Islamic Banking

By: DU-FBS- DBI-16- 011

Table of Contents: The Definition Interest or Riba................................................................................................................. 3

Riba Al-Nasiah: .............................................................................................................................................................. 3 Riba al-Fadl: ................................................................................................................................................................... 3

Prohibition of Riba in the holy Quran:...................................................................................................... 3 Introduction to Mudarabah: .................................................................................................................... 4

Types of Mudarabah: .................................................................................................................................................... 4 Distribution of Profit & Loss .......................................................................................................................................... 5 Termination of Mudarabah ........................................................................................................................................... 6

Introduction to Musharakah: ................................................................................................................... 6 Diminishing Musharakah: ........................................................................................................................ 7

Basic Structure:.............................................................................................................................................................. 7 Example of Diminishing Musharakah: ........................................................................................................................... 7

Shirkah/ Shirkat: ..................................................................................................................................... 8

Shirkat-ul-milk (Partnership by joint ownership): ......................................................................................................... 8 Shirkat-ul-Aqd (Partnership by contract): ..................................................................................................................... 9

Difference between Mudarabah and Musharakah: ................................................................................ 10 Bai Salam and Parallel Salam: ................................................................................................................ 11
Conditions of Salam ..................................................................................................................................................... 11 Parallel Salam: ............................................................................................................................................................. 12 Scope and potential of Salam ...................................................................................................................................... 13

Istisna: .................................................................................................................................................. 14
Conditions of Istisna .................................................................................................................................................... 14 Difference between Istisna & Salam: ......................................................................................................................... 15 Parallel Istisnaa ............................................................................................................................................................ 15 Risks in Istisna applications and their solutions: ......................................................................................................... 15

Bai Murabaha: ...................................................................................................................................... 16

Rules and features of Murabaha: ................................................................................................................................ 16 Sukuk Murabahah ....................................................................................................................................................... 17 Difference Bai Salam & Bai Murabaha: ....................................................................................................................... 17 Bai Muajjal: .................................................................................................................................................................. 18

Qard Hasan: .......................................................................................................................................... 18

Why Qard Hasan:......................................................................................................................................................... 18

The Definition Interest or Riba

The literal meaning of interest or Al-RIBA as it is used in the Arabic language means to excess or increase. In the Islamic terminology interest means effortless profit or that profit which comes free of compensation or that extra earning obtained that is free of exchange. Islam only prohibits those increases that are charged on the loan with a prefixed rate. It covers both usury and interest. There are two types of riba: riba al-nasiah and riba al-fadal.

Riba Al-Nasiah:
The term nasiah comes from the root nasaa which means to postpone, to defer, or wait and it refers to the time that is allowed for the borrower to repay the loan in return for addition. Riba Al-Nasiah refers to the practice of lending money for any length of time on the understanding that the borrower would return the money to the lender at the end of the period along with an increase on it, in consideration of the lender having granted him time to pay. Interest, in all modern banking transactions, falls under the purview of Riba Al-Nasiah. As money in the present banking system is exchanged for money with excess and delay, it falls, under the definition of riba.

Riba al-Fadl:
Riba al-Fadl is described as an unlawful excess in the exchange of homogenous commodities where the excess is measurable through weight or measure. The concept is based on some hadith according to which if gold, silver, wheat, barley, dates, and salt are exchanged against themselves, they should be spot and equal and specified. If these conditions are not found, this transaction will become Riba al-Fadl. The Concept of Riba Al-Fadl refers to sale transactions while Riba Al-Nasiah refers to loan transactions.

Prohibition of Riba in the holy Quran:

The First Phase: "That which you give in usury for increase through the property of people will have no increase with Allah: but that, which you give for charity seeking the countenance (favor) of Allah, it is these who will get a recompense multiplied." Sura Al-Rum: 39

The Second Phase:

"Oh you who believe! Devour not usury doubled and multiplied; but fear Allah that you may prosper." Sura AlImran: 130

The Third Phase:

"That they took usury though they were forbidden and they devoured peoples wealth wrongfully; w e have prepared for those amongst them who reject faith a grievous chastisement." Sura Al-Nisa: 161

Introduction to Mudarabah:
Mudarabah is a special kind of partnership where one partner providers the capital (rabb-ul-maal) to the other (mudarib) for investment in a commercial enterprise. The capital investment comes from the first partner, who is called the "rabb-ul-mal", while the management and work is the exclusive responsibility of the other party, who is called the "mudarib". The Mudarabah (Profit Sharing) is a contract, with one party providing 100 percent of the capital and the other party providing its specialist knowledge to invest the capital and manage the investment project. Profits generated are shared between the parties according to a pre-agreed ratio. If there is a loss, the first partner "rabb-ul-mal" will lose his capital, and the other party "mudarib" will lose the time and effort invested in the project. Qard meaning 'surrender' is used to refer to the surrender of capital, hence the alternative name for mudarabah which is muqaradah.

