in society, !hich can be best achieved through Musharakah and Mudarabah. Therefore, this instrument should be used as a transitory step taken in the process of the Islami.ation of the economy and should only be used in those cases !here Mudarabah or Musharakah are difficult to be used. 2. The second important point is that, Murabahah as a mode of financing has been allo!ed by the Shariah scholars !ith some conditions. 8nless these conditions are fully observed, Murabahah is not permissible. In fact, it is the observance of these conditions 1see rules for Murabahah3 !hich can dra! a clear line of distinction bet!een conventional and Murabahah transaction. 6. Murabahah is not a loan given on interest. It is the sale of a commodity for a deferred price !hich includes an agreed profit added to the cost. :. "s Murabahah is a sale and not a loan, therefore, it should fulfil all the conditions necessary for a valid sale, especially those discussed in earlier chapters.
39
BankIslami Pakistan Limited =. Murabahah cannot be used as a mode of financing e cept !here the client needs funds to actually purchase some commodities. $or e ample, if he !ants funds to purchase cotton as a ra! material for his ginning factory, the Bank can sell him the cotton on the basis of Murabahah. But !here the funds are re'uired for some other purposes, like paying the price of commodities already purchased by him, or the bills of electricity or other utilities or for paying the salaries of his staff, Murabahah cannot be effected as Murabahah re'uires a real sale of some asset. In other !ords Murabahah has to be asset back. 6. The Bank must have o!ned the commodity before he sells it to the client. >. The commodity must come into the possession of the Bank, !hether physical or constructive, in the sense that the commodity must be in his risk, even if it is for a short period. The table belo! sho!s the se'uence of events in a valid Murabahah transaction. Financier (after receiving a financing request !ay !ay 2 !ay !ay : from customer3 4 6 &laced an 7rder for desired commodity Took the delivery of that commodity &aid the price Informed the customer about availability Sold the commodity to customer
/ /

/ / / /
/ / / /
/ / /
#.
$ % ) MURABAHAH TR)N&)#TI N I& &TR"#T"R'! Bilal o!ns a sugar mill. 0e is in need of funds urgently as he suffered some loss in another business. 0e !ants to buy sugarcane for his mill. $or this, he approaches a Bank. The Bank agrees to buy sugarcane for Bilal under Murabahah mode. We !ill see ho! a simple Murabahah transaction takes place bet!een Bilal and the Bank in the follo!ing stepsF 4. The Bank and Bilal enter into a "greement to Murabahah !hereby the Bank agrees to buy sugar cane from the market and sell it to Bilal after having added (DS over cost incurred. The sale is to be effected on an agreed date. 2. 6o! the Bank !ill ac'uires the re'uired sugarcane from market and takes its possession in a manner that all risk before selling it to Bilal are borned by the Bank. 6. The Bank !ill inform Bilal Sugar *ills about the availability of the sugarcane !ith the Bank and the price. :. Bilal !ill receive the sugarcane and Murabahah !ould be concluded. =. &ayment of price of the sugarcane !ould be according to agreed time line and other terms and conditions.
40
BankIslami Pakistan Limited ,. &%"+TI+"# ST4&S I6 +76ST%8+TI6< " *8%"B"0"0 T%"6S"+TI76 4. +lient and Bank sign an agreement to enter into Murabahah Bank "greement to Murahabah 2. Bank gives money to supplier for purchase of goods Bank -(reement to Murabahah ,isbursement to the supplier %isk Transferred Supplier +lient +lient
6. +lient pays the price of goods purchased under Murabahah Bank &ayment from client to Bank 1&rompt or deferred in installments3 +lient
;ura-ahah under )gency Transaction8 ) 2ra0hical Presentation+ 5ou must have noticed that !hatever has been discussed so far has relates to a simple Murabahah transaction in !hich Bank directly purchases the goods and hands it over to the customer. &ractically speaking this kind of transaction is rare in Banking. It is not easy for banks to trade in goods. In such cases there is a method for Murabahah that is called JMurabahah under agencyK. In this method, Bank appoints its "gents to perform trading of goods on behalf of the Bank. The agent ac'uires goods from market on BankMs behalf and takes its possession on behalf of the Bank as !ell. This appointed agent may be any person including the client himself. This is graphically illustrated belo!F 4. Bank appoints +lient as an agent to purchase goods on its behalf "greement to *urahabah "gency "greement
Bank
+lient
41
BankIslami Pakistan Limited 2. The Bank pays the cost of goods purchased directly to the supplier or to the client 1as he is the agent of the Bank3. Bank "greement to Murabahah "gency "greement &ayment +lient
Supplier 6. The client purchases the commodity on behalf of the Bank and takes possession as the agent of the Bank. %emember that the client is performing t!o roles here E he is a client as !ell as an agent. "gent
Transfer of %isk
Bank
,elivery of <oods Supplier
:. The client, then, informs the Bank that he has purchased the commodity and at the same time makes an offer to purchase it from the Bank. Bank 7ffer to purchase =. "s the client has possession of the goods as an "gent of the Bank, the sale is concluded immediately after the Bank accepts the offer. 7n this, the o!nership as !ell as risk is transferred to the client. Bank 7ffer and acceptance +lient "gent
Transfer of %isk 6. +lient pays the agreed price of goods purchased under Murabahah to the Bank according to an agreed schedule. This is usually done on a deferred payment basis !hich is called '2ai Muwa11al'. Bank +lient &ayment
42
BankIslami Pakistan Limited '. LI;IT)TI N& , ;"R)B)$)$ ; !'
#et us remind you that Murabahah, is a type of sale and not a loan, that is !hy it is important that Murabahah fulfills all the conditions necessary for a valid sale. Murabahah has certain limitationsF It cannot be used as a mode of financing e cept !here the client needs funds to actually purchase some commodities. $or e ample, if a client !ants funds to purchase cotton as a ra! material for his ginning factory, the Bank can sell him the cotton on the basis of Murabahah. 0o!ever !here the funds are re'uired for some other purposes, like paying the price of commodities already purchased by him, or running e penses like bills of electricity or other utilities or for paying the salaries of his staff, Murabahah cannot be used because Murabahah is al!ays asset based. The o!nership of the subject matter is a e tremely essential element of Murabahah, thus financier must o!n the commodity before he sells it to his client. The commodity should also come into the possession of the financier, !hether physical or constructive. This means that the commodity must be in his risk, even for a short period. Therefore, if o!nership is not possible !ith its gist then Murabahah can not be used. "s Murabahah is a type of trade, all necessary conditions for trading must be observed in it. 9no!ing the specifications is e tremely vital. If there is any commodity !here specification cannot be identified, Murabahah cannot be used. $or e ample, if a trader !ants to purchase on Murabahah basis =DD bales of cotton stored in a !arehouse !ith other bales, the Murabahah can not be performed unless the sold bales are identified properly through batch number or any other !ay. Similarly, industries !here ra! material is ac'uired from different sources cannot avail Murabahah unless they are able to identify sources and 'uantify the goods. $or e ample, a packed milk producing company that purchases milk from different resources cannot use Murabahah for purchasing milk unless a mechanism is put in place that clearly identifies the sources.
43
&ession 6+ Pro1it #alculation

&ession #hecklist ". #earn ho! profit is calculated in Murabahah B. Benchmarking rate to a prevailing benchmark +. &rocess flo! of a sample Murabahah transaction
A.
HO
!"O#I$ IS %AL%&LA$'( I) A MURABAHAH $"A)SA%$IO)
&rofit in Murabahah can be calculated in three !ays depending on the payment of Murabahah price by the +ustomer. &lease remember that the payment terms should be negotiated !ith the +ustomer on e ecution of Murabahah +ontract. To ensure transparency in the transaction, it is compulsory for the concerned officer to define payment period in clear terms. "ny e ception made to this rule has to be approved by the 0ead 7ffice. We !ould like to dra! your attention to another important point. This is that the payment of Murabahah price by the +ustomer is not recorded or !ritten as %4&"5*46T. This is done because an Islamic Bank is not involved in advancing loan. Murabahah being a trading transaction, the +ustomer is only making payments of the goods purchased. $ollo!ing situations may arise at the time of calculation of Murabahah price. #etF *& T *urahabah &rice +& T +ost &rice % T &rofit %ate & T &eriod 4. Bullet Payment
In cases the Murabahah price is being paid in one bullet payment 1+ost &rice U &rofit3, the Murabahah price is calculated by the follo!ing formulaF *& T +& U +& Examp e! +& % & T T T %s. =DDmn =BS p.a. @>B days =BS @>BN@>B T %s ==Bm % &N@>B
*& T =DD U =DD
44
BankIslami Pakistan Limited 2. Re0ayment in eKual Installments
In cases the Murabahah price is being paid in e'ual periodic installments and each payment carries a portion of the +ost &rice and &rofit, the installment !ill be calculated using an I%% based e'ual payment formula as follo!sF Installment T VVV+& W r....... Q= E 1=N 1= U r3 &R WhereF & T 6o. of periods % T &rofit %ate N 6o. of periods
15ou are not suppose to learn this.3 Murabahah &rice T Installment W n Examp e! +& % & T T T %s. =DDmn =BS p.a. @>B days $our 4'ual Installments %s (?.@) mn at the end of every 'uarter %s =D2.B( mn 1(?@.@) A3
&ayment fre'uency Murabahah &rice 1"mount ,ue3 +ontract &rice 1Murabahah Selling &rice3 6. Re0ayment in uneKual Installments
If the Murabahah price is being paid in une'ual periodic installments in such a !ay that the profit portion of the selling price is paid over the life of the transaction e'ually and the +ost &rice is paid at maturity, the Murabahah &rice is calculated as follo!sF *& T +& U +& % &N@>B
The profit is calculated as follo!sF &eriodic profit T % =Nfre'uency +& &rofit %ate 6o. of days 1days per period3 N @>B
Interim Installments T +ost &rice " ustration! $inancing "mount &rofit %ate Tenor &ayment
T %s =DDmn T =BS p.a. T = year T $our 8ne'ual Installments !ith bullet payment of cost price X =DD3
"mount due at the end of first @ 'uarters "mount due at the end of last 'uarters
T %s @.?Bmn 1=BS
T %s =D@.?Bmn 1=DD U @.?B3
+ontract &rice T %s ==Bmn 1=DD U =B3 1Murabahah Selling &rice to the customer3
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BankIslami Pakistan Limited *. *')%HMA"+I), $O A !"'-AILI), *')%HMA"+ Shariah Scholars allo! using variable profit rate tied to a kno!n benchmark. In other !ords, any kno!n benchmark can be used in a Murabahah transaction for calculating the profit. This approach helps to manage profit rate in Murabahah transaction especially in cases !here a large and long e posure is intended to be taken. 0o!ever, you must consider the follo!ing guidelinesF =3 7nly a kno!n benchmark should be used. (3 $loor 1lo!er limit3 and ceiling 1upper limit3 if applicable, are clearly defined. @3 &rofit %ate of each Murabahah transaction should be fi ed at the time of disbursement !hich !ill not change after the e ecution of offer O acceptance. We have discussed before, price once fi ed cannot be changed. A3 6e! rate !ill only be applicable on each ne! disbursement. &lease remember and clarify to the customer that the rate of the !hole facility !ould be floating but rate !ould be fi ed for each disbursement of the Murabahah facility. B3 5ou should also keep this fact in mind that though the Shariah scholars allo! using interest based benchmarks. This permission is given only for the interim period in the absence of an Islamic benchmark. The activity is regarded as permissible but not preferable. In case an Islamic benchmark is available, it should be used. %. !"O%'SS #LO #O" A SAM!L' MURABAHAH $"A)SA%$IO)
6o! let us go through the real !orld Murabahah transaction process. This is !hat happens in actual. =3 +ustomer and Bank agree to do business. (3 +redit &roposal for the limit clearly specifies the nature of procurement process of the commoditiesNgoods to be used as a subject matter of Murabahah, normally in a separate section of proposal. It also discusses the Murabahah &rocess to be follo!ed !hile undertaking Murabahah financing !ith the customer. @3 6ecessary approvals are obtained. A3 #egal documents are prepared. B3 The Bank and the +ustomer enter into a ;ain Murabahah ,inancing )greement 1**$"3. 8nder the agreement, the Bank promises to sell and the +ustomer promises to buy the agreed commoditiesNgoods from time to time as per the terms of the **$". >3 The Bank and +ustomer enter into an )gency )greement. 8nder this agreement, the Bank appoints the +ustomer as its agent to procure the specified commoditiesNgoods on its behalf. ?3 Whenever the customer has a purchasing re'uirement he contacts the Bank. )3 The Bank negotiates tenor, rate and amount as per agreed guidelines !ith the customer.
46
BankIslami Pakistan Limited 23 +ustomer re'uests the Bank 1for purchasing of re'uired goods3 by sending &urchase %e'uisition to the Bank. +ustomer also informs the follo!ing to the Bank. aA +redit &eriod it re'uires -A "greed &rofit %ate cA Supplier 6ame and +ity in !hich the payment to the supplier is re'uired and re'uest for issuance of pay order in favor of the supplier. dA 4 pected dateNperiod !ithin !hich commodityNgood !ill come in its possession. =D3The Bank revie!s the documents and if found appropriate payment is made to the supplier. ==37nce the payment process is completed, the Bank contacts the customer to get the confirmation of possession of commodityNgoods as per the information received from the customer at the time of disbursement. "s a buyer, Bank !ill check its agent 1customer3 about the possession of good. =(3"s soon as the confirmation is received from the customer, process for obtaining ,eclaration of purchase and taking possession from the customer starts. =@3" representative of the Bank visits customerMs premises for physical verification of commodityNgoods received on behalf of the Bank by the customer. =A3"fter verification, ,eclaration i.e offer and acceptance is e ecuted on the site of customer. The BankMs representative is also re'uired to obtain any proof of purchase in the form of receipt, temporary invoice, etc. BankMs proportionate o!nership in the purchase is also clearly specified on the ,eclaration. =B3The BankMs representative also obtains confirmation from the customer that the commodityNgoods are received from the same supplier to !hom the payment !as made. ,ollowing guidelines should -e strictly 1ollowed while e<ecuting a !eclaration+ =>3If the value of commodityNgoods is e actly e'ual to the funds disbursed by the Bank, then +ost &rice, Murabahah +ontract &rice 1*urabahah selling price3 and &roportionate 7!nership is as follo!sF

