1. As Applied by Islamic Banks

2. Dr. Hussein shehata Prof. of accounting Al- Azhar University Cairo

3. Preface Moslems-certainly – believe that Islam is a way of life, it is a Belief, Jurisprudence, a State and a Whole System. Allah said: "We have neglected nothing in the Book" (al- Annam 38). Islamic jurisprudence (Islamic Law) is universal, perfect, permanent for all times and places, and comprehensive for all things and affairs. The Islamic Economic System is a sub-system of the whole Islamic Economic system. It is ruled by the Islamic jurisprudence. Teachings and Principles. ( أحكام ومبادئ الشريعة الإسلامية )

4. One of the main purpose of Islamic Banks is to collect funds according to Mudaraba Contract, and invest these according to Islamic financing forms. This book is mainly concerned with Islamic financing forms, Nature, principles, and how they are applied in real life by Islamic Banks. Some case studies will be introduced to familiarize the reader with their practical side.

5. Our approach in compiling this book is as follows : A brief overview on the nature and the principles of each Islamic financing form.A brief overview on the nature and the principles of each Islamic financing form. The main procedures as carried out by Islamic Banks.The main procedures as carried out by Islamic Banks. Case studies on each Islamic financing form through figures.Case studies on each Islamic financing form through figures.

6. I have done my best to make the selected Islamic financing forms in this book very easy to follow and to be applied in real life, so as to be of great help for Banks, Business-men and to whom it may concern. We all should always remember that, " Allah is the most all knowing… By Glorified. We have no knowledge except which you has thought us", thanks and praise be to Allah ". May 2008 Dr. Hussein H. Shehata Prof. of Accounting Al- Azhar University

7. Chapter One General background to shari'a principles of Islamic financing forms

8. (1/1) Shari'a principles of Islamic financing. -The main Shari'a principles that should be respected and complied with financing are : (1)Legitimate Dealings : المشروعية والحلال It means that all financing affairs should be carried out within the limits and rules of Shari'a principles. Avoiding areas of suspicion and forbidden. In general, finance dealings in essence are lawful except those forbidden by texts from the Glorious Qur'an or Sunnah.

9. (2) What is Good and Pure الطيبات Projects which would be financed, should be in good and pure dealings and be restrained from the illicit. Allah is Good and accepts nothing but the Good. (3)Adherence to Islamic priorities : الأولويات الإسلامية Muslim should adhere to Islamic investment. He should give priority to Daruriyat الضروريات (necessities) and Hajiyat الحاجيات (needs) over Tahsinyat تحسينات (commendable), so as to avoid Wasting funds الإسراف in unnecessary التبذير things.

10. (6) Protecting and Progressing Capital : حفظ وتنمية الأموال Preserving and multiplying capital through legal means is one of the main Islamic Shari'a's objectives, Therefore, capital should be invested by capable and qualified persons and through out safety projects. The Shari'a has forbidden certain kinds of activities because they lead to destroying of capital. On the other hand, capital should be invested to be multiplied and increased. Shari'a forbids Treasury الاكتناز. Allah said: the ones who Treasure up gold and silver, and do not expend them in the way of Allah then give them the tidings of a painful torment ".

11. (4) Balance between Risks and Profit : التوازن بين الربح والمخاطر Islamic financing depends on dealings suspected with profit and losses, increasing and decreasing, gains and failure and so on. Muslim should balance between risks and profits to maintain Funds intact. (5) Diversification amongst Activities : التوزيع بين الأنشطة Muslim should invest funds in several projects to minimize failures and maximize gains. He should avoid to invest all funds in one project or highly risk ones.

12. (1/2) Islamic Financing Forms : صيغ الاستثمار الإسلامي The funds of an Islamic Bank are invested through many financing Forms (instruments) according to Shari'a principles. These are : Mudaraba : المضاربة - Unrestricted Mudaraba. المضاربة المطلقة - Restricted Mudaraba. المضاربة المقيدة Musharaka : المشاركة - Fixed Musharaka. المشاركة الثابتة - Decreasing Musharaka. المشاركة المنتهية بالتمليك - Permanent Musharaka. المشاركة الدائمة

13. Murabaha: المرابحة - Cash Murabaha. المرابحة الناجزة - Credit Murabaha. المرابحة لأجل Bia-El-Salam بيع السلم Bia-El-Istisnaa. بيع الاستصناع Installment Deferred Sales. البيع بالتقسيط El-Egara (Leasing). الإجارة Investment Securities. الاستثمارات في الأوراق المالية Trading projects. التجارة AL- Tawarrok التورق Others. أخرى

14. Chapter Two بيع المضاربة Nature and case studies on Mudaraba Financing Forms

15. (2/1) Mudaraba Meaning : معنى المضاربة Mudaraba is a form of joint venture capital financing between two parties, the first provides capital, the second provides labour (efforts). In case of a profit, it is distributed between the parties as agreed between them. in case of loss, the capital provider would charge it, the labour losses his effort.