Types of Mudarabah:
There are 2 types of Mudarabah namely: 1. Restricted Mudarabah (Al Mudarabah Al Muqayyadah): Rab-ul-Maal may specify a particular business or a particular place for the mudarib, in which case he shall invest the money in that particular business or place. This is called restricted Mudarabah (Al Mudarabah Al Muqayyadah). 2. Unrestricted Mudarabah (Al Mudarabah Al Mutlaqah): However if Rab-ul-maal gives full freedom to Mudarib to undertake whatever business he deems fit, this is called unrestricted Mudarabah (Al
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Mudarabah Al Mutlaqah). However Mudarib cannot, without the consent of Rab-ul-Maal, lend money to anyone. Mudarib is authorized to do anything, which is normally done in the course of business. However if they want to have an extraordinary work, which is beyond the normal routine of the traders, he cannot do so without express permission from Rab-ul-Maal. He is also not authorized to: Keep another Mudarib or a partner. Mix his own investment in that particular Modarabah without the consent of Rab-ul Maal.

Distribution of Profit & Loss

It is necessary for the validity of Mudarabah that the parties agree, right at the beginning, on a definite proportion of the actual profit to which each one of them is entitled. The Shariah has prescribed no particular proportion; rather it has been left to their mutual consent. They can share the profit in equal proportions and they can also allocate different proportions for Rab-ul-Maal and Mudarib. However in extreme case where the parties have not predetermined the ratio of profit, the profit will be calculated at 50:50. The Mudarib & Rab-ul-Maal cannot allocate a lump sum amount of profit for any party nor can they determine the share of any party at a specific rate tied up with the capital. For example, if the capital is Rs.100,000/-, they cannot agree on a condition that Rs.10,000 out of the profit shall be the share of the Mudarib nor can they say that 20% of the capital shall be given to Rab-ul-Maal. However they can agree that 40% of the actual profit shall go to the Mudarib and 60% to the Rab-ul-Maal or vice versa. It is also allowed that different proportions are agreed in different situations. For example, the Rab-ul-Maal can say to Mudarib "If you trade in wheat, you will get 50% of the profit and if you trade in flour, you will have 33% of the profit". Similarly, he can say "If you do the business in your town, you will be entitled to 30% of the profit and if you do it in another town, your share will be 50% of the profit". Apart from the agreed proportion of the profit, as determined in the above manner, the Mudarib cannot claim any periodical salary or a fee or remuneration for the work done by him for the Mudarabah. All schools of Islamic Fiqh are unanimous on this point. However, Imam Ahmad has allowed for the Mudarib to draw his daily expenses of food only from the Mudarabah Account. The Hanafi jurists restrict this right of the Mudarib only to a situation when he is on a business trip outside his own city. In this case he can claim his personal expenses, accommodation, food, etc. but he is not entitled to get anything as daily allowances when he is in his own city.

If the business has incurred loss in some transactions and has gained profit in some others, the profit shall be used to offset the loss at the first instance, then the remainder, if any, shall be distributed between the parties according to the agreed ratio. The Mudarabah becomes void (Fasid) if the profit is fixed in any way. In this case, the entire amount (Profit + Capital) will be the Rab-ul-Maal's. The Mudarib will just be an employee earning Ujrat-e-Misl. The remaining amount will be called (Profit). This profit will be shared in the agreed (pre-agreed) ratio.