+ost &rice T Calue of funds disbursed Murabahah &rice T +ost &rice including &rofit 7!nership &ercentageT =DDS
"n illustration of the above is as follo!sF

BankIslami paid %s. BD million to a supplier to purchase machinery for *Ns "B+ O +o on :anuary D=, (DDB. BankIslami plans to sell the machinery to "B+ for a total price of %s. BB million to be received after one year. ,eclaration !ould be e ecuted as follo!sF
+ost &rice T %s. BD million Murabahah +ontract &riceT %s. BB million 7!nership &ercentageT=DDS
17*In the above situation, no financing from the customerMs side !as involved. In other
!ords, the customer !as not leveraged and !as not using his o!n e'uity. In practical !orld, this may not be al!ays the case. +ustomer may like to use his funds in addition to the ones provided by the Bank. "s a matter of fact this may be preferable
47
BankIslami Pakistan Limited from credit point of vie!. In such cases the proportionate cost price !ould be calculated as follo!sF +ost price of the tranche *& Total disbursement "n illustration of the above is follo!sF
BankIslami paid %s. BD million to a supplier to purchase cotton for *Ns "B+ O +o on :anuary D=, (DDB. The customer is intending to purchase cotton of %s ?B m using %s. (B* from o!n sources. BankIslami plans to sell the cotton to "B+ for a total price of %s. BB million to be received after one year. "B+ paid %s. (B million from other sources to the supplier. +otton !as received by *Ns "B+ as per the follo!ing schedule.

+otton valued %s. =B million on :anuary D?, (DDB +otton valued %s. (D million on :anuary D2, (DDB +otton valued %s. DB million on :anuary ==, (DDB +otton valued %s. =B million on :anuary =@, (DDB
The ,eclaration of the above !ould be e ecuted as follo!sF 7n :anuary D?, (DDB +ost &rice T %s. =B million Murabahah &rice T %s. =>.B million 1=BNBDYBB3 7!nership &ercentage T =DDS 1=BN=BY=DD3
7n 7n
:anuary D2, (DDB +ost &rice T %s. (D million Murabahah &rice T %s. (( million 1(DNBDYBB3 7!nership &ercentage T =DDS 1(DN(DY=DD3 :anuary ==, (DDB +ost &rice T %s. DB million Murabahah &rice T %s. B.B million 1DBNBDYBB3 7!nership &ercentage T =DDS 1BNBY=DD3
:anuary =@, (DDB +ost price recovered to date T =BU(DUBTADm +ost price remaining T BD/ADT=Dm Murabahah &rice T %s. == million 1=DNBDYBB3 7!nership &ercentage T >>.>>S 1=DN=BY=DD3 5ou may askF Why cost price !as not recovered proportionately? There are t!o reason. $irstly, banks like to recover their funds 'uickly. If the credit is of good 'uality, the Bank may like to defer recovery right upto the end. Secondly, Sharia scholars prefer recovery of funds under agency 'uickly.
=)3&rofit is accrued at the end of each month. =23&ayment of Murabahah +ontract &rice is done on the due date by the customer. (D3In case the customer unnecessarily delays payment, charity may be charged.
48
&ession :+ Murabahah Risks

&ession #hecklist ". %isks for banks in Murabahah B. Securities in Murabahah
A. "IS+S I) A MURABAHAH $"A)SA%$IO) The most critical point for you to remember is that Murabahah is a sale transaction !hich involves taking o!nership of the asset being financed by the Islamic Bank. "ll risk related to the o!nership of the asset are borne by the Islamic Bank until the assets are sold to the +ustomer usually against deferred payment. " Murabahah transaction !here the Bank does not assume o!nership risk is not a valid transaction. Islamic Banks face t!o types of risks !hile undertaking Murabahah financing. 7ther risks such as li'uidity, operational, rate etc. are ignored to keep the discussion focused on MurabahahF =. "sset1s3 %isks (. +redit %isks 4. )sset Risks
5ou remember under a Murabahah transaction, Bank sells the assets to the customer after purchasing it from a supplier. In case the asset is destroyed before on!ard sale to the customer, the Bank !ould be responsible for any kind of loss. Therefore, before entering into a Murabahah !ith a +ustomer, the Bank should study the procurement process of the asset1s3. &roper steps should be taken to cover risks arising in the procurement process. Similarly, if the customer fails to purchase or decides not to purchase the asset from the Bank due to any reason despite his promise to do so, the Bank !ould be left !ith the asset. In this situation the Bank !ould sell the asset in the market and may recover actual loss from the customer !ho defaulted on his promise. #et us revie! an e ample in the follo!ing paragraph to clarify the point. Suppose Saleem O +o approaches "!ami Bank to purchase a generator under a Murabahah transaction. "fter e ecution of the legal agreements, "!ami Bank purchases a generator from a supplier at a cost %s. =DD,DDD and contact Saleem O +o. for necessary actions. ,ue to some reasons, Saleem O +o fails to purchase the asset from "!ami Bank. "!ami Bank has no choice but to sell the asset in the market. "ny of the follo!ing three situations may arise no!F =. "sset is sold at a price greater than %s. =DD,DDD say %s. =D=,DDD (. "sset is sold at a price e'ual to %s. =DD,DDD @. "sset is sold at a price lo!er than %s. =DD,DDD say %s. 22,DDD In scenario = and ( the Bank !ould not be allo!ed to charge any amount from the customer. The Bank is also not allo!ed to charge any li'uidated damages. If charged, the amount should be given to charity. 0o!ever, in the third scenario, the Bank is
49
BankIslami Pakistan Limited allo!ed to charge %s. =,DDDN/ from Saleem O +o as the Bank has suffered actual loss due to the default in promise. $ow to manage )sset Risks5 The assets risk can be avoided if proper steps are taken at the time of credit evaluation. " credit proposal should clearly specify the nature of procurement process i.e. the steps re'uired in procurement of the commoditiesNgoods to be used as a subject matter of Murabahah, in a separate section of the proposal. It should also discuss the Murabahah &rocess to be follo!ed !hile undertaking Murabahah financing !ith the customer. " good understanding of the process !ould help the Bank to take appropriate measures to minimi.e the attached risks !hich !ill vary from transaction to transaction and from customer to customer. 2. #redit Risks
"s in Murabahah the Bank allo!s the customer to defer the payment of price for a certain time period, credit risk comes into play. The risk is the same !hich is faced by conventional banks and financial institution and that is !hy it should be managed in the same manner. *. $.!'S O# S'%&"I$I'S A,AI)S$ MURABAHAH "s discussed before, the procedure of Murabahah financing comprises of different steps carried out at different stages. In the earlier stages of the process, client does not incur a debt, as he is only acting as agent of the Bank. It is only after the commodity is sold to him by the Bank on credit that the relationship of a creditor and debtor comes into e istence. 5ou see in case the commodity is destroyed during the period of agency agreement, the Bank can have recourse to the security only if it is proved that the incident took place due to the negligence of the client. %eason being the fact that the asset !as not sold to the customer, therefore the Bank !as the beneficial o!ner. The above fact re/emphasi.es the importance of obtaining the 7ffer O "cceptance i.e ,eclaration along !ith the purchase evidence in Murabahahs booked by the Bank !ithout unnecessary delay. It is important to kno! that any kind of security, !hich is acceptable in la! can be taken to secure Murabahah financing. $ollo!ing is the e ception list due to Shariah reasonsF
1* Shares of conventional commercial banks, leasing companies, ,$Is, 6B$Is and