16. (2/2) Shari'a Principles of Mudaraba : الضوابط الشرعية للمضاربة Shari'a principles (Law) of Mudaraba are : The capital is provided by the first partner, who is called Rab-e-Mal رب المال (the capital provider). He is not entitled to share in management. The manager is appointed to manage the Mudaraba Business. He is called El-Mudarab, Rab-El-Amal. رب العمل The capital can be in sort of cash, or assets which can be valued in monetary terms without suspicion or doubt. Profits generated from Mudaraba are not realized untill capital is fully maintained.

17. Profit is divided between the partners according to the common rate due to each partner. No guarantee for each of giving them a minimum profit. Loss is charged to the capital provider, the Mudarib المضارب has lost his effort. The Mudarib may be held liable for losses in case of carelessness الإهمال and inattentiveness التعدي, and negligence التقصير. The accounts of Mudaraba should be checked by an experienced Auditor or by the Capital provider, as settled down in the contract.

18. (2/3) Mudaraba procedures as implemented by Islamic Banks: (2/3) Mudaraba procedures as implemented by Islamic Banks: If a client (Applicant) has the desire to joint-venture with an Islamic Bank in the form of Mudaraba, the following procedures should be carried out: The Business-man (the client) proceeds a request to the Islamic Bank requiring capital through Mudaraba Financing Form, attaching some documents: such as : the Feasibility Study. The Islamic bank would study and evaluate the request according Shari'a principles & Investment Criteria, and other Technical Rules. In the case of accepting the request, the client would provide some sort of Guarantee, Documents against willful, negligence, carelessness and so on.

19. After that, Mudaraba financing Contract is settled down and signed by both partners. The Islamic Bank should provide the Capital, and the Mudarab would manage the activities as settled down at the contract. Every period, or at the end of the Mudaraba activities, the financial statements is prepared, which sow the results of affairs (profit or loss) which is distributed as settled down reflect) in the contract. At the end of the Mudaraba activities, the liquidation accounts are prepared which declare the distribution of profit and loss and the share of each part. The Mudaraba Contract could be renewed for another period, if the two parts wish and confirm this desire.

20. (2/4) Case studies on Mudaraba financing form : (2/4) Case studies on Mudaraba financing form : Case (1): Case (1): A Mudaraba contract is settled down between an Islamic bank and a Client, as follows : the Islamic Bank provides capital of 10000000 S.R., and the client provides his efforts. the subject activity of the Mudaraba is Trading in foods, for one year. profit is divided as : 60% for the Islamic Bank, 40% for the client. the result of activities was as follows : Sales Income 12000 000 S.R. Purchases Costs 9000 000 S.R Mudaraba Expenses 1 000 000 S.R. According to the previous data and information, the income statement is prepared as shown at the following page.

21. Mudaraba project with …………… Income statement For the period from ………….. to ………….. Sales Income12 000 000 Less : - Purchase Cost9 000 000 - Mudaraba Expenses1 000 000 (10 000 000) Net profit before Tax2 000 000 Less : Tax (20%) (for instance)400 000 Net profit available for distribution1 600 000 - Bank Share of profit (60%)960000 - Mudarib Share of profit (40%)640000 1 600 000

22. Case (2) : If in the previous case the Sales income was 7000000, in this case, the Mudaraba activity results would be a loss of 3000000 S.R. the Bank would charge it, because the Mudarib has done his best. According to the previous new Data and information the Mudaraba Income statement is prepared as shown below.

23. Mudaraba contract of …….. Income statement For the period from ……….. to ……. Sales Income7 000 000 Less : - Purchase Cost9 000 000 - Mudaraba Expenses1 000 000 10 000 000 - Net Loss( 3 000 000) - Not Tax……….. - Bank Share of Loss3 000 000 - Mudarib Share of Loss………. - Remark3 000 000 Al-Mudaraib has lost the reward of his effort.

24. Chapter Three المشــاركة Nature and case studies on Musharaka Financing Forms

25. (3/1) Musharaka Meaning : معنى المشاركة It Means : participation of two or more partners with defined amounts of capital and efforts, they carried out the activities according to Shari'a Principles. Profit & Loss may be shared proportionately according to the agreement settle down in the contract. There are two main kinds of Musharaka : Fixed and Decreasing

26. (3/2) Shari'a Principles of Musharaka : الضوابط الشرعية للمشاركة Shari'a principles (Law) of Musharaka are : The defined amount of capital provided by each party should be in case or assets which can be valued in monetary terms without suspicion or doubt. Management of Musharaka affairs are implemented (carried out) by all partners or by one of them as agreed. Musharaka could have a separate entity from their owners. Profits generated from Musharaka are not realized until capital is fully maintained.