Termination of Mudarabah
The Mudarabah will stand terminated when the period specified in the contract expires. It can also be terminated any time by either of the two parties by giving notice. In case Rab-ul-Maal has terminated services of Mudarib, he will continue to act as Mudarib until he is informed of the same and all his acts will form part of Mudarabah. If all assets of the Mudarabah are in cash form at the time of termination, and some profit has been earned on the principal amount, it shall be distributed between the parties according to the agreed ratio. However, if the assets of Mudarabah are not in cash form, it will be sold and liquidated so that the actual profit may be determined. All loans and payables of Mudarabah will be recovered. The provisional profit earned by Mudarib and Rab-ul-Maal will also be taken into account and when total capital is drawn, the principal amount invested by Rab-ul-Maal will be given to him, balance will be called profit which will be distributed between Mudarib and Rab-ul-Maal at the agreed ratio. If no balance is left, Mudarib will not get anything. If the principal amount is not recovered fully, then the profit shared by Mudarib and Rab-ul-Maal during the term of Mudarabah will be withdrawn to pay the principal amount to Rab-ul-Maal. The balance will be profit, which will be distributed between Mudarib and Rab-ul-Maal. In this case too if no balance is left, Mudarib will not get anything.

Introduction to Musharakah:
Musharakah or Musharaka is a word of Arabic origin which literally means sharing. In the context of business and trade it means a joint enterprise in which all the partners share the profit or loss of the joint venture. It is an ideal alternative for the interest-based financing with far reaching effects on both production and distribution. In the modern capitalist economy, interest is the sole instrument indiscriminately used in financing of every type. Since Islam has prohibited interest, this instrument cannot be used for providing funds of any kind. Therefore, musharakah can play a vital role in an economy based on Islamic principles.

Diminishing Musharakah:
Diminishing Musharakah is a form of partnership, which ends with the complete ownership of a partner who purchases the share of another partner in that project by a redeeming mechanism agreed between both of them. Diminishing Musharakah is used mostly when one party who wants to own an asset or a commercial business which does not have adequate funds to pay the full price; and takes the assistance of financing from another party. The share of the financier is divided into a number of units and it is understood that the client will purchase the units of the share of the financier one by one periodically, thus increasing his own share till all the units of the financier are purchased by the client so as to make him the sole owner of the asset. In this kind of partnership, all partners are co-owners of each and every part of the joint property or asset on a prorata basis and one partner cannot make a claim to a specific part of the property or asset leaving the other parts for other partners.

Basic Structure:
1. The customer approaches the Bank with the request for Project/Machinery/House financing 2. The Bank enters into a Musharakah (Joint Ownership) agreement with the customer and both of them pay their respective shares to the seller of the asset. 3. Client promises to purchase Banks share (units) over the tenure of transaction with the help of Undertaking to Purchase 4. Client promises to purchase Banks share (units) over the tenure of transaction with the help of Undertaking to Purchase 5. Customer pays rent for the use of banks share in the property 6. Client purchases the units every month via a separate offer & acceptance every month and will eventually become the owner of the property. 7. Ownership of the asset is gradually transferred to the customer upon payment of asset price. (with the help of a Sale transaction between bank & customer at the end of each period)

Example of Diminishing Musharakah:

1. Customer request financing for a fixed Asset costing Rs. 300 million. 2. Islamic Bank agrees to provide financing up to 90% of the cost.

3. Joint Ownership Agreement is executed between the bank and the Customer. 4. Bank will purchase 90% share in the asset by paying Rs. 270 million to supplier. 5. Customer pays its share of Rs. 30 million. 6. Banks share is divided into five units. 7. Customer agrees to buyout Banks share (units) on yearly basis and the Undertaking is executed by the customer. 8. Customer pays the rent for the usage of the Banks units. 9. Rental reduces after purchase of each unit by the customer. 10. After five years ownership of the asset is completely transferred to the customer.

Shirkah/ Shirkat:
The literal meaning of Musharakah is sharing. The root of the word "Musharakah" in Arabic is Shirkah, which means being a partner. It is used in the same context as the term "shirk" meaning partner to Allah. Under Islamic jurisprudence, Musharakah means a joint enterprise formed for conducting some business in which all partners share the profit according to a specific ratio while the loss is shared according to the ratio of the contribution. It is an ideal alternative for the interest based financing with far reaching effects on both production and distribution. The connotation of this term is little limited than the term "Shirkah" more commonly used in the Islamic jurisprudence. For the purpose of clarity in the basic concepts, it will be pertinent at the outset to explain the meaning of each term, as distinguished from the other. "Shirkah" means "Sharing" and in the terminology of Islamic Filth, it has been divided into two kinds: 1. Shirkat-ul-milk (Partnership by joint ownership) 2. Shirkat-ul-Aqd (Partnership by contract)

Shirkat-ul-milk (Partnership by joint ownership):

It means joint ownership of two or more persons in a particular property. This kind of "Shirkah" maycome into existence in two different ways:

1. Optional (Ikhtiari): At the option of the parties e.g., if two or more persons purchase equipment, it will
be owned jointly by both of them and the relationship between them with regard to that property is called

"Shirkat-ulMilk Ikhtiari" Here this relationship has come into existence at their own option, as they themselves elected to purchase the equipment jointly.