shares of companies !hich do not pass the Shariah Screening +riteria. The reason Shariah scholars have not allo!ed to take these instruments as securities is their im0ermissi-le nature i.e. the business of these companies is not permissible. 7nly those commoditiesNproperties can be used as a security, !hich are recogni.ed as *aal/*uta'a!!am= in Shariah. (3 In case of ,efense Saving +ertificates, Special Saving +ertificates, +onventional T$+s and Bonds, #ien cannot be marked on the interest portion. 7nly principal portion can be used to recover any amount outstanding. $inancing against these securities is disliked. "pproval of the Shariah "dvisor !ill be necessary before accepting them as securities.
= " thing !hich has a value according to Islamic Shariah
50
51
#ha0ter =+
&alam
52
#ha0ter = 9 #a am
&ession #hecklist ". What is Salam? Its definition, purpose and rules. B. %ules of valid Salam contract +. +omparing Salam and Murabahah? ,. &arallel Salam?
INTR !"#TI N Salam is one of the permissible economic financing modes in Islam compared to others as most of the other modes are trade based. Salam is a different types of sale that have been discussed in early chapters. "s you have gone through in earlier sections on Islamic +ontract of Sale, there are three basic conditions for validity of a simple saleF =. The asset 1subject matter of sale transaction3 must e ist. (. The seller must o!n the asset. @. The asset must be in the physical or constructive possession of the seller. These are mandatory conditions, ho!ever, according to 0adith there are t!o sale transactions that deviate from the above established rules. They areF ?( Salam ( Istisna Both these sales are of special nature and are allo!ed by Shariah( We !ill discuss Salam in this chapter and Istisna in the ne t +hapter. ). %$)T I& #A$AM5 Salam is a sales transaction !here the seller undertakes to supply some specific goods to the buyer at a future date against an advance price fully paid on spot but the supply is deferred. There are three basic elements, in a Salam transactionF =. Specified goods (. Supply of goods on future date @. &rice is fully paid in advance Salam !as allo!ed by the &rophet 1S"WS3 subject to certain conditions.
Chapter 5 0 Salam
53
BankIslami Pakistan Limited "ctually Salam !as allo!ed to meet the needs of small farmers !ho needed money to gro! their crops and to feed their families till the time of harvest. The background is that after the prohibition of Riba in -urMan, they could not borro! money on interest, hence they !ere allo!ed to sell their agricultural products in advance. Salam is beneficial to the buyer and seller both E The seller receives the price in advance and the buyer gains since the Salam price is generally lo!er than the spot price in the market. B. R"L'& , V)LI! #A$AM # NTR)#T
"s discussed earlier, some conditions have been considered necessary for simple sale, to eliminate ambiguity and uncertainty in delivery and possession. "fter establishing the fact that Salam is an e ception to the general rules of sale, one can think that deferred delivery of goods in Salam remains a factor of ambiguity and <harar 1e cessive uncertainty3 !hich is prohibited, so ho! it is dealt !ith? 0adiths that allo!ed Salam have mentioned some conditions that should be observed to minimi.e ambiguity and element of ,harar that are inherent in Salam. The Salam transaction is allo!ed subject to these conditionsF a3 b3 c3 d3 e3 f3 g3 h3 &ayment of price in full 0omogeneity of the product <eneral availability at the time of delivery <enerality of source 4 actness of date and place of delivery Security Settlement as per contract only +ancellation of contract
We !ill no! e plain the above points one by oneL =3 The Salam price must be paid in full at the time of effecting sale. We established earlier that the delivery of goods in Salam is in future, it means the subject matter 1goods3 is due on seller as an obligation and debt. If both price and delivery are kept at the end of the delivery period, it !ould effectively mean selling of debt !ith debt. This is prohibited in Islam. "s !ell, the basic !isdom behind permissibility of Salam is to fulfill the instant needs of the seller. If the price is not paid in full by the buyer, this purpose is defeated. (3 "nother important condition for validity of Salam sale is that Salam is not allo!ed in every halal commodity. The commodities Salam is meant for must be homogeneous and fungible in nature. We mean by MfungibleM that every unit of the item is identical, same and substitutable by other. $or instance, !heat is a commodity !here each unit of it i.e. every grain is identical to other in the sense that the difference bet!een them is negligible. 0eterogeneous item i.e. rare items, or those that are not precisely specifiable because every unit of them is not identical to other, cannot be the subject matter of the Salam contract because of significant difference bet!een each units. $u'aha 1:urists3 are of the vie! that Salam cannot be effected for heterogeneous commodities since each unit of these commodities is different from others in si.e, !eight and value, and cannot be precisely and clearly specified and 'uantified before hand. $or e ample precious stones, cattle and trees etc.
Chapter 5 0 Salam
54
3* The commodity must be generally available in market at the date of delivery. If the
commodity is not easily available at the time of delivery. Salam !ould not be allo!ed. $or e ample, selling of a commodity in off/season. It is obvious that the seller may not be able to deliver the commodity at the delivery time.
4* In Salam- one can not put a condition of buying a particular commodity or product of a
particular field or farm e. g. supply of !heat of a particular field or the fruit of a particular tree. There is a possibility that the crop is destroyed before delivery and keeping such possibility in vie! the delivery remains uncertain B3 The e act date and place of delivery by the seller must be specified in the contract.
6* " security in the form of a guarantee, mortgage or hypothecation can be taken in a

Salam in order to ensure that the seller delivers.
7* The seller at the time of delivery must hand over the commodity. Sometimes it
happens that the buyer does not !ant to take the delivery, instead, he !ishes a monetary settlement. Scholars are of the vie! that this a hidden !ay of taking interest, therefore, seller must deliver the subject matter to the buyer and not money.
1* The Salam contract once established cannot be canceled unilaterally. +onsent of

both parties is re'uired. 5ou must note that in no case can a seller hands over money in place of commodity on the date of delivery. Salam can be done forF
&urchase of homogeneous commodities for !orking capital. $or!ard purchase of manufacturing inputs e.g. +otton.
#.
# ;P)RIN2 #A$AM )N! ;"R)B)$)$ #et us take a look at differences bet!een Salam and *urabahah. Though both Salam and *urabahah are sale based transaction, there are distinctive differences bet!een the t!oF Murabahah 4. 2. 6. The buyer can pay the sale price on 4. deferred basis or in installments. The subject matter of sales i.e. goods 2. must e ist before sale is e ecuted. The goods must be possession of the seller. firstly in 6. #a am The buyer must pay the full sale price in advance. The commodity does not e ist at the time of sale. 2he 3uestion o' possession oes not arise since the commo ity is yet to ,e (ro/n+
!.
P)R)LL'L #A$AM Salam as a mode of financing has some limitations. While doing a Salam transaction !ith customer, Bank purchases a commodity as a buyer. "fter given period it takes possession of the commodities it purchased from a supplier. &ractically speaking, it is not possible for a Bank to have Salam contracts !ith suppliers, ac'uire the commodities and maintain huge stocks for supplying to customers as Muslam ilaih 1seller3 !hen any customer approaches it. 0aving said that, Salam is still very useful instrument for banks. Shariah Scholars keeping this in vie!, have allo!ed a ne! structure for Salam called IParallel #a amJ.
Chapter 5 0 Salam
55
BankIslami Pakistan Limited In this structure of Salam, the financial institution makes an arrangement for the commodities it !ill ac'uire by !ay of Salam from a supplier 1Salam "3. The Bank then sells the commodities it ac'uired by Salam " to a customer through a parallel contract of Salam 1Salam B3 for the same date of delivery. This is called parallel Salam. 5ou must remember that the Bank has to first ac'uire the goods through Salam " before it sells it to the customer through Salam B. $or instance, BankIslami 1BI3 has entered in a Salam of =DD *T !heat !ith *NS :a!!ad and +o. the details areF TransactionF Transaction dateF +ommodityF -uantityF &riceF ,eliveryF SellerF BuyerF #a am ) =st, :an, (DD> Wheat 1+ode of !heatF W/=( pak3, =DD *. Ton Z=D,DDD 1&aid on =st, :an, (DD> by the BI3 (FDD &*, (Bth, :an, (DD>, in 9arachi *NS :a!!ad and +o. BI
"s per contract, *NS :a!!ad !ill deliver the !heat to the Bank on (Bth, :an, (DD>. $ortunately, BankIslami found a customer, *NS "l!ani O +o. #td. !ho is ready to buy !heat from the Bank. BankIslami entered !ith *NS "l!ani in a Salam contract in !hich it undertook to provide them =DD *. ton !heat on a specific date. Immediately after signing the agreement, *NS "l!ani paid to the Bank full price for !heat it !ould take in future. The details of the ne! contract areF TransactionF Transaction dateF +ommodityF -uantityF &riceF ,eliveryF SellerF BuyerF #a am B (nd, :an, (DD> Wheat 1+ode of !heatF W/=( pak3, =DD *. Ton Z=D,BDD 1&aid on (nd, :an, (DD> by the buyer3 (F@D &*, (Bth, :an, (DD>, in 9arachi BI *NS "l!ani O +o. #td.
6o!, just analy.e both situations. In the first, BankIslami is a buyer at price of Z=DD per *. Ton. In the second transaction, it is a seller at price of Z=DB &er *. Ton. The period of Salam in the second parallel contract is less and the price is higher than the first contract. The difference bet!een the t!o prices ZBDD is the the profit earned by BankIslami. By arranging a parallel Salam, Bank successfully off loaded the commodity. ;)IN ,')T"R'& , P)R)LL'L #A$AM
In an arrangement of parallel Salam- there must be t!o different and independent contracts, one !here the Bank is a buyer and the other in !hich it is a seller. The t!o contracts cannot be tied up and performance of one should not be contingent on the other. This can be better understood through the follo!ing e ample.
Chapter 5 0 Salam
56
BankIslami Pakistan Limited If M"M has purchased from MBM =DDD bags of !heat by !ay of Salam to be delivered on =FDD &*, @= ,ecember, M"M can contract a parallel Salam !ith M+M to deliver to him =DDD bags of !heat at =F@D &*, @= ,ecember. While contracting parallel Salam !ith M+M, the delivery of !heat to M+M cannot be conditioned !ith taking delivery from MBM. Therefore, even if MBM did not deliver !heat on @= ,ecember, M"M is duty bound to deliver =DDD bags of !heat to M+M. 0e can seek !hatever recourse he has against MBM, but he cannot rid himself from his liability to deliver !heat to M+M. Similarly, if MBM has delivered defective goods, !hich do not conform to the agreed specification, M"M is still obligated to deliver the goods to M+M according to the specifications agreed !ith him.
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57
&ession 2+ $ow to use #a am

