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Contents of the
lecture
Mode
of financing;
Islamic
Trade
modes;
Rental
Participatory
mode of financing;
Mode of financing
Mode of financing:
Mode of financing means way of supplying funds to those who need
funds;
Supply of fund from a financial institution to a company is called
financing;
Conventional banks supply funds under one and only mode of financing
that is LENDING of money;
Every banking product, whether it is a car loan, industry loan,
investment loan, personal loan or a governmental loan, is offered under
this mode;
modes of financing;
Rental-based mode of financing; and
Participation-based of financing;
Financial activities
Capital provisioning
Non-remunerative
Loan
Gift
Permanent
Temprory
Trade-based modes of
financing
Trade-based
MUSAWAMAH;
A
SALAM;
A
ISTISNAA';
A
The customer expresses its wish to buy a certain thing from the
bank and the bank buys it from market and sells it on instalments;
All modes follow laws and rules of Islamic Sale contract with little
or no modifications;
Each mode has separate set of additional rules which needs to be
followed strictly;
Any error may lead to make the transaction a void sale;
Credit Risk is lower in this kind of financing therefore Islamic
Banks prefers it;
The rate once fixed in these modes could not be changed;
The concept of credit sale applies here in these modes;
Islamic banks earn money through cash purchase and credit sale;
Profit is difference between cash purchase and credit sale;
Fixation of return/profit in
trade-based modes
A repeated question is that the return/profit is fixed in tradebased modes of financing while Islam prohibits fixinf of
profit;
So what about famous Islamic concept of non-fixation of the
profit rate?
The actual reason of prohibition is not FIXATION or NONFIXATION;
In fact the element of GHARAR is not acceptable in financial
transaction;
Gharar sometime appears in fixation and sometime in nonfixation.
Murabahah
definition and
concept
Murabahah
definition and
concept
The seller (bank) sells a specific commodity or asset as per
the laws and rules of Islamic sale (pertaining to Price,
Subject Matter, Wordings and Contractors);
The cost and profit are disclosed to the buyer;
The buyer shows his agreement with the price for that
commodity /asset;
Lastly the buyer takes delivery of the asset (possession,
physical or constructive) and the sale is concluded;
The payment of price should be according to the rules and
laws set for Islamic sale and purchase;
As per the rules set for sale and purchase either the price
or the delivery of the sold goods (not both) could be
deferred;
Murabahah
definition and
concept
Murabahah
definition and
concept
Process flow
Murabahah step by
step
Step # 1:
Client and Bank sign an agreement to enter into Murabahah.
BANK
AGREEMENT TO MURABAHAH
CLIENT
Step # 2:
Client appointed as agent to purchase goods on behalf of Bank;
AGREEMENT TO MURABAHAH
BANK
CLIENT
AGENCY AGREEMENT
Step # 3:
Bank gives money to directly to supplier or to the client for purchase of
goods;Client appointed as agent to purchase goods on behalf of Bank;
AGREEMENT TO MURABAHAH
BANK
CLIENT
AGENCY AGREEMENT
SUPPLIER
Step # 3:
Client pays agreed price to bank according to an agreed schedule. Usually
on a deferred payment basis (Bai Muwajjal) in tranches;
BANK
PAYMENT OF PRICE IN AN
AGREED PERIOD OF TIME
AND INSTALMENTS
CLIENT
Application
Murabahah Application
It could be used for assets which are acceptable to Shariah and has a
tangible form.
Musawamah
Questions