2. Compulsory (Ghair Ikhtiari): This comes into operation automatically without any effort/action taken
by the parties. For example, after the death of a person, all his heirs inherit his property, which comes into their joint ownership as a natural consequence of the death of that person. There are two more types of Joint ownerships (Shirkat-ulMilk): Shirkat-ul-Ain Shirkat-ul-Dain

Shirkat-ul-Aqd (Partnership by contract):

This is the second type of Shirkah, which means, "a partnership effected by a mutual contract". For the purpose of brevity it may also be translated as "joint commercial enterprise." Shirkat-ul-Aqd is further divided into three kinds: 1. Shirkat-ul-Amwal (Partnership in capital): where all the partners invest some capital into a commercial enterprise. 2. Shirkat-ul-Aamal (Partnership in services): where all the partners jointly undertake to render some services for their customers, and the fee charged from them is distributed among them according to an agreed ratio. For example, if two people agree to undertake tailoring services for their customers on the condition that the wages so earned will go to a joint pool which shall be distributed between them irrespective of the size of work each partner has actually done, this partnership will be a shirkat-ul-aamal which is also called Shirkat-ut-taqabbul or Shirkat-us-sanai or Shirkat-ul-abdan. 3. Shirkat-ul-wujooh (Partnership in goodwill): The word has its root in the Arabic word Wajahat meaning goodwill. Here the partners have no investment at all. They purchase commodities on deferred price, by getting capital on loan because of their goodwill and sell them at spot. The profit so earned is distributed between them at an agreed ratio. Each of the above three types of Shirkat-ul-Aqd are further divided into two types: 1. Shirkat-Al-Mufawada (Capital & labor at par): All partners share capital, management, profit, and risk in absolute equals. It is a necessary condition for all four categories to be shared amongst the

partners; if any one category is not is not shared, and then the partnership becomes Shirkat-ul Ainan. Every partner who shares equally is a Trustee, Guarantor and Agent on behalf of the other partners. 2. Shirkat-ul-Ainan : A more common type of Shirkat-ul Aqd where equality in capital, management or liability might be equal in one case but not in all respect meaning either profit is equal but not labour or vice versa. All these modes of "Sharing" or partnership are termed as "Shirkah" in the terminology of Islamic Fiqh, while the term "Musharakah" is not found in the books of Fiqh. This term (i.e. Musharakah) has been introduced recently by those who have written on the subject of Islamic modes of financing and it is normally restricted to a particular type of "Shirkah", that is, the Shirkat-ul-Amwal, where two or more persons invest some of their capital in a joint commercial venture. However, sometimes it includes Shirkatul-Aamal also where partnership takes place in the business of services. "Shirkah" has a much wider sense than the term "Musharakah" as is being used today. The latter is limited to "Shirkat-ul-Amwal" only i.e. all the partners invest some capital into a commercial enterprise, while the former includes all types of joint ownership and those of partnership.

Difference between Mudarabah and Musharakah:

Mudarabah is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called rabb-ul-mal, while the management and work is an exclusive responsibility of the other, who is called mudarib. The difference between musharakah and mudarabah can be summarized in the following points: 1. The investment in musharakah comes from all the partners, while in mudarabah, investment is the sole responsibility of rabb-ul-mal. 2. In musharakah, all the partners can participate in the management of the business and can work for it, while in mudarabah, the rabb-ul-mal has no right to participate in the management which is carried out by the mudarib only. 3. In musharakah all the partners share the loss to the extent of the ratio of their investment while in mudarabah the loss, if any, is suffered by the rabb-ul-mal only, because the mudarib does not invest anything. His loss is restricted to the fact that his labor has gone in vain and his work has not brought any fruit to him. However, this principle is subject to a condition that the mudarib has worked with