&ession #hecklist ". &rocess flo! of Salam B. %isks in Salam and ho! they can be mitigated +. What are the common mistakes in e ecuting Salam
A%
&R'(E## F$') 'F #A$AM =3 +ustomer M"M approaches BankIslami !ith a re'uest for Salam financing. (3 $ull specifications of the commodity are finalised, sale price is fi ed and the date of delivery is agreed upon. @3 +ollateral against Salam finance is agreed bet!een the t!o parties and the customer furnishes the collateral to BankIslami. A3 Salam agreement is signed bet!een BankIslami and customer M"M incorporating all the details given in ( and @ above. B3 BankIslami pays the full sale price to customer M"M. >3 BankIslami finalises a parallel Salam !ith customer MBM. The commodity details and the date of delivery remain the same as in the earlier Salam contract. The period of the contract is normally shorter and the sale price is higher. ?3 " separate Salam contract is signed !ith BankIslami as seller and customer MBM as buyer. )3 7n due date, customer M"M delivers the commodity to BankIslami. 23 7n the same day, BankIslami delivers the same commodity to +ustomer MBM. =D3If customer M"M fails to deliver on due date or delivers commodity !hich is either defective or not according to agreed specifications, BankIslami must purchase it from the market and honour its commitment to customer MBM.
B%
R"#* "+ #A$AM ,RA+#A(,"'+ Being a Bank !e should kno! the risk inherent in Salam transaction. They are as follo!sF =3 The customer M"M may fail to make delivery of the commodity due to natural disasters like e cessive rains, floods, storms, earth 'uakes, fire etc. (3 The customer may note that spot market prices is very high and instead of delivering to the Bank, he may sell it in the market. Thereby defaulting from his commitments.
Chapter 5 0 Salam
58
BankIslami Pakistan Limited @3 In the above circumstances, !hen the Bank goes to the market to purchase the commodity for delivery to customer MBM, t!o things can happen. aA The price in the market may be high thus the profit margin of the Bank is reduced or the Bank may actually suffer a loss. -A The commodity may not be available in the market at that time. To mitigate these risks, the Bank may take the follo!ing stepsF =3 Take special care in the matter of collateral. "ll securities must be perfect and should be readily encashable as far as possible. $unds should be paid to the customer only after the collateral documents have been e ecuted and are in BankMs possession. (3 The commodity must be generally available in markets at the date of delivery. If the commodity is not easily available at the time of delivery, Salam !ould not be allo!ed as per Shariah. @3 &referably, care should be taken that subject matter of the Salam contract is a commodity !hich remains in the market right from the day of contract up to the date of delivery. In other !ords the commodity is not seasonal. (% ('MM'+ M"#,A*E# "+ E-E(U,"+G #A$AM $inanciers make some common mistakes !hile finali.ing Salam contracts. These mistakes areF =3 Since financiers have commodity in their hands and if for some reason a parallel Salam cannot be done, they sell the commodity back to the seller at a higher price. (3 This is a buy/back and it is not permitted in Shariah.
Chapter 5 0 Salam
59
#ha0ter 6
Istisna
60
#ha0ter 6 9 "stisna
&ession #hecklist ". What is Istisna'? B. *ain features of Istisna? +. 0o! does Istisna differ from Salam?
A%
)HA, "# "#,"#+A. Istisna is simply a sale transaction !here a commodity is transacted before it comes into e istence. Istisna is the second e ception !here a sale is allo!ed !ithout e istence of the goods sold. The first one being Salam. Istisna is an order to a manufacturer to produce a specific commodity for the purchaser. It is necessary that the manufacturer uses his o!n material to manufacture the re'uired goods. If the manufacturer provide his services to produce the item and the material is from ordering party then this transaction !ill not be an Istisna' transaction. Istisna can be use for made/to/order commodities !here a customer orders a specific good !ith some specifications to be manufactured in a particular period of time and delivered to him after completion. #et us no! revie! the main features and basic rules of Istisna.
B%
MA"+ FEA,URE# 'F "#,"#+A =3 Istisna is a particular type of sale hence it cannot be used generally. It relates 76#5 to goods that re'uire manufacturing. (3 Istisna transaction has t!o stages in its e ecutionF aA The understanding or contract bet!een buyer and seller for manufacturing a particular good !ith all the specifications, determination of price and manufacturing period. -A Starting of !ork by seller 1manufacturer3 through purchasing of re'uired goods and material for manufacturing. Istisna contract is not considered started by just establishing a contract. Instead, it starts !hen the manufacturer buys ra! material for making goods. Thus the contract can be canceled unilaterally by the purchaser before the manufacturer starts the !ork. "fter he starts the !ork, the contract cannot be canceled unilaterally.
Chapter 6 0 Istisna
61
BankIslami Pakistan Limited 7n the other hand, if Istisna contract is established !ith a manufacturer !ho already has the re'uired material, the transaction is effected immediately after manufacturer undertakes to manufacture goods and therefore, cannot be canceled unilaterally. @3 It is necessary for the Istisna transaction that the price is fi ed and necessary specifications of the product are defined. $ollo!ing should be noted about priceF aA It is not necessary for buyer in Istisna to pay price in full or in advance. -A &rice can be paid according to any schedule mutually agreed upon by both parties. cA Similarly, the payment may also be made in installments. A3 To make the ordered goods, the manufacturer has the option to either use his o!n material or procure them from the market. B3 "ll specifications should be mutually agreed upon bet!een parties at the time of contract. The buyer has a right to reject the goods after inspection if the goods do not conform to the specifications agreed upon. Time o1 deli7ery $i ing of delivery time is not necessary in Istisna. If desired, the purchaser may fi a ma imum time for delivery after !hich the contract !ill become invalid. In order to ensure that the goods are delivered !ithin the specified period, some modern agreements contain a penal clause to the effect that in case the manufacturer delays the delivery after the appointed time, he shall be liable to a penalty. 6o! the 'uestion arises, can such a penal clause be inserted in a contract of Istisna according to Shariah? "lthough the classical jurists are silent about this 'uestion !hen they discuss the contract of Istisna- yet they have allo!ed a similar condition in the case of I1arah of services( It is said that if a person hires the services of person to tailor his clothes, the fee may be variable according to the time of delivery. The hirer may say that he !ill pay %s. =DD in case the tailor prepares the clothes !ithin one day and %s. )D in case he prepares them after t!o days. 7n the same analogy, the price in Istisna may be tied up !ith the time of delivery and it !ill be permissible if it is agreed bet!een the parties that in case of delay in delivery, the price shall be reduced by a specified amount per day.
Chapter 6 0 Istisna
62
BankIslami Pakistan Limited (% ('M&AR"#'+ 'F "#,"#+A )",H #A$AM #a am =3 Subject of Salam may be anything !hich fulfills the Salam conditions. (3 &rice should be fi ed and paid in full in advance. "stisna
1* The subject of Istisna is al!ays

something manufacturing. !hich re'uires
(3 &rice may be paid under any agreed schedule. It can be tied up !ith the time of delivery and if the manufacturer misses the deadline the price may decrease but this must be decided beforehand and included in Istisna contract. @3 $i ing the time of delivery is not necessary in Istisna. 0o!ever the buyer may fi a ma imum date of delivery. A3 +ontract may be canceled unilaterally before the manufacturer starts !ork i.e, before the ra! materials are purchased or !ork is performed on materials in inventory. 7nce it is done, it is assumed that the !ork has started.
@3 ,etermining the time of delivery is an essential part of Salam(
A3 Salam contract, once effected, cannot be canceled unilaterally.
Chapter 6 0 Istisna
63
&ession 2+ Parallel "stisna

&ession #hecklist ". What is &arallel Istisna? B. What is the process flo! in Istisna? +. What is the scope of Istisna?
A%
&ARA$$E$ "#,"#+A #ike &arallel Salam- there is a concept of '<arallel IstisnaM. The financier of an Istisna is a person !ho orders a specific thing to be manufactured for him so that he can deliver it to his customer. The contractor may not have the e pertise of manufacturing or construction. To get the job done, he can sub/contracts the job to a third party. This is a simple e ample of a <arallel Istisna. This !ill be clear from the follo!ing e ampleF Saad o!ns a land and seeks financing for construction of a house. "dil "ssociates 1financier3 undertakes to construct the house on the basis of Istisna. In case Saad does not o!n the land and !ants to purchase that too, "dil "ssociates 1financier3 !ill provide him !ith a constructed house adding the specified price of land in overall cost as !ell. It is not necessary that "dil "ssociates constructs the house themselves. They can enter into a parallel Istisna !ith a third party 1other than the client3 and order the third party to construct the house. In this case "dil "ssociates calculates their cost and fi es the price of Istisna !ith Saad after adding a reasonable profit for them. When an agreement on price is reached, the payment of installments by Saad may start right from the day !hen the contract of Istisna is signed by the parties. In order to secure the payment of installments, the title deeds of the house or land or any other property of the client may be kept by "dil "ssociates as security until the last installment is paid by Saad. "dil "ssociates are responsible to strictly conform to the specifications in the agreement for the construction of the house. The cost of correcting any discrepancy !ould have to be borne by them.
B%
&R'(E## F$') 'F "#,"#+A =3 " +ustomer named M"yubM approaches BankIslami !ith his re'uest to finance for manufacturing of some items. (3 BankIslami obtains full description of the !ork to be done !ith e act specifications. @3 BankIslami consults a contractor MBashirM and obtains cost estimates of the project. A3 BankIslami adds its profit and 'uotes an Istisna price to "yub. B3 8pon agreement of the terms, including mode of payment and delivery date an Istisna contract is signed !ith "yub. >3 "t the same time, a &arallel Istisna contract is separately signed !ith the contractor
Chapter 6 0 Istisna
64
BankIslami Pakistan Limited MBashirM containing all the terms agreed upon. ?3 7n the due date, contractor MBashirM delivers the manufactured goods to BankIslami, !hich in turn hands them over to customer "yub. )3 The difference in amount received from "yub and the amount paid to the Bashir is BankIslamiMs profit. (% #('&E 'F "#,"#+A Istisna mode can be used in various situations such asF =3 %eal 4state $inance e.g. construction of residential and commercial buildings. (3 <overnment projects e.g. dams, airports, seaports, dockyards etc. @3 $inancing of plant N building N machinery in factories. A3 0otels, 0ospitals etc. B3 The modern B7T 1build, operate and transfer3 arrangements may be structured through Istisna.
Chapter 6 0 Istisna
65
66
#ha0ter >+
I?arah @LeasingA
67
#ha0ter > 9 "/arah @LeasingA
&ession 4+
&ession #hecklist ". What is I1arah? B. Important features and basic rules of I1arah. +. ,istinguishing factors of I1arah.
A% )HA, "# "0ARAH. The literal meaning of I1arah is Hto give something on rentH. In Islamic jurisprudence this term is used in t!o different situations. $irstly, it means to employ the services of a person on !ages given in e change of his hired services. This kind of I1arah is not discussed here. The second type of I1arah !hich is being used in Islamic Banking means to transfer the rights of use of a particular property to another person in e change for a rent claimed from him. In this !hile, the o!nership of the item remains !ith the Bank 1lessor3, only the right of use is transferred to the person renting it 1lessee3. It is just like you take a house on rent and you pay a rent to the o!ner of the house for use of his house, the o!nership remains !ith him. B% "M&'R,A+, FEA,URE# A+1 BA#"( RU$E# 'F "0ARAH There are some basic rules for I1arah. #etMs take an e ample of #atif as a #essor and 8sman as a #essee to elaborate the concept of I1arah. =3 #easing is a contract in !hich the o!ner of an asset 1#essor3 transfers the rights of its use to another person 1lessee3 for an agreed period, at an agreed consideration and the o!nership of the leased asset remains !ith the #essor. So if #atif, the o!ner of an asset 1lessor3, gave 8sman 1lessee3 that asset against a particular amount 1rent3 to be paid by 8sman for an agreed period of time, this activity !ould be considered as JI1arahK. In this case #atif 1lessor3 transfers the right of use of his asset to 8sman 1lessee3 for an agreed period, but the o!nership remains !ith him. (3 The leased asset must have a valuable use permissible in Shariah. Items !hich have no value in Shariah can not be used e.g. gambling machines. @3 Since I1arah is transfer of rights of use, therefore anything !hich is consumed cannot be leased e.g. money, eatables, fuel, ammunition, etc., because their use is not possible unless they are consumed.
Chapter 7 0 Ijarah )4easin(*
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BankIslami Pakistan Limited A3 "s the o!nership is not transferred, all the liabilities animating from the o!nership i.e. insurance, transportation, duties etc., shall be borne by #atif 1lessor3 but the liabilities relating to use of the property shall be borne by 8sman 1lessee3. B3 The leased asset shall remain in the risk of the #atif 1lessor3 through/out the lease period. "ny damage or loss caused by factors !hich are beyond the control of the 8sman 1lessee3 shall be borne by #atif 1lessor3. >3 8sman cannot use the leased asset for any purpose other than the purpose specified in the lease agreement. ?3 8sman is liable to compensate #atif 1lessor3 for any damage to the leased asset caused by any misuse or negligence on his part . )3 The period of lease must be determined in clear terms and the leased asset must be fully identified and 'uantified by bothL #atif 1lessor3 and 8sman 1lessee3. 23 %ental must be determined at the time of contract for the !hole period of lease. Cariable amounts of rent can be fi ed for different periods, but these must be kno!n. $or e ample, if a house is taken on lease, different amount of rent can be taken for each year. =D3#atif 1lessor3 cannot increase the rent unilaterally. ==3The lease period shall commence from the date on !hich the leased asset has been delivered to 8sman 1lessee3 !hether 8sman has started using it or not. =(3If the leased asset has lost the function for !hich it !as leased and no repair is possible, lease shall terminate on the day on !hich such loss occurred. 0o!ever, if the loss of function is caused due to misuse or negligence of 8sman, he !ill be liable to compensate #atif 1lessor3 at a value that !as prevailing in the market immediately before the loss. =@38sman 1lessee3 !ill bear the maintenance and operating costs of the asset during the lease period. =A3#atif 1lessor3 !ill bear the cost of insurance of the asset and its annual rene!als during the lease period. In case of increase in premium by the insurance company during the currency of the lease, #atif 1lessor3 !ill not be entitled to make a corresponding increase in the rental amount unless other!ise agreed beforehand !ith 8sman. =B3"ll o!nership related e penses at the time of purchase of vehicle shall be borne by #atif 1lessor3. =>3%ent !ill start after delivery of the goods to 8sman. %ent or any part of it may be paid in advance i.e before the delivery of the asset to 8sman. The amount so collected by #atif 1lessor3 shall remain !ith him as Mon accountM payment and shall be adjusted to!ards the rent after its becoming due.
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BankIslami Pakistan Limited =?3"fter completion of the tenor of lease i. e. e piry of the lease period the o!nership of asset !ill revert back to #atif 1lessor3. "t that time #atif 1lessor3 !ill have the liberty to go for any of these four optionsF

