modes of islamic finance
TRANSCRIPT
Modes Of Islamic FinanceBasic principles of Islamic finance :1- Prohibition of Riba: The practice of charging financial interest or a premium in excess of the principal amount of the loan.2-Risk sharing:
Interest is prohibited and owner of funds become investors instead of creditors. The provider of capital and entrepreneur shares business risks and shares profits and loss according to the ratio of investment and participation by way of their Capital or Skill.3-Prohibition of speculative behavior:
An Islamic financial system discourages exhibition of wealth and prohibits transactions featuring extreme uncertainties, gambling, and risks
4-Transparency of contracts:Disclose all obligations and information regarding the contracts
undertake
Modes Of Islamic FinanceBasic principles of Islamic financial :5-Shariah Approved Activities
Sharia’h qualifies businesses are allowed (alcohol, gambling and casinos) are not allowed6- Prohibition of Gharar
Gharar is variously defined in English as 'uncertainty' or 'deceptive uncertainty'. The Qur'an uses the word "al-gharūr" to mean "deceptive".
A Gharar transaction occurs where one party can only benefit by the other's loss, under conditions of uncertainty.
Commercial insurance is given as an example of this, since either the insured pays a premium and receives no counter value, or the insurer pays out much more on a claim than was received by way of premium.
Example Of Gharar:1-Selling goods that the seller is unable to deliver 2-Selling known or unknown goods against an unknown
price 3-Selling goods without proper description 4-Selling goods without specifying the price
Modes Of Islamic Finance
Example Of Gharar:5- Making a contract conditional on an unknown event 6-Selling goods on the basis of false description7-Selling goods without allowing buyer to properly examine the goods8-Gambling is a form of Gharar because the gambler is ignorant of the result of his gamble
Modes Of Islamic FinanceTowards achieving the objectives of Shari’ah (Maqasid al-Shari’ah)High ethical values - justice, fairness, trust, honesty and integrityProtection of religion, life, lineage, intellect and wealth More equitable distribution of wealth1-Materiality and Validity of Transactions Economically productive underlying activities Avoidance of interest-based transactions No involvement in illegal and unethicalactivities Genuine trade and business transactions Avoidance of speculative transactionsEmbedded Governance2-Mutuality of Risk Sharing Entitlement of protitcontingent upon risktaking Honouring both substance and form ofcontractDisclosure & Transparency
Modes Of Islamic Finance1- Modarba (Riba Free Mode Of Financing)
2-Mosharika(Trade Financing)
3-Morabha (Equity Participation or Venture Financing
4-Ijarah (Asset Financing)
Modes Of Islamic Finance3-Morabha (Equity Participation or Venture
Financing :Definition:
Morabaha is a contract of sale in which a commodity is sold on profit. The seller tells the buyer his cost price as well as his profit he is adding to the cost.
Modes Of Islamic FinanceParties Of Murabaha Contract:
1-Finacial Institution (Rab-Ul-Maal) i.e Meezan Bank etc.
2-Murahib (who influences the Rab-Ul-Maal to buy the goods) 3- Muqqddam (The agent may be hired by the Rab-Ul-Maal)
4- The Supplier (who is directly approached by the Rab-Ul-Maal)
Modes Of Islamic Finance3-Morabha (Equity Participation or Venture
Financing :1- Morabaha is a financing technique that
involves a request by the Morahib (Worker) to the financier (Rab-ul-Maal) for the purchase of a certain goods or equipment or Asset for him and adds up the declared profit in the cost(COST+PROFIT) which is agreed by the Murahib.
Modes Of Islamic Finance3-Morabha (Equity Participation or Venture
Financing :2- The financer (Rab_ul_Maal) approaches to
the supplier by himself or through Muqqddam (Agent) for the purchase of machines and add up the all expenses or less the financing amount invested by Murahib (ARBOON)
Modes Of Islamic Finance3-Morabha (Equity Participation or Venture
Financing :
The seller discloses the cost to the buyer
Disclosed profit is added
Normal Sale
The seller does not disclose the cost to the buyer
Hidden profit
Murabaha Sale
Modes Of Islamic Finance3-Morabha (Equity Participation or Venture
Financing :• As per the rules of Shariah the seller cannot sell the goods unless
they come into his ownership. • The goods are need to be identified and purchased. • The bank(Rab-Ul-Maal) , being a financial institution does not have
the expertise to identify the goods and negotiate an efficient price.• The customer, however, being in the industry, can do this. The
Bank therefore appoint him(Maqqaddam), in the first step of the transaction, to identify and procure the goods on the bank’s behalf.
Modes Of Islamic Finance• Once the customer purchase the goods the risk of the goods transfers to
the Bank. Bank can now sell these goods to the customer.
• The customer play two different roles in this transaction. On that of Bank’s agent and other of purchaser. These roles should be clearly segregated to make the transaction halal.
• This process is explained in detail in next slides.
3-Morabha (Equity Participation or Venture Financing :3-Morabha (Equity Participation or Venture Financing :
Modes Of Islamic Finance3-Morabha (Equity Participation or Venture
Financing :3-Morabha (Equity Participation or Venture Financing :
Agreement to Murabaha
Bank Client
Murabha Financing Step By Step
1- Client and bank sign an agreement to enter into Murabaha
Modes Of Islamic Finance3-Morabha (Equity Participation or Venture
Financing :3-Morabha (Equity Participation or Venture Financing :
Murabha Financing Step By Step
2- Client appoints as an agent to purchase asset on behalf of Bank
Agency
Agreement
Bank ClientAgreement to
Murabaha
Modes Of Islamic Finance3-Morabha (Equity Participation or Venture
Financing :3-Morabha (Equity Participation or Venture Financing :
Murabha Financing Step By Step
3- Bank gives money to client to buy an asset
Agreement to Murabaha
Agency Agreement
Disbursement to the client
Bank Client
Modes Of Islamic Finance3-Morabha (Equity Participation or Venture
Financing :3-Morabha (Equity Participation or Venture Financing :
Murabha Financing Step By Step
4- Client purchases the asset on behalf of Bank
Client purchases goods and takes possession
Transfer of Risk Vendor
Bank Client
Modes Of Islamic Finance3-Morabha (Equity Participation or Venture
Financing :3-Morabha (Equity Participation or Venture Financing :
Murabha Financing Step By Step
5. Client makes an offer to purchase the goods
from bank.
Offer to purchase
Bank Client
Modes Of Islamic Finance3-Morabha (Equity Participation or Venture
Financing :3-Morabha (Equity Participation or Venture Financing :
Murabha Financing Step By Step6. Bank accepts the offer and sale is concluded.
Murabaha Agreement +
Transfer of Title
Bank Client
Modes Of Islamic Finance3-Morabha (Equity Participation or Venture
Financing :Murabaha financing and risk diversion
In a conventional transaction the bank transfer the risk on the client, however in a Murabaha transaction the Bank takes the following risks:
1. Asset Risk•Since for a short period of time the risk of Asset is transferred to the bank.
2. Credit Risk •Since once money is receivable from the customer, the risk of non-payment does exist
Modes Of Islamic Finance3-Morabha (Equity Participation or Venture
Financing :
• Murabaha transaction is the simplest from of an Islamic
Financial Transaction.
• Murabaha can be used to finance the purchase of any assets
which is recognized as Mal-e-Mutaqawam (Valuable) under
Shariah.
• A wide range of customer needs can be catered through
financing purchase of different assets by the customers.
Conclusion
Modes Of Islamic Finance3-Morabha (Equity Participation or Venture
Financing :Calculation Under Murabaha Contract with Modarba
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