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due diligence which is normally required for the business of that type. If he has worked with negligence or has committed dishonesty, he shall be liable for the loss caused by his negligence or misconduct. 4. The liability of the partners in musharakah is normally unlimited. Therefore, if the liabilities of the business exceed its assets and the business goes in liquidation, all the exceeding liabilities shall be borne pro rata by all the partners. However, if all the partners have agreed that no partner shall incur any debt during the course of business, then the exceeding liabilities shall be borne by that partner alone who has incurred a debt on the business in violation of the aforesaid condition. Contrary to this is the case of mudarabah. Here the liability of rabb-ul-mal is limited to his investment, unless he has permitted the mudarib to incur debts on his behalf. 5. In musharakah, as soon as the partners mix up their capital in a joint pool, all the assets of the musharakah become jointly owned by all of them according to the proportion of their respective investment. Therefore, each one of them can benefit from the appreciation in the value of the assets, even if profit has not accrued through sales. The case of mudarabah is different. Here all the goods purchased by the mudarib are solely owned by the rabb-ul-mal, and the mudarib can earn his share in the profit only in case he sells the goods profitably. Therefore, he is not entitled to claim his share in the assets themselves, even if their value has increased.

Bai Salam and Parallel Salam:

Bai Salam is a contract in which advance payment is made for goods to be delivered at a future date, following Islam and Islamic shariah. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. Bai salam covers almost everything which is capable of being definitely described as to quality, quantity and workman ship. For Islamic banks this product is an ideal for Agriculture financing.

Conditions of Salam
1. It is necessary for the validity of Salam that the buyer pays the price in full to the seller at the time of affecting the sale, because the basic wisdom for allowing Salam is to fulfill the instant need of the seller. If its not paid in full, the basic purpose will not be achieved.

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2. Only those goods can be sold through a Salam contract in which the quantity and quality can be exactly specified e.g. precious stones cannot be sold on the basis of Salam because each stone differ in quality, size, weight and their exact specification is not possible. 3. All details in respect to quality of goods sold must be expressly specified leaving no ambiguity which may lead to a dispute. 4. It is necessary that the quantity of the commodity is agreed upon in absolute terms. It should be measured or weighed in its usual measure. 5. Salam cannot be affected on a particular commodity or on a product of a particular field or farm e.g. supply of wheat of a particular field or the fruit of a particular tree since there is a possibility that the crop is destroyed before delivery and given such possibility, the delivery remains uncertain. 6. The exact date and place of delivery must be specified in the contract. 7. Salam cannot be affected in respect of things, which must be delivered at spot. e.g. Salam b/w wheat and barley. 8. The commodity of Salam contract should remain in the market right from day of contract up to the date of delivery or at least at the date of delivery. 9. There should be actual delivery of commodity.

Parallel Salam:
In an arrangement of parallel salam, the bank enters into two different contracts. In one of them, the bank is the buyer and in the second one the bank is the seller. Each of these contracts must be independent of the other. They cannot be tied up in a manner that the rights and obligations of one contract are dependent on the rights and obligations of the parallel contract. Each contract should have its own force and its performance should not be contingent on the other. For example, if A has purchased from B 1000 bags of wheat by way of salam to be delivered on 31 December, A can contract a parallel salam with C to deliver to him 1000 bags of wheat on 31 December. But while contracting parallel salam with C, the delivery of wheat to C cannot be conditioned with taking delivery from B. Therefore, even if B did not deliver wheat on 31 December, A is duty bound to deliver 1000 bags of wheat to C. He can seek whatever recourse he has against B, but he cannot rid himself from his liability to deliver wheat to C.
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Similarly, if B has delivered defective goods which do not conform with the agreed specifications, A is still obligated to deliver the goods to C according to the specifications agreed with him. Parallel salam is allowed with a third party only. The seller in the first contract cannot be made purchaser in the parallel contract of salam, because it will be a buy-back contract, which is not permissible in Shariah. Even if the purchaser in the second contract is a separate legal entity, but it is fully owned by the seller in the first contract the arrangement will not be allowed, because in practical terms it will amount to buy-back arrangement. For example A has purchased 1000 bags of wheat by way of salam from B, a joint stock company. B has a subsidiary C, which is a separate legal entity but is fully owned by B. A cannot contract the parallel salam with C. However, if C is not wholly owned by B, A can contract parallel salam with it, even if some share-holders are common between B and C.

Scope and potential of Salam

1. The Salam sale has the flexibility to cover the needs of various sectors of people such as farmers, industrialists, contractors, exporters or traders. It can be used to meet the capital requirements as well as to meet the cost of operations. 2. Salam sale is suitable to finance the agricultural operations where the bank can transact with farmers who are expected to have the commodity in penalty during harvest either from their own crops or crops of others, which they can buy and deliver in case their crops fail. Thus the bank renders great services to the farmers in their way to achieve their production targets.