Take the asset back from 8smanL %ene! the lease contract for another tenorL #ease it out to another partyL Sell it to 8sman or to any other person.
If you take e ample of a Bank as a lessor and customer as a lessee, the Bank has the right to choose !hatever option it !ishes and the customer 1lessee3 has no right to force the Bank 1lessor3 to sell it to him, nor can such a condition be imposed on the Bank 1lessor3 in the lease agreement. 0o!ever, on e piry of the lease, if the Bank 1lessor3 !ants to sell and the customer 1lessee3 desires to purchase, the asset may be sold on mutually agreed terms and conditions. &lease not that the desire of the Bank to sell the asset to the customer cannot be part of the main I1arah "greement. It has to be contracted separately. $or this purpose, the Bank 1lessor3 !ill give a side/letter to the customer 1lessee3 promising the customer that he !ould have first option to purchase the leased asset. This type of I1arah in !hich there is a separate promise from the Bank 1lessor3 to the customer 1lessee3 to give him first right to purchase the asset, is called 'I1arah-0aI:tina'. Since Shariah does not permit t!o contracts in one agreement, this arrangement does not form part of the main #ease "greementL =)3If the customer 1#essee3 breaches any condition of the #ease agreement, the Bank 1#essor3 may unilaterally terminate the agreement. 0o!ever, if there is no contravention, the agreement can only be terminated by mutual consent. It !ould be interesting to kno! that rules governing Ijarah are similar to the rules governing sale because in both cases something is transferred from one person to another. The only difference isF In case of sale, title of property is transferred to Buyer. In case of Ijarah, title remains !ith the #essor only the use of the property is transferred to the #essee. #an you claim a Re-ate on early rental re0ayments in "/arah5 If 8sman 1lessee3 opts to repay I1arah rentals before due maturity date can he claim a rebate on early payments? The ans!er is that he cannot claim any rebate or concession on early payment as the rents and their fre'uency is governed by a contract. 0o!ever, #atif 1lessor3 may consider a concession at its o!n discretion. The policies laid do!n by the Shariah Board !ould govern such practices in BankIslami. Rollo7er o1 "/arah 6o!, If 8sman faces severe financial constraints and gets in a position !here he cannot make rental payments !ithin due date, I1arah payment cannot be rolled over for an e tended period. If 8smanMs case holds merit, some additional time can be given to him. This is done at the sole discretion of #atif 1lessor3. In case 8sman is unable to pay !ithin this additional time too, then the leased asset can be repossessed by #atif 1lessor3 and leased to another person.
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BankIslami Pakistan Limited (% 1"#,"+GU"#H"+G FA(,'R# 'F "0ARAH While studying I1arah you must be thinking about the difference bet!een conventional lease and I1arah. In &akistan, leasing is being done on a large scale by commercial banks, leasing companies, investment companies and private enterprises mainly on the basis of conventional leases. These conventional leases are of t!o typesF
&ale L Lease-ack 8 In this type of lease, 8sman 1lessee3 purchases a car and later decides to get it leased. 0e takes it to a leasing company !hich buys his car and pays the money to 8sman then lease the same car back to 8sman. This method is not recommended in Islamic Banking as it allo!s the lessee to get into camouflaged !ays to receive cash under the umbrella of I1arah. $or your information, most of leasing in &akistan is done as Msale and lease backM. "t BankIslami, the Shariah Board only allo!s sale and lease back transaction !here the monies so received are to be used in retiring conventional funding. !iret Lease 8 In this type of lease, the leasing companyNBank 1lessor3 purchases the car 1asset3 from the supplier and becomes its o!ner and then it leases it to the lessee. This type of lease is allo!ed in Shariah. The main differences bet!een conventional leasing and Islamic leasing 1I1arah3 are outlined in the ne t section.
71
&ession 2+
&ession #hecklist ". What is the difference bet!een +onventional #ease and I1arah?
B. ,ifferent types of #eases

A% 1"FFERE+(E# BE,)EE+ ('+2E+,"'+A$ A+1 "#$AM"( $EA#E #on7entional ,inance Lease @ommen$ement In most cases of the Mfinancial leaseM the lessor i.e. the financial institution purchases the asset through the lessee himself. The lessee purchases the asset on behalf of the lessor !ho pays its price to the supplier. In some lease agreements, the lease commences the very day on !hich the price is paid by the lessor, irrespective of !hether the lessee has effected payment to the supplier and taken delivery of the asset or not. In other !ords, the lesseeMs liability for the rent starts before the lessee takes delivery of the asset. AB+enses $onse:uential to ownershi+ In most traditional financial leases, all the e penses incurred in the process of purchase of the asset. $or e ample, registration charges, import e penses like freight and customs duty etc. are paid by the lessee. "s the lessor is the o!ner of the asset and he has purchased it from the supplier directly or through agent, he is liable to pay all the e penses incurred in the process of its purchase and its import to the country of the lessor. 0e can of course include all these e penses in his cost and can take them into consideration !hile fi ing the rentals. *ostly the financial institution buys the asset for the lessee. Similarly, the correct !ay, according to Shariah, is that the rent is charged after the lessee has taken delivery of the asset not from the day the price has been paid. If the supplier has delayed the delivery after receiving the price, the lessee should not be liable for the rent of the period of delay. "/arah
7iabilit% of +arties in $ase of loss to asset The agreements of the traditional Mfinancial leaseM generally do not differentiate bet!een the !ear and tear or losses caused by misuse or negligence of the lessee and situations that are out of control of the lessee. The lessee is liable for costs incurred due to events that are out of his control e.g. theft of the asset or damage in event of a natural disaster. The lessee is responsible for any loss caused to the asset by his misuse or negligence. 0e can also be made liable for the !ear and tear, !hich normally occur during its use. 0o!ever, he cannot be made liable for a loss caused by factors beyond his control. In a lease based on the Islamic principles, both the situations are to be dealt !ith separately.
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BankIslami Pakistan Limited #on7entional ,inance Lease <enalt% on late +a%ment of rent In most contemporary financial leases, an e tra monetary amount is charged if rent payment is not paid on time. This e tra amount is taken into income of the lessor. The lessee may be asked to undertake that if he fails to pay rent on due date, he !ill pay certain amount to a charity. $or this purpose the financierNlessor may maintain a +harity $und !here such amounts are be credited and disbursed for charitable purposes, including advancing interest/free loans to the needy and poor. The amount payable for charitable purposes by the lessee may vary according to the period of default and may be calculated as a percent or on lump sum basis. 8nder no circumstances it can form part of the lessorMs income. "/arah
*ermination of lease In some agreements of the Mfinance leaseM it has been noticed that the lessor is given an unrestricted right to terminate the lease unilaterally !henever he !ishes to at to his sole discretion. Insuran$e of the assets The insurance e pense of the asset is If the leased property is insured, it should borne by the lessee. be at the e pense of the lessor and not at the e pense of the lessee. #essor can ho!ever recover the insurance e penses in the rentals. *itle of ownershi+ at the end of lease +eriod It is understood bet!een the parties that the title of the asset !ill be passed on to the lessee at the end of the lease term. In other !ords, transfer of the asset at the end is made a condition of the transaction. The position in Shariah is that the asset shall be the sole property of the lessor and at the e piry of the lease period, the lessor shall be at liberty to do !hatever he !ishes to. The lessee cannot force him to sell it to him nor such a condition can be imposed on the lessor in the lease agreement. The agreement of I1arah itself should not contain a condition of gift or sale at the end of the lease period. 0o!ever, the lessor may enter into a unilateral promise completely separate from #ease "greement to sell the leased asset to the lessee at the end of the lease period. This promise !ill be binding on the lessor only. If the lessee breaches any term of the agreement, the lessor has a right to terminate the lease contract unilaterally. 0o!ever, if there is no breach on the part of the lessee, the lease cannot be terminated !ithout mutual consent.
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BankIslami Pakistan Limited B% ,3&E# 'F $EA#"+G 4. 0erating Lease #ease is basically meant for giving the right by a person to other to use an asset against a compensation !ith the o!nership not transferred. This kind of leasing is called M7perating #easeM !here lessee !ants to use the asset only. In other !ords, operating lease is a contract through !hich a person takes the right to use some specific asset in return for some kind of consideration. Islamic #easing i.e. I1arah is very close to operating lease. 7ne has to make sure that the essential elements of I1arah are incorporated in the agreement to keep an operating lease shariah compliant. 2. ,inance Lease This is also called capital lease. In simple !ords, the essence of transaction in financial lease is funding not use of asset. In such transactions, the obligations of the lessee are almost that of the borro!er not an asset user. In most cases the lessee takes over the o!nership risks as !ell as the financial risks of the transaction. "dditionally, purchase of asset is made a part of the contract. $ailure to do so is categori.ed as a default event. This kind of finance lease is not allo!ed in Shariah. 6. &ale L Lease Back Sale and #ease Back is a form of I1arah. 8nder this format, the Bank purchases an asset from the customer and leases the same back to the same customer. $re'uently, this is being re'uested by the customer to ease their cash flo! problems e.g. payment of salaries, utilities, servicing banksM debts etc. It is mostly considered a hide/!ay for interest based transactions and this is the reason that majority of Shariah scholars fro!n on this practice. Sale and lease/back could be allo!ed in very rare cases and !ith the approval of Shariah Board as has been e plained earlier.
74
&ession 6+
&ession #hecklist ". What is the process flo! of I1arah? B. 0o! profit is calculated in I1arah? +. What are the risks in I1arah?
). =. PR #'&& ,L % , "0ARAH
8sman 1the customer3 approaches the Bank !ith the re'uest for financing and enters into a promise to lease agreement. %e'uest to purchase Islamic Bank &romise to lease agreement +ustomer
(.
Bank purchases the item, receives title of o!nership and makes payment to the vendor. Cendor Sale Title of o!nership &ayment Islamic Bank
@.
The Bank leases the asset to 8sman and receives rentals. "fter full payment the Bank sells the asset to 8sman separately. #ease agreement Islamic Bank ,elivery of asset &ayment of rentals Transfer of title +ustomer
B.
PR ,IT #)L#"L)TI N IN I0ARAH It is reminded once again that in Ijarah- all costs relating to purchase are borne by the Bank. These include the base price of the asset, custom clearance and duties 1in case of imported asset3, transportation, insurance, registration etc.
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BankIslami Pakistan Limited In the long term lease agreements it is mostly not in the benefit of the Bank to fi ed rent for the !hole period of lease because the market conditions may change. $or this purpose, it is allo!ed to use discount rate or any other benchmark i.e. 9IB7% to determine the rental amounts. 0o!ever, rental for the period should be fi ed at the start of the period. "ny change in the benchmark rate during the period !ill not affect the current rent. It can be used to calculate rent of the ne t month. The constant rate is called as fi ed rate. The variable rates are kno!n as floating rates since they can change from time to time. While using floating rate as a benchmark, it is customary to define a cap and floor rate meaning the highest or lo!est amount belo! or above !hich the profit !ill not be charged. This is to protect the interest of both parties in case there is a sharp fall or increase in the rates. Rental #alculation N1or in1ormation onlyO %ent can be calculated by using the follo!ing formula. %ent T "sset +ost &aid by the Bank W r Q= E 1=N 1= U r3 nR Where, n T 6o. of periods r T &rofit %ate N 6o. of periods (% R"#*# "+ "0ARAH "s !e have discussed, the Bank must o!n the asset before it is leased to the customer. Being the o!ner, all risks and re!ards of the asset lies !ith the Bank. Therefore, if the asset suffers any loss !hich cannot be regarded as the customerMs mistakeNnegligence, the Bank !ould be responsible for the repair or replacement of the asset. The Bank cannot in any case claim any damages from the customer unless the loss resulted from the customers negligent use. $or this reason, at the time of preparation of credit proposal for I1arah facility, in addition to the credit risk, the %elationship *anager should also analy.e the asset risk. Secondly, the leased asset !ill continue to remain in the BankMs o!nership throughout the lease period. 7ther problems !hich may arise areF @iA " complicated and long dra!n recovery process.
@iiA $ailure of the lessee to reimburse any e penses paid by the Bank on his behalf. To mitigate these risks, the Bank may at its discretion ask the lessee to furnish any of the follo!ing securitiesF

