11 islamic products

8/13/2019 11 Islamic Products

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MURABAHAH PRODUCT

STRUCTURE

Pr ice (s) (deferred payment)

Customer

Supplier

Bank

Customer asagent

Title

Application

FA

Title Price (c)

Paid

AA

Goods


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MURABAHAH PRODUCT STRUCTURE

steps and relationships

1. Client & Bank sign facility agreement - Promise to buy / sellcommodities on an agreed profit ratio. Promisor / Promisee.

2. When customer requires a commodity he is appointed as agent for

purchasing the commodity => agency agreement Principal / Agent3. Client purchases from a Third party, takes possession as agent of the

Bank. Supplier / Buyer. Bank becomes owner of the goods

4. Client Informs the Bank and makes an offer to purchase from it.

Buyer ( client) / Seller (bank).

5. Offer accepted and sales concluded. Ownership as well asrisk

transferred from the bank to the client. Debtor / Creditor.


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MURABAHAH

a sale transaction in which the bank takes the role ofseller and business firm takes the role of buyer.

The actual cost directly incurred in acquiring the

commodity is disclosed and the profit negotiated. By defering the sale price it becomes a financing

product.

Rules of a sale to be followed e.g. Offer and acceptance

Instant and absolute : not for a future date

The price must be certain


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MURABAHAH

Underlying theme is :

The bank on the request of customer (who needs to

buy commodities for his business) will buy

commodities and after adding its profit will sale to

him on deferred payment basis. The price will be paid

by the customer to bank according to a mutuallyagreed schedule. Bank will be entitled to evaluate and

mitigate its credit risk as well as other risks in a

suitable manner


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MURABAHAH PRODUCT STRUCTURE

some important issues

Exact cost ascertainable.

Actual purchase of commodities. No buy-back.

The financier must:

own, take possession, assume risk of ownership.

Preferably he should purchase himself.

Customer can act as agent.

Violation of the recommended procedure may turn it into an Interest

based loan.


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USES OF MURABAHA

L/C

Purchase and resale of goods, plants m/cs etc

Short term and long term

Various forms used by Islamic banks


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DEFINITION OF IJARAH

Ijarah is an agreement whereby the lessor conveys

to the lessee in return for rent, the right to use an

asset for an agreed period of time.

A finance lease is a lease that transfers

substantially all the risks and rewards incidental to

ownership of an asset.


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BASIC RULES OF IJARAH

Owner transfers usufruct for an agreed period and

consideration. Retains ownership

Period n Purpose of use to be clearly defined.

Loss to be borne by bank except due to misuse .

All liabilities emerging from the ownership to be

borne by the lessor.Liabilities referable to the use of

the property to be borne by Lessee. e.g:-

* Property tax ------ lessor.

* water tax, Electricity ------ lessee.


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Commencement of Lease.

Different relations of the parties.

Expenses consequent to ownership.

Liability of parties in case of loss to the asset.

Variable rentals in long term lease.

DIFFERENCE B/W IJARAH &

FINANACE LEASE.


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Penalty for late payment of rent

Termination of lease

Insurance

the residual values of the leased asset

sub-Lease

Assigning of the lease.

Securitization of Ijarah.

ontinued


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SECURITIZATION OF IJARAH

The leased asset is purchased by the financier.

He can do it either on his own or have other partners

who will share the rent income

The partners can be few institutions or large no of

small investors from the general public

Certificates of proportionate ownership in the assets

to be leased out can be issued which can be traded

over the counter or listed on the stock exchange


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INSTITUTE OF BUSINESS FINANCE & INDUSTRY

M U S H A R I K A

Musharika or Shirkat-ul-amwal is a relationship

established by the parties through a mutual

contract,whereby the parties agree to invest in a

commercial enterprise

Investment in cash or kind subject to valuation

Sharing the assets in the ratio of financing


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PROFIT /LOSS DISTRIBUTION

1. Proportion agreed in the beginning to make it a

valid contract. Ratio of investment or different.

2. Ratio of actual profits, not the face value of the

instrument.

3. On account payment possible, subject to

adjustment in the final accounts.

4. Sleeping partner should not get more than the

ratio of his investment

5. Loss in proportion to the investment


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M A N A G E M E N T

1. Every partner or some by agreement can manage.

2. The bank takes the role of sleeping partner.

3. at maturity musharaka will come to an end.4. can be terminated by notice

4. To ensure continuity n prevent mischief conditions may be

agreed in the beginning to facilitate exit of the partners without

forcing a liquidation or separation

5. Price of the share of the leaving partner to be determined by

mutual consent.


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A P PL I C A T I O N S

Project Financing

Import / Export Financing

Working Capital Financing


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P R O J E C T F I N A N C I N G Modarabah or Musharakah or combination

Valuation of Capital

Distribution of Profits

Withdrawal of the Financier

Investment Units Securitization COMs

Liquid / illiquid asses


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IMPORT / EXPORT FINANCING

Mudarabah or Musharakah or Combination

depending on LC margin.

Ownership of goods and therefore proceeds in the

ratio of investment Importer can also purchase financiers share on

MP or negotiated price if goods not sold until a pre-

agreed date.

Pre-agreed price not possible .

Loss to be shared except due to negligence or

misconduct of the client.


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W O R K I N G C A P I T A L

Owners contribution in the form existing

capital to be determined through evaluation

with mutual consent

Financers Contribution in the form of cash

Period may be 12 month, 6 months or less.


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-The contract of Shirkat ul Milk or joint ownership is used

Joint ownership of unit say 80/20. The client pays rent for

using the share of the Other party. (In other words a

rent is determined to be paid by client for using the house

and is shared in proportion to the ratio of investment.

Financiers share is paid by the client ).

Financier makes investment in units which areprogressively bought by the client.

ASSET FINANCING


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MAIN FEATURES OF THE MODEL

Joint ownership in the property (shirkat-al-milk)

is created.The share of the financier is given on rent to the client.Promise from the client to purchase the units of share

of the financier.

Actual purchase of the units at different stages.Adjustment of the rental according to the remaining

share of the financier.


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Equity Investment

1. Main Business not violative of shariah

2. Disapproval for surplus money being kept in

interest bearing accounts.

3. Proportionate income from the dividends be

given in charity.

4. Negotiability subject to some illiquid assets.

Extent of illiquid assets 51%- 33% Price should

be more that the value of liquid amount

Debt to Asset ratio 35%


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Special Kind of Partnership where:One Partner (Investor or rabb-ul-mal) gives moneyto another (Manager or Mudarib) for investing itin a Commercial Enterprise

Investor and ManagerRestricted or unrestricted businessMudarib authorized to do any thing normally done inthat business.Permission of Investor(s) required for Extra ordinarythings

M O D A R A B A


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BUSINESS PROFITS

Distribution on a definite proportion of actualprofits to be agreed in the beginning

No lump sum

No percentage of capital investedNo salary for the Mudarib


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TERMINATION

Contract Terminable by either party after notice.

Assets may be disposed off at termination.Minimum time limit, may be specified in the

beginning to ensure continuity

All the conditions agreed upon by the Muslims are

upheld, excepts a condition which allows what is

prohibited or prohibits what is allowed

11 islamic products

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