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3. Salam sale is also used to finance the commercial and industrial activities, especially in phases prior to production and export of commodities and that is purchasing it on Salam and marketing them for lucrative prices. 4. The bank in financing craftsman and small producers applies the Salam sale by supplying them with the inputs of production as a Salam capital in exchange of some for their commodities to market.

Istisna:
Istisna (Manufacturing Finance) is a specific type of sales contract, whereby the good is clearly described and ordered to be manufactured and payments are made in stages of manufacturing or partially or completely at the beginning or end of the manufacturing / processing / construction work. Istisna enables any

construction company get finance to construct slabs / sections of a building by availing finances in installments for each slab. Istisna also helps manufacturers to avail finance for manufacturing / processing cost for any large order for goods supposed to supply in stages. Istisna helps use of limited funds to develop higher value goods/assets in different stages / contracts.

Conditions of Istisna
1. The subject of Istisna is always a thing which needs manufacturing. 2. Manufacturer use his own material. 3. Quality and Quantity should be agreed in absolute term. 4. Purchase price should be fixed with mutual consent. 5. The nature and quality of the item to be delivered must be specified. 6. The manufacturer must make a commitment to produce the item as described. 7. The delivery date is not fixed. The item is deliverable upon completion by the manufacturer. 8. The contract is irrevocable after the commencement of manufacture except where delivered goods do not meet the contracted terms. 9. Payment can be made in one lump sum or in installments, and at any time up to or after the time of delivery. 10. The manufacturer is responsible for the sourcing of inputs to the production process.

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Difference between Istisna & Salam:

Istisna
Time of Delivery does not have to be fixed The contract can be cancelled before the manufacturer starts working. The subject of istisna is always a thing which needs manufacturing. The price in istisna does not necessarily need to be paid in full in advance.

Bai Salam
Time of delivery is an essential part of the sale The contract cannot be cancelled unilaterally.

The subject can be any thing.

The price has to be paid in full in advance.

Parallel Istisnaa
Parallel Istisnaa, also known as al-istisna al tamwili, is a form of istisnaa used by Islamic banks to finance the manufacturing of an asset requested by a customer. Since a financer is not interested to keep the manufactured assets, there is a need for an ultimate client paying the price upon delivery. Therefore the financer enters two parallel Istisnaa contracts with same specifications. It is worthwhile noting that both contracts are independent and if the manufacturer defaults the bank itself would default.

Risks in Istisna applications and their solutions: Risks

Delivery Risk Delay in delivery of goods from the manufacturer to MBL at maturity The Manufacturer may not be able to manufacture the goods during assigned time and refuses to carry on the responsibility further.

Mitigation/ Solution
Istisnaa price can be reduced on daily basis to penalize the manufacturer MBL can terminate the Istisna agreement and demand the price back from the manufacturer. Alternatively, the price may be paid by MBL in installments after being satisfied with the performance.

Non-performance

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Quality Risk

The Manufacturer delivers defected/inferior goods, which is realized by MBL only when the ultimate purchaser points out to that. Cost incurred by manufacturer turns out to be higher than anticipated earlier causing manufacturer to default on performance

The manufacturer can be asked to rectify the defect.

Increased cost of Manufacturing

Increased cost will be borne by manufacturer unless caused by some force majeure events in which case Istisna price may be increased with mutual consent. This may be covered through Takaful of the goods and by minimizing the time duration between acceptance of delivery under Istisna and delivery to the ultimate purchaser. The Agent is asked to procure Takaful as part of his services The Customer (in its independent capacity) may be asked to provide Corporate Guarantee to guarantee payment obligations of ultimate buyers.

Storage Risk

The goods once delivered by Manufacturer will be at MBL's risk before the same are sold to the ultimate purchaser

The ultimate purchaser refuses to make Default by ultimate Purchaser payment on time or goes bankrupt.

Bai Murabaha:
Murabahah is a type of contract, a form of sale, where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person (the buyer) by adding some profit or mark-up thereon. The amount of the profit margin in money terms should be specified. The gain made by the seller is not seen as a reward for the use of his money capital, since it is not permissible to rent out money in Islam, but is instead seen as a profit on the sale of goods. Mechanism has to be conducted with complete sincerity/trust by the seller/financier by stating the cost price of the purchase and the total profit incurred clearly and truthfully. Hence, murabaha is a sale based on trust (amanah).