,o!n payment as a portion of total asset cost #ien on deposits Bank guarantee &ersonal guarantee1s3
In addition to above, the Bank may obtain any other security !hich is permissible in Shariah.
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#ha0ter B+
;udara-ah
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#ha0ter B 9 Mu4arabah
&ession #hecklist ". What is Mudarabah? B. What are the types of Mudarabah? +. What are the rules of Mudarabah? ,. What are some issues in Mudarabah?
In this chapter !e !ill be taking a look at Mudarabah !hich is one of the t!o modes of financing considered ideal by Islamic scholars. The other being Musharakah. A% )HA, "# MU1ARABAH. Mu4arabah is a kind of partnership !here one partner gives money to another for investing in a commercial enterprise. The investment comes from the first partner !ho is called HRabb5u 5maa 6 !hile the management of the business is an e clusive responsibility of the other, !ho is called )Mudarib'( The profits generated are shared in a mutually agreed in a predetermined ratio. "s per rules described for Mudarabah, role of Rabb-ul-maal in Mudarabah, is to provide MinvestmentM, !hile Mudarib performs the MmanagementM of the venture. Therefore, JRabb-ul-Maal. must hand over the management of the investment to Mudarib leaving all decision making him !ithout interference in the management. "s a financing techni'ue adopted by Islamic banks, it is a contract in !hich the capital is provided by the Bank !hile the business is managed by the other party 1customer3. The profit is shared in pre/agreed ratios and loss is borne by the Islamic bank if any, unless caused by negligence or violation of terms of the contract by the [ MudaribC The Bank passes on this loss either to the depositors or charges it off against o!n revenues as the case may be. 4. Mu4arabah #a0ital The capital in Mudarabah may be either in form of cash or in kind. In case the capital is in kind, it has to be properly valued so that the valuation is kno!n in clear terms to the Rabb-ul-mall and Mudarib. The necessary element is that if the capital is in form of assets then it should be clearly valued and its real value is kno!n to both Rabb-ul-Mall 17!ner3 and Mudarib 1*anager3.
Chapter 1 0 Mu ara,ah
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BankIslami Pakistan Limited B% ,3&E# 'F MU1ARABAH Mudarabahs are mainly of t!o types, namelyF 4. Restricted Mu4arabah! (Mudarabah-al-Mu:a%%adah# In this type of Mudarbah, the Rabb-ul-maal specificies a particular business or a particular place for the Mudarib, !hich means that investment !ill be made only in the specified business or business shall be eamed out at the agreed place. $or e ample, a Rabb-ul Maal may restrict Madarib to do auto/mobile business only. This kind of Mudarabah is called restricted Mudarabah. 2. "nrestricted Mu4arabah (Mudarabah-al-Mutla:ah# In this type of *udarabah, the %abb/ul/maal gives full freedom to *udarib to undertake !hatever business he finds suitable. This is called unrestricted *udarabah. In an 8nrestricted *udarabah, the *udarib is authori.ed to carryout a vast range of activities. Based on the same concept Islamic Banks can have restricted or unrestricted investment accounts. In %estricted investment accounts, the investment holder 1or %abb/ul/*aal3 imposes certain restrictions like !here, ho! and for !hat purposes his funds are to be invested. 0e is the sole decision maker for his investments In 8nrestricted investment accounts, the investment holder 1%abb/ul/*aal3 does not prescribe such conditions. The Islamic Bank or the *udarib makes decisions like !here, ho! and for !hat purpose the funds of the investment holder can be placed. $or your information all deposit accounts in BankIslami are under the concept of *udarabah and are of unrestricted nature. (% BA#"( RU$E# A+1 MA"+ FEA,URE# 'F MU1ARABAH =3 Rabb-ul-maal has the authority toF

7versee the MudaribCs activities. Work !ith the Mudarib if he consents, other!ise he is not allo!ed to participate.
(3 *udarib does not have the authority toF

9eep another Mudarib or a partner. *i his o!n investment in that particular Mudarabah !ithout the consent of Rabb-ul-maal
@3 ,ifferent +apacities of *udaribF Since *udarib is the one !ho performs all business related activities and keeps capital of %abbul *aal in his custody, jurists are of the vie! that *udarib acts in the follo!ing capacities and hence he possesses relevant rights and obligations. They areF
"meen 1Trustee3 "s the money given by Rabb-ul-maal and the assets ac'uired for business are held by him in trust, he cannot use them at his sole discretion. Instead, he should perform everything according to Rabbul-Maal guidelines.
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Wakeel 1"gent3 In purchasing goods for trade, he is an agent of Rabb-ul-maal, so !hatever he does is considered as an act of Rabbul Maal.
Shareek 1&artner3 In case the enterprise earns a profit, he is a partner of Rabb-ul-maal in the earned profit and shares the profit in agreed ratio.
Pamin 1#iable3 If the business suffers a loss due to his negligence or misconduct, he is responsible to compensate the loss to Rabb-ul-maal. In othere !ords, the loss is his liability.
"jeer 14mployee3 If the Mudarabah becomes void due to any reason the Mudarib has the right to get a fee for his services.
1%
#'ME "##UE# "+ MU1ARABAH 4. Termination o1 Mu4arabah
"t the beginning of each Mudarbah, a contract period should be specified in the contract bet!een Rabbul Maal and Mudarib. The Mudarabah !ill stand terminated !hen the period specified in the contract e pires. 7ne form of termination could be that either of the t!o parties gives notice and terminate the *udarba at the end of notice period. In case Rabb-ul-maal has terminated services of *udarib, he !ill continue to act as *udarib until he is informed of the same. 8ntil then, all his acts !ill form part of Mudarabah.
If all assets of the Mudarabah are in cash form at the time of termination, and some profit is earned on the principal amount, it shall be distributed bet!een the parties according to the agreed ratio. If the assets of Mudarabah are not in cash form, they !ill be sold and li'uidated so that the actual profit may be determined. "ll payables and receivables of Mudarabah !ill be paidNrecovered on termination. The agreed profit paid to Mudarib and Rabb-ul-Mal !ill also be taken into account and !hen the total capital is !ithdra!n. The principal amount invested by Rab-ul-Mall !ill be given to him first, remaining balance !ill be called profit !hich !ill be distributed bet!een Mudarib and Rabb-ul-maal according to the agreed ratio. If no balance is left on !ithdra!l of capital Mudarib !ill not get anything. If the principal amount invested by the %abbul *aal is not recovered fully, then the interim profit paid to Mudarib and Rabb-ul-maal during the term of Mudarabah !ill be taken into account in the payment of the principal amount to Rabb-ul-Maal.
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&ession 2+ "ses o1 Mu4arabah

&ession #hecklist ". ,eposits E 0o! does the Bank !ork as a *udarib? B. Investments E 0o! does the Bank !ork as a Rabb-ul-maal? +. &rofit and #oss ,istribution in *udaraba
MU1ARABAH "+ ,HE M'1ER+ ('+,E-, It has been discussed earlier that Mudarabah is a business venture !hich is considered one of the most preferred Islamic financing mode. The Islamic Banks and $inancial Institutions utili.e JMudarabahM in t!o !ays. In one !ay they act as JMudaribK and in other !ay they function as JRabbul MalK. ,epositors in an Islamic Bank authori.e the Bank to utili.e their deposits on the basis of profit and loss sharing. Such depositors may be termed as Rabb al-Mal and the Bank, as their agent i.e. Mudarib. 7n the other e treme, the Bank may invest in a business !hich is managed by someone else. In this case it assumes the role of Rabb-ul-maal. ). !'P &IT& 9 $ % ! '& T$' B)N* % R* )& ) MU1AR"B

