eoif working capital finance revised-1

8/8/2019 Eoif Working Capital Finance Revised-1

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WORKING CAPITAL FINANCEWORKING CAPITAL FINANCECONTEMPORARY ANDCONTEMPORARY AND

ISLAMIC WAYSISLAMIC WAYS

PREPARED BYPREPARED BY

ASAD DANISH SIDDIQUI (1462)ASAD DANISH SIDDIQUI (1462)

SYED RAUF UR RAHEEM (1772)SYED RAUF UR RAHEEM (1772)AHMAR JAMAL CHANDNA (1884)AHMAR JAMAL CHANDNA (1884)

TALHA YOUSUF (1245)TALHA YOUSUF (1245)

ASIM RAZA (2134)ASIM RAZA (2134)

GROUP DGROUP D


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WORKING CAPITAL FINANCE 2

INTRODUCTION TO WORKING CAPITALINTRODUCTION TO WORKING CAPITAL

Funds DeploymentFunds Deployment

Period of FinancePeriod of Finance

Investment in Current AssetsInvestment in Current Assets

ShortShort--Term CapitalTerm Capital


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USES OF WORKING CAPITAL FINANCEUSES OF WORKING CAPITAL FINANCE

Working Capital Provides ongoingWorking Capital Provides ongoingInvestmentInvestment

Sustained GrowthSustained Growth

LongLong--Term and ShortTerm and Short--TermTerm


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GENERAL SOURCES OF WORKINGGENERAL SOURCES OF WORKING

CAPITAL FINANCINGCAPITAL FINANCING

Sources of Working Capital Finance:Sources of Working Capital Finance:

OWN FUNDSOWN FUNDS

Long Term FundsLong Term Funds

Equity Share CapitalEquity Share Capital

Reserves & SurplusReserves & Surplus

BANK BORROWINGSBANK BORROWINGS

Cash Credit, Packing Credit, Bills Discounting etc.Cash Credit, Packing Credit, Bills Discounting etc.

CREDITORSCREDITORS


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PRIMARY FORMS OF WORKING CAPITALPRIMARY FORMS OF WORKING CAPITAL

FINANCINGFINANCING

Islamic Law of Contract disapproves theIslamic Law of Contract disapproves the

contemporary methods due to violation ofcontemporary methods due to violation of

law of contractlaw of contract

OPTION REASON FOR REJECTION

1 Line of Credit. INTEREST BASED

2 Accounts Receivable (AR)

Loan.

DEBT SOLD FOR BIGGER

UNEQUAL DEBT

3 Factoring. DEBT AGAINST DEBT

4 Inventory Loan. LOAN AGAINST UNFINISHED

GOODS AS SECURITY.

5 Term Loan. INTEREST BASED


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THE ISLAMIC SOURCES OF WORKINGTHE ISLAMIC SOURCES OF WORKINGCAPITAL FINANCINGCAPITAL FINANCING

Working Capital Financing:Working Capital Financing:

1.1.MurabahaMurabaha

2.2. IstisnaIstisna

3.3.IjaraIjara

4.4.MudarabahMudarabah

5.5.MusharakahMusharakah


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MURABAHAMURABAHA

Asset basedAsset based

Trade finance / Acquisition financeTrade finance / Acquisition finance

Unconditional contract of sale; goods, cost price,Unconditional contract of sale; goods, cost price,

markmark--up and payment date = defined and agreedup and payment date = defined and agreed

Profit from markedProfit from marked--up sale price (not interest) paid inup sale price (not interest) paid in

instalmentsinstalments

Examples:Examples:

importimport--export financeexport finance

infrastructure project financinginfrastructure project financing


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ISTISNAAISTISNAA

Asset basedAsset based Funding agreement for production, manufacture orFunding agreement for production, manufacture or

construction of asset to agreed specification: allconstruction of asset to agreed specification: all

specifications, delivery options, payment conditionsspecifications, delivery options, payment conditions

and pricing must be agreed in contractand pricing must be agreed in contract No fixed delivery date and no payment in full atNo fixed delivery date and no payment in full at

outset requiredoutset required

Advance funding of:Advance funding of:

major industrial, construction and real estatemajor industrial, construction and real estatedevelopmentdevelopment

project financeproject finance

large equipment e.g. ships, aircraftlarge equipment e.g. ships, aircraft


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IJARAIJARA


Hybrid between conventional operational andHybrid between conventional operational andfinance leases; a business processfinance leases; a business process

Analogous to secured loanAnalogous to secured loan Examples:Examples:

aircraft financeaircraft finance

Working capital managementWorking capital management

ship financeship finance

project financeproject finance


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IJARA WAIJARA WA--IKTINAIKTINA


Lease with option for lessee to purchaseLease with option for lessee to purchase

leased assetleased asset

Analogous to finance lease / hire purchaseAnalogous to finance lease / hire purchase

contractcontract

Examples:Examples:

medium term trade finance of equipmentmedium term trade finance of equipment refinancing under sale and leasebackrefinancing under sale and leaseback


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MUDARABAMUDARABA

Risk sharing; profit and loss sharingRisk sharing; profit and loss sharing

Limited partnership: one partner providesLimited partnership: one partner provides

capital; other partner providescapital; other partner provides

expertise/effort and makes businessexpertise/effort and makes businessdecisionsdecisions

Restricted or unrestrictedRestricted or unrestricted

Examples:Examples: funded participation arrangementfunded participation arrangement

establishment of investment fundestablishment of investment fund


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MusharakaMusharaka

Risk sharing; profit and loss sharing in sameRisk sharing; profit and loss sharing in sameproportionsproportions

General partnership / joint ventureGeneral partnership / joint venture

arrangement between financier and investorarrangement between financier and investor Provides working capital financing as aProvides working capital financing as a

venture; greater riskventure; greater risk--reward factors andreward factors andgreater investor say in project managementgreater investor say in project management


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MURABAHA ISTISNAA IJARA MUDARABA MUSHARAKA

Asset Based

Trade Finance

Unconditional

Contract

Profit From

Marked-up

Asset Based

Funding

Agreement

No Fixed

Delivery Date

Advance

Funding

Asset Based

Hybrid

Analogous

Sharing;

Profit And Loss

Limited

Partnership

Restricted Or

Unrestricted

Profit And

Loss Sharing

General

Partnership

Provides

Working

Capital

THE ISLAMIC SOURCES OF WORKINGTHE ISLAMIC SOURCES OF WORKING

CAPITAL FINANCINGCAPITAL FINANCING


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Thank you!Thank you!

Questions?Questions?

eoif working capital finance revised-1

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