Rules and features of Murabaha:

1. The end user settles the amount outstanding in one lump sum amount upon delivery or thereafter. 2. The settlement date must be specified. 3. The financier (bank) maintains ownership of the purchased items until delivery. 4. The financier (bank) bears all the costs and risks of ownership until delivery.
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5. The end user and financier must pre-agree and specify the mark-up to be applied. 6. The mark-up applies to all relevant costs incurred by the financier. 7. The goods subject to the transaction must be specified. 8. The cost of the required items, and other relevant costs, must be specified prior to contracting. 9. In the event of default by the end user, the financier only has recourse to the items financed and no further mark-up or penalty may be applied to the sum outstanding, although the seller may alternatively require the buyer to make a pre-specified donation to an agreed charity. 10. The item purchased by the financier cannot be under the ownership of the financier but must instead belong to a third party at the time of contracting. 11. The seller may require the buyer to furnish security for the payment due but only at the time when delivery of the purchased items to the buyer is made.

Sukuk Murabahah
Sukuk defined as trust certificate or participation securities which grant the investor a share of an asset along with the cash flows and risk commensurate with such ownership. Sukuk holders are entitled to share in the revenues generated by the sukuk assets and proceeds of the realization of the sukuk assets. A sukuk represents an undivided proportionate ownership interest in an asset. Sukuk is the arabic name for financial certificates that are the Islamic equivalent of bonds.

Difference Bai Salam & Bai Murabaha: Bai Salam

In Salam, purchased goods are deferred, price is paid on spot. In Salam price has to be paid in full in advance. Salam is not executed in the particular commodity but commodity is specified by specifications. Salam cannot be affected in respect of things, which must be delivered at spot e.g. wheat and barley. Murabaha can be executed in those things.

Bai Murabaha
In Murabaha purchased goods are delivered at spot, price may be either on spot or differed. In Murabaha price may be on spot or differed Murabaha can be executed in particular commodity.

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Bai Muajjal:
Bai-Muajjal means sale for which payment is made at a future fixed date or within a fixed period. In short, it is a sale on Credit. Bai-Muajjal may be defined as a contract between a Buyer and a Seller under which the Seller sells certain specific goods permissible under Islamic Shariah and Law of the land) to the Buyer at an agreed fixed price payable at a fixed future date in lump sum or within a fixed period by fixed installments. The seller may also sell the goods purchased by him as per order and specification of the Buyer. The price that is fixed for said commodity in the Bai Muajjal transaction may be the same price as the "spot price" or it may be either higher or lower in comparison to the spot price. Another name for Bai Muajjal is "deferred payment sale," but it is important to consider that one of the essential descriptions applied to riba is where there is an unjustified delay in the payment, or the price is either increased or decreased in instances where the payment has been immediate or has been delayed. This is an excellent example of how practices in Islamic finance can be different in comparison to normal finance practices. Following best practices for avoiding riba, compliance with shariah rules for Islamic finance is the best way to make sure that everyone benefits from these types of transactions.

Qard Hasan:
Qard hasan means Good loan. A good loan is a loan which is provided without charging any return or profit or interest. If a return in any form is associated with the loan, it will not be a qard hasan. So qard hasan is an interest-free loan given for either welfare purposes or for fulfilling short-term funding requirements. The borrower is only obligated to repay back the principal amount of the loan. The loan is payable on demand and repayment is obligatory. But if a debtor is in difficulty, the lender/creditor is expected to extend time or even to voluntarily waive repayment of the whole or a part of the loan amount. Qard hasan may be viewed as something between giving charity or gift and giving a loan (qard).

Why Qard Hasan:

1. In Islam, mankind originates from one soul, Adam, and hence mankind are brothers and sisters (in blood relation). A brother/sister is supposed to help other brothers/sisters in need. Qard hasan is one kind of help. 2. In the Islamic philosophy, Allah is the creator, sustainer, provider of all income and wealth, and thus the owner of everything. He has given wealth to mankind as a Trustee. Therefore, He has right to determine the terms of the Trust. A such term is to spend wealth for mankind (infaq fi sabilillah). A qard is to spend service of wealth which could be earned, if not loaned out.
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3. Every individual and institution has a social responsibility to assist those who are in need. 4. In Islam, qard hasan is encouraged so much so that it is mentioned in the Quran as a good loan to Allah Himself.

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