&rofit earned by the Bank is shared bet!een the Bank 1as Mudarib3 and the investment account holder 1as Rabb-ul-maal3 in a pre/agreed ratio. The Bank does not bear any loss as Mudarib but remains responsible for any loss due to the negligence. 7ther!ise all losses are on account of Rabb-ul-maal( The Bank recovers from the depositors a management fee for managing their monies. This is called Mudarib fee. The Bank is bound to return the capital to the investors after adding profits or deducting any losses or Mudarib share in profit at the time of !inding up the contract or on demand as the case may be.
B%
"+2E#,ME+,# 7 ,HE BA+* A# RABB5U$5MAA$ If Bank !ants to enter in a Mudarabah transaction for financing, the Bank in this situation !ould be Rabb ul Maal and the customer !ould be Mudarib . In this case, the Mudarib 1customer3 re'uests Rabbul Maal for funds to invest in a business. &rofit earned from this Mudaraba venture, in !hich Bank has its o!n investment through funding, is shared bet!een the Bank 1as Rabb-ul-maal3 and the customer 1as Mudarib# in a pre/agreed ratio. The Bank !ill bear all the losses unless the Mudarib violates the terms of agreement. *he Mudarib is bound to return the $a+ital to the 2ank after dedu$ting an% losses or Mudarib fees at the time of winding u+ the $ontra$t(
82
BankIslami Pakistan Limited (% &R'F", A+1 $'## 1"#,R"BU,"'+ "+ MU1ARABA (A&",A$ =3 %emember that a Mudarbah !ill only be valid if the parties agree in the beginning on a profit sharing ratio bet!een them. Shariah has prescribed no particular proportionL rather it has been left on the mutual consent of the contracting parties. They can share the profit in e'ual proportions and they can also allocate different proportions for Rabb-ul-Mall and Mudarib. 0o!ever in rare cases !here the parties have not agreed on a ratio of profit, it !ill be calculated on BDFBD. (3 The Mudarib D Rabb-ul-Mall cannot allocate a lump sum amount of profit for any one of them nor can they determine the share of any party at a specific rate tied up !ith the capital. The sharing ratio must be linked !ith profit that !ould be earned in future. $or e ample, if the capital is %s.=DD,DDDN, they cannot agree on a condition that %s.=,DDD out of the profits shall be the share of the Mudarib nor can they say that profit e'uivalent to (DS of the capital shall be given to Rabb-ul-Mall. It is possible that the total profit for the venture !ould be less then %s. =,DDD or less then (DS of the capital. Such condition !ould put the transaction at par !ith %iba based transaction @3 It is ho!ever permissable to agree that say ADS of the profit !ill go to the Mudarib and >DS to Rabb ul Maal. %eason being the fact that profit sharing ratio is pre/ determined and is in relation to profits in future. A3 It is allo!ed that different profit sharing ratios are agreed in different situations. $or e ample, the Rabb-ul-Mall can say to Mudarib JIf you trade in cotton, you !ill get BDS of the profit and if you trade in yarn, you !ill have @@S of the profitK. Similarly, he can say JIf you do the business in your to!n, you !ill be entitled to @DS of the profit and if you do it in another to!n, your share !ill be BDS of the profitK. B3 +ompensation for Mudarib and Rabul Maal is profit earned by venture. 6either Mudarib nor Rabbul Maal can take any fi ed amount from the venture. "part from the agreed proportion of the profit, as determined in the manner described above, the Mudarib cannot claim any periodical salary or a fee or remuneration for the !ork done by him for the Mudarabah( >3 If the business incures loss in one transaction and gains profit in others, the profit shall be used to offset the loss at the first instance, then the remainder, if any, shall be distributed bet!een the parties according to the agreed ratio. "ll losses shall be set off against the profits before profit distribution commences. In other !ords profits and losses are vie!ed together and cannot be treated seperately. ?3 The Mudarabah becomes void (9asid# if the profit is fi ed in any !ay. In this case, the entire amount 1&rofit U +apital3 !ill be of the Rabb-ul-Mall. The Mudarib !ould be just an employee earning E1rat-e-Misl 1market based remuneration3(
83
&ession 6+ Process ,low and Risks

&ession #hecklist ". What is the process flo! of Mudarabah? B. What are the risks in Mudarabah for ? +. Where Mudarabah can be used by Islamic Banks?
A%
&R'(E## F$') 'F MU1ARABAH ,RA+#A(,"'+ 5ou !ill no! go through the details of ho! a Mudarabah !orks. &lease keep all the steps in mind carefully. =3 T!o parties discusses the possibility of entering into a Mudarabah transaction. (3 The follo!ing details are agreed mutuallyF

What capital is the Rabb-ul-maal is bringing in and in !hat shape E is it cash or in kind? Will it be a restricted or unrestricted Mudarabah? If restricted, !hat is the mandate for Mudarib? *eaning !hat is the Mudarib restricted from doing? What is the period of the Mudarabah? 0o! the profit !ill be shared, i.e. &rofit sharing ratio? Will the Rabb-ul-maal get any interim profit, and if so, ho! much? +an %abb/ul/*al terminate the Mudarabah unilaterally? 0o! many daysM notice !ill be given? 0o! many days of notice !ill be re'uired for termination of Mudarbah if either party decides to terminate?
@3 7nce all the details are !orked out, Mudarabah "greement is signed by both parties. A3 7n the completion of Mudarabah period, full accounting !ill be done and profit shared as per agreed ratio. B% R"#*# "+ MU1ARABAH $ollo!ing is a brief description of some of the risks in *udarbahL In7estment Risk+ Banks 1as Rabb-ul-maal3 do not have a recourse in case of genuine business loss. It is to be noted that proving negligence of the Mudarib is also very difficult, cumbersome and long dra!n process.
84
BankIslami Pakistan Limited 0erational Risk+ Banks 1as %abb/ul/maal3 have a very lo! degree of control over the management of funds as they are managed by the *udarib. ,ifferent business activites may re'uire vastly varied and even conflicting procedures. #redit Risk+ %isk of contractual defaults if the Bank as %abb ul maal is in spread business. ;arket Risk+ %isk of price fluctuations specially if the Bank 1as %abb/ul/maal3 invests funds in securities or commodities. (% H') MU1ARABAH (A+ BE U#E1 "+ "#$AM"( BA+*#. Mudarabah can be used in the follo!ing areasF )sset &ide ,inancing =. ShortN*ediumNlong/term financing (. &roject financing @. Small O medium enterprises setup financing A. #arge enterprise financing B. Import financing >. Import bills dra!n under import letters of credit ?. Inland bills dra!n under inland letters of credit ). Bridge financing 2. #+ !ithout margin =D.4 port financing 1&re/shipment financing3 ==.Working capital financing =(.%unning accounts financing N short term advances Lia-ility &ide ,inancing =. (. @. A. +urrent N saving N investment accounts Inter/bank lending N borro!ing Term $inance +ertificates O +ertificate of Investment T/Bills and $ederal Investment Bonds N Sukok
85
86
#ha0ter C+
;usharakah
87
#ha0ter C 9 ;usharakah
&ession #hecklist ". B. What is Musharakah? Types of Shirkah
#et us share !ith you that in the opinion of a vast majority of Islamic scholars, Musharakah is the most ideal mode of finance as it conforms to the true spirit of Islamic financial injunctions. A% )HA, "# MU#HARA*AH.

Musharakah literally means sharing. This !ord has been derived from )Shirkah. !hich means being a partner. In Musharakah- a joint enterprise is formed for conducting some business in !hich all partners share the profit according to an agreed ratio !hile the loss is shared in the ratio of capital. 6ote that !hile profits can be shared in any agreed ratio, losses are only allo!ed to be shared in the ratio of capital. It is the most preferred financing mode in Shariah.
There is a Ha4ith 8u4si @%ords o1 )llah 1rom mouth o1 Pro0hetA about Shirkah !hich saysF9A ah (#),: has 4ec are4 that he ;i become a partner in a business bet;een t;o Mushariks unti the< in4u ge in cheating or breach of trust=% 4. %hat is &hirkah5
Shirk or Shirkah in "rabic means partnership. "ssigning partners to "llah is referred to as Shirk. Shirkah is a partnership in "rabic. Musharakah- commonly used no!, means the act or contract of striking up a partnership. In classical Islamic la!, partnerships are referred to as Shirkah. 0o!ever, the concept of Musharakah is slightly limited in relation to the concept of Shirkah, !hich is used in a !ider sense. "ll modes of JSharingK or partnership are termed as JShirkahK in the terminology of Islamic $i'h, !hile the term )Musharakah. is not found in the books of $i'h. It is more commonly used in commercial conte t. The term Musharakah has been introduced recently by those !ho have !ritten on the subject of Islamic modes of financing and it generally refers to t!o particular type of JShirkahK namelyF

Shirkat/ul/*ilk Shirkat/ul/"'d
B%
,3&E# 'F #H"R*AH 4. &hirkat8ul8;ilk
This kind of Shirkah may come into e istence in t!o different !aysF
Chapter 9 0 Mushara5ah
88
BankIslami Pakistan Limited a. 7ptional Shirkat-ul-Milk
If t!o or more persons purchase any item, it !ill be o!ned jointly by both of them and the relationship bet!een them !ith regard to that property is called )Shirkat-ul-milk(.
6ote that this relationship has come into e istence at the option of the partners and through their conduct.. b. +ompulsory Shirkat-ul-Milk
This comes into e istence !ithout any effortNaction taken by the parties.
$or e ample, after the death of a person all his heirs inherit the property, !hich comes into their joint o!nership as a natural conse'uence of the death of that person. In a Bank, Shirkat-ul-Milk is usually used in ,iminishing Musharakah for fi ed assets. 2. &hirkat8ul8)Kd Shirkat/ul/"'d is simply a partnership !hich has come into e istence through a mutual contract for commercial purposes. It can also be referred to as a joint commercial enterprise or activity. Shirkat-ul-/:d is divided into three typesF a( Shirkat-ul-/mwal b( Shirkat-ul-/amal $( Shirkat-ul-0u1ooh a. Shirkat/ul/"m!al
" partnership in !hich all partners invest some capital into a commercial venture. Three partners opening a grocery store is a good e ample. b. Shirkat-ul-/amal
" partnership in !hich the partners jointly decide to offer some services to their customers. In this case the fee charged from the customers is distributed among the partners according to an agreed ratio. c. Shirkat-ul-0u1ooh
The !ord 0u1ooh comes from 0a1ahat meaning good!ill, hence this is a partnership in good!ill. 0ere the partners contribute in the business not through the capital but through their good!ill and reputation and share profit according to an agreed ratio. 4ach of these three Shirkah i.e. /mwal- /amal and 0u1ooh are further divided into t!o sub/typesF i: Shirkat-al-Mufawada ii: Shirkat-ul-/inan
89
BankIslami Pakistan Limited i# Shirkat-al-Mufawadal The partners share capital, management, profit, and risk in absolute e'ual amount. 4very partner is a trustee, guarantor and agent on behalf of other partners. This type of partnership is rare these day, some types of partnerships though are of such nature e sist even today in &akistan i.e. a 0indu un/divided family. ii# Shirkat-ul-/inan The partners share capital, management, profit, and risk in an agreed proportion !hich may not be e'ual. This is the most common type of Shirkat. The follo!ing table graphically illustrates the types of Shirkat. Shirkat
Shirkat/ul/*ilk
Shirkat/ul/"'d
"m!al 7ptional +ompulsory
"amal
Wujooh
*ufa!ada
"l/Inan
*ufa!ada
"l/Inan
*ufa!ada
"l/Inan
90
&ession 2+ RulesD &ecurity and Termination

&ession #hecklist ". +haracteristics and rules of Musharakah. B. %ights O 7bligations of partners in Musharakah +. Security in Musharakah ,. 0o! a *usharakah can be terminated? 4. The differences bet!een interest/based financing and Musharakah?
A%
(HARA(,ER"#,"(# A+1 BA#"( RU$E# 'F MU#HARA*AH 6o! let us revie! the basic rules of MusharakahF =3 4ach partner has a right to take part in Musharakah management. (3 If the partners !ish they can appoint a managing partner by mutual consent. @3 7ne or more of the partners may decide not to !ork for the Musharakah and !ork as a sleeping partner. A3 The ratio of profit distribution must be agreed before the period of contract begins. It may not be as per ratio of capital. B3 The ratio must be determined as a proportion of the actual profit earned by the enterprise. &rofit sharing cannot be fi edF
" percentage of a partnerGs investment. $or e ample, if "liMs investment in Musharakah is >DS, then his profit sharing could not be set in relation to his investment, i.e. he cannot say he !ould get ADS of his investment. In lump sum amount. $or e ample, if "li says that he must get %s. =D,DDD from the overall profit each month. This is not allo!ed.
>3 The partners may be paid a provisional profit at any rate, but it must be adjusted from final profit distribution later. ?3 The partners may agree on any ratio of profit distribution, but the ratio of profit of sleeping partner must not e ceed his ratio of capital. $or e ample, if "liMs investment as a sleeping partner is ADS he can not get more than ADS of the profits. )3 In case the business incurs a loss, all partners !ill share the loss in the ratio of their capital. 23 Share capital in a *usharakah can be contributed either in cash or in kind. In case if
91
BankIslami Pakistan Limited a partner is contributing in kind, then market value of the goods must be determined. This market value in terms of money !ill be added in overall capital and it !ill become share of the partner in the capital of the venture. B% R"GH,# > 'B$"GA,"'+# 'F &AR,+ER# "+ MU#HARA*AH We !ill take you through the po!ers and rights each partner can e ercise in Musharakah. It is important for you to remember that after entering into a Musharakah contract, each partner has unless other!ise agreedF a3 The right to sell the mutually o!ned property since all partners are representing each other in Shirkah and all have the right to buy O sell for business purposes. b3 The right to buy ra! material or other stock on cash or credit using funds belonging to Shirkah to put into business. c3 The right to hire people to carry out business if needed.
d3 The right to deposit money O goods of the business belonging to Shirkah as depositor trust !here and !hen necessary. e3 The right to use Shirkah's fund or goods in Mudarabah.
f3 The right of giving Shirkah's funds as hiba 1gift3 or loan. If one partner has taken a =ard for the Musharakah business, then paying it becomes liable on all. (% #E(UR",3 "+ MU#HARA*AH In case of a Musharakah agreement taking place bet!een the Bank and the client, the Bank has the right and discretion to obtain ade'uate security from the client to ensure that the capital is invested as per agreed terms and conditions and that the profit earned is paid !ithout any delay. 6ote that the security can not be used to set off against any losses that may result due to the inherent nature of business or in course of business conducted on as per agreed terms and conditions including situations !hich are called M$orced *ejureM. 1% H') A MU#HARA*AH (A+ BE ,ERM"+A,E1. =3 4ach of the partners has the right to terminate the Musharakah at any time after giving prior notice to other partners unless other!ise agreed. In that situation the assets of Musharakah !ill be distributed as underF

If the assets are in li'uid form, these !ill be distributed in the ratio of capital. If the assets are non/li'uid, there can be t!o situationsL a3 b3 The assets are li'uidated and the proceeds distributed. The assets can be distributed in their e isting form after valuation. If the assets cannot be distributed in their e isting form e.g. *achinery, these !ill first be li'uidated and the proceeds distributed.
92
BankIslami Pakistan Limited (3 In case any of the partners dies during the currency of the Musharakah- his heirs !ill have the option toF a3 b3 4ither li'uidate their share, or +ontinue !ith the business
@3 In case any one of the partners becomes insane or other!ise incapable of conducting commercial transactions, the Musharakah !ill stand terminated. A3 If one partner !ants to terminate the Musharakah but other partners !ant to continue, it can be done by mutual agreement. 5ou must remember the follo!ing !hile doing so F
Termination of Musharakah !ith one partner does not mean termination !ith other partners. Calue of outgoing partnerGs share must be determined. If assets are not li'uid, their valuation must be done to pay out the shares of outgoing partners.
E%
1"FFERE+(E# BE,)EE+ "+,ERE#,5BA#E1 F"+A+("+G A+1 MU#HARA*AH We !ill no! look at the differences bet!een interest/based financing and MusharakahF Interest -ased 1inancing =3 %eturn is pre/determined and has nothing to do !ith the profitability of the venture. (3 The financier cannot suffer loss, unless the borro!er defaults. @3 %esults in concentration of !ealth. Musharakah
1* Musharakah does not offer a fi ed

rate of return. The return is based on the actual profit earned by the joint venture. (3 In *usharkah, the financier can suffer loss if the joint venture fails to produce fruits. @3 %esults in distribution of !ealth.
93
&ession 6+ !iminishing Musharakah

&ession #hecklist ". What is ,iminishing Musharakah? B. Step/by/step procedure of ,iminishing Musharakah +. Where Musharakah can be used as a *ode of $inancing? ,. What are the risks for banks in Musharakah $inancing? 4. +omparison of Musharakah and Mudarabah
In this section, !e introduce you to 4iminshing Musharakah !hich is one of the most popular !ords. A% 91"M"+"#H"+G MU#HARA*AH U+1ER #H"R*A, U$ M"$*= ,iminishing Musharakah is usually done under Shirkat ul *ilk.This type of Musharakah is primarily used for %eal 4state $inancing. It involves the Bank taking share in the o!nership of a specific asset along !ith the customer and then gradually transferring complete o!nership to the customer. There are three different components of ,iminishing Musharakah' I3 :oint o!nership of the Bank and the customer.
II3 +ustomer as a #essee uses the share of the Bank and pays rents. III3 <radual redemption of the share of the Bank by the customer until he ac'uires full o!nership. It is 'uite clear from the above mentioned components of the ,iminishing Musharakah transaction that this product comprises of three modes In the first step it is Musharakah, in the second step it is I1arah and in the third step it is a Sale. 5ou must note that rules pertaining to each one of the mode should be follo!ed !hile undertaking the transaction. In the first step i.e. MusharakahD the Bank takes o!nership in the asset and thus all the risks and re!ards of the o!nership stays !ith the Bank as !ell as during the currency of the transaction. It is, therefore, suggested that a complete analysis of the o!nership related risks should be done before undertaking the project. In the second step i.e. #easing or I1arah portion of the transaction, all the rules and regulation of the I1arah transaction are applied. "ny mistake or irregularity in understanding and implementation of I1arah can make the transaction defective from Shraiah point of vie!.
94
BankIslami Pakistan Limited In the third and last step, Sale of BankMs share to the +ustomer takes place. This is done according to Shirkat ul Milk as in this type of Shirakat it is allo!ed to sell a partnerMs share to another partner or a third party at a pre/agreed price. &lease note that ,iminishing Musharakah cannot be follo!ed under Shirkat ul /:d. In Shirkat ul /:d, a partner cannot sell hisNher share to another at a pre/agreed price, instead the portion should be sold at market price at the time of sale. 6evertheless, since our current discussion is limited to ,iminishing Musharakah under Shirkat ul *ilk !e !ill restrict ourselves to this particular mode and !ill not go into other details of Shirkat ul "'d. In the discussion to follo!, !e !ill take you through step/by/step procedure of ,iminishing Musharakah. B% #,E&5B35#,E& &R'(E1URE 'F 1"M"+"#H"+G MU#HARA*AH =3 "li, the +ustomer, approaches the Bank !ith the re'uest for financing. (3 The Bank enters into a Shirkartul *ilk 1:oint 7!nership3 agreement !ith "li and both of them pay their respective shares to the seller of the asset. 6an5 7roperty &ayment of agreed share Client
@3 "li pays rent for the use of BankMs share in the property 1as in the case of I1arah i(e( se$ond ste+3. 6an5 7roperty %ental &ayment A3 The BankMs share in the asset is divided into several JunitsK as per mutual agreement. "li purchases these units over a period of time. Thus the BankMs share gradually decreases and at the same time the customerMs share increases. This is done as mentioned in third step !hich is based on Sale transaction. <radual sale of share in property 6an5 7roperty %ental&ayment B3 7!nership of the asset is then transferred to "li upon full payment of BankMs share. 7!nership transformed Client Client
6an5 (%
7roperty
Client
)HERE MU#HARA*AH (A+ BE U#E1 A# A M'1E 'F F"+A+("+G
95
Musharakah can be successfully used in the follo!ing areasF

&roject financing Working capital financing Import $inancing 4 port $inancing %unning finance Saving account +ertificates of Investments Term finance certificates Treasury Bills Inter bank lendingNborro!ing
1%
R"#*# F'R BA+*# "+ MU#HARA*AH The main risk for Banks relate to in/ade'uate, in/proper or at times fradulent disclosure on part of the customer to the Bank. Tempered books of accounts, and representations !hich are !ithout reasonable basis are some of the additional risk factors. 0o!ever all of these risk factors directly relate to in/ability of the Banks to understand the clients business. "s a Bank officer, it is important for you to understand the business of the client before you even think about Musharika.
E%
('M&AR"#'+ 'F MU#HARA*AH A+1 MU1ARABAH Musharakah =. "ll partners invest. (. "ll partners may participate in the management of the business and can !ork for it. @. "ll partners share the loss to the e tent of the ratio of their investment. Mu4arabah =. 7nly Rabb-ul-Maal invests. (. Rabb-ul-maal has no right to participate in the management !hich is carried out by the *udarib only. @. 7nly Rabb-ul-maal suffers loss if *udarib has !orked !ith diligence. The *udarib does not invest anything, Mudarib earns remuneration for his efforts in case of profit only. A. The liability of Rabb-ul-maal is limited to his investment unless he has permitted the Mudarib to incur debts on his behalf. B. The goods purchased by the Mudarib are solely o!ned by Rabb-ul-maal and the Mudarib can earn his share in the profit only in case he starts the business and generate revenue !ith profit.
A. The liability of the partners is normally unlimited.
B. "s soon as the partners mi their capital in a joint pool, all assets become jointly o!ned by all of them according to the proportion of their respective investment. "ll partners benefit from the appreciation in the value of the assets even if profit has not accrued through sales.
96

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Islamic 'conomic &ystem

BankIslami Pakistan Limited

#ha0ter 4+ Islamic 'conomic &ystem

&ession 4+ %hat is &hariah5

and private life of an individual.

people living inside a *uslim society.

Chapter 1: Islamic Economic System

BankIslami Pakistan Limited

ISLAM a panoramic view

Chapter 1: Islamic Economic System

BankIslami Pakistan Limited B. & "R#'& , &$)RI)$

Chapter 1: Islamic Economic System

BankIslami Pakistan Limited

Chapter 1: Islamic Economic System

Chapter 1: Islamic Economic System

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&ession 2+ 'ssentials o1 Islamic 'conomics

Chapter 1: Islamic Economic System

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the commandment of "llah.

Chapter 1: Islamic Economic System

BankIslami Pakistan Limited 6. 'radicating the concentration o1 wealth

<harar 1e cessive uncertainty3

Chapter 1: Islamic Economic System

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&ession 6+ 'conomic )cti7ities in Islam

Chapter 1: Islamic Economic System

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* E"RH)N &)(& )B "T RIB)5

Chapter 2 : .i,a an its prohi,ition 0 -r(uments an rationale 'or its prohi,ition

To sum up, In the !ords of &rophet 1S"WS3

Chapter 2 : .i,a an its prohi,ition 0 -r(uments an rationale 'or its prohi,ition

Chapter 2 : .i,a an its prohi,ition 0 -r(uments an rationale 'or its prohi,ition

BankIslami Pakistan Limited

&ession 2+ #ommon arguments in su00ort o1 #ommercial interest

Chapter 2 : .i,a an its prohi,ition 0 -r(uments an rationale 'or its prohi,ition

Chapter 2 : .i,a an its prohi,ition 0 -r(uments an rationale 'or its prohi,ition

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Chapter 2 : .i,a an its prohi,ition 0 -r(uments an rationale 'or its prohi,ition

Chapter 2 : .i,a an its prohi,ition 0 -r(uments an rationale 'or its prohi,ition

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Chapter 2 : .i,a an its prohi,ition 0 -r(uments an rationale 'or its prohi,ition

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Islamic &ales #ontract

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#ha0ter 6 9 Islamic &ales #ontract

&ession 4+ Islamic law o1 contracts

Chapter 3 0 Islamic Sales Contract

Chapter 3 0 Islamic Sales Contract

Chapter 3 0 Islamic Sales Contract

Chapter 3 0 Islamic Sales Contract

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