27. Profits may be distributed proportionately according to the shared capital provided by each partner or by other proportion which takes into the consideration the efforts. Profits may be distributed proportionately according to the shared capital provided by each partner or by other proportion which takes into the consideration the efforts. Losses should always be distributed proportionately according to the shared capital provided by each partner. Losses should always be distributed proportionately according to the shared capital provided by each partner. Guarantee of capital or profits should not be given from a partner to another. Guarantee of capital or profits should not be given from a partner to another. The partner who manages the project may be allowed a management Fee defined in advance in the contract. The partner who manages the project may be allowed a management Fee defined in advance in the contract. Each partner have access to the books and records of the Musharaka project at any time. Each partner have access to the books and records of the Musharaka project at any time. Musharaka documents, records, books, accounts, statements and reports should be audited by partners or by Authorized Auditor. Musharaka documents, records, books, accounts, statements and reports should be audited by partners or by Authorized Auditor. Musharaka contract is normally for a fixed period, with an option to renew it to another period if the partners wish and confirm this desire. Musharaka contract is normally for a fixed period, with an option to renew it to another period if the partners wish and confirm this desire.

28. (3/3) Musharaka procedures as implemented by Islamic Banks. If a Business-man (client) has the desire to participate with an Islamic Bank in the form of Musharaka, the procedures to be followed are the same in the case of Musharaka mentioned before in chapter two. they are summarized as follows. proceeding a request for financing through Musharaka form, the client may provide some documents ordered by the Bank. the Islamic Bank would study the request and the other documents, and collect data about the financial position of the client. the client would provide Guarantee against carelessness, willful, negligence and bad behavior. writing (settling down) and signing the contract by partners.

29. Musharaka project is carried-out according to the principles, policies, plans and projects shown at the feasibility study. Musharaka project is carried-out according to the principles, policies, plans and projects shown at the feasibility study. Preparing financial statements every period to show the results of affairs and the financial position of the project. Preparing financial statements every period to show the results of affairs and the financial position of the project. Profit distribution after accepting and confirming the financial statements. Profit distribution after accepting and confirming the financial statements. Losses may be differed to another period, if partners accept this desire. Losses may be differed to another period, if partners accept this desire. At the end of the Musharaka period settled down in the contract, liquidation accounts are prepared and finishing the Musharaka contract. At the end of the Musharaka period settled down in the contract, liquidation accounts are prepared and finishing the Musharaka contract. The Musharaka contract could be renewed for another period if the partners wish and confirm this desire. The Musharaka contract could be renewed for another period if the partners wish and confirm this desire.

30. (3/4) Case studies on Musharaka Financing Form : Case (1) : fixed & continuous Musharaka. Case (1) : fixed & continuous Musharaka. A Musharaka contract is settled down between an Islamic Bank and a Client according to the following terms. - Bank share in capital 6 000 000 S.R. - Client Share in capital 4 000 000 S.R. - Profits & Losses are distributed according to the shares in capital : 60% for the Bank, 40% for the client. - the summary of Musharaka project transactions were as follows : - Sales income 20 000 000 SR. - purchase cost 16 000 000 S.R. - Sales expenses 1 500 000 S.R. - Adm. Expenses 5000 000 S.R. - Depreciation 500 000 S.R. - Provisions 500 000 S.R. - Stock at the end of the period 1 000 000 S.R - Management free for the client 500 000 S.R.

31. Musharaka project with ……… Income statement For the period from …….. to …….. Sales Income 20 000 000 Less : cost of sales - Purchase Cost 16 000 000 - Less Stock Cost - Less Stock Cost (1 000 000) Cost of sales (15 000 000) Gross profit 5 000 000 Less - Sales Exp 1 500 000 Adm. Exp 500 000 Depreciation. Provisions (3 000 000) Net profit before management Fee 2 000 000 Less: Management Fee Management Fee 500 000 Net profit available for distribution 1 500 000

32. Musharaka project with …………. Profit preparation statement For the year ended ……… Case (2) : Decreasing Musharaka A Musharaka contract is settled down between an Islamic Bank and a client according to the following terms : Bank share in capital 4000000 S.R. client share in capital 1000000 S.R. Profits & Losses should be distributed according to percentage of share in capital. Net Profit Available for distribution1 500 000 - Bank share 60%900 000 - Client share 40%600 000

33. Case (2) : Decreasing Musharaka : A Musharaka contract is settled down between an Islamic Bank and a client according to the following terms Bank share in capital 4000000 S.R. client share in capital 1000000 S.R. Profits & Losses should be distributed according to percentage of share in capital.

34. The client should buy every year from the Bank shares an amount by 1000000 S.R. according to the historical value. the net profits for the first five years were as follow : first Year 500 000 S.R. second Year 750 000 S.R. Third Year 750 000 S.R Fourth Year 1 000 000 S.R. fifth Year 1 000 000 S.R. According to the previous data and information the profit preparation statement would be prepared as shown on the following page :

35. Capital shares & profit preparation For the period from ………. to ………… Year Total Capit al Bank Share in Capital Client Share in Capital Percentage of Distribution Net Profit Bank Share in profit Client Share in profit Remar ks 1 50000 00 400000010000004: 1500000400000100000 2 50000 00 300000020000003: 2750000450000300000 3 50000 00 200000030000002: 3750000300000450000 4 50000 00 100000040000001: 41000000200000800000 5 50000 00 - 0: 51000000- 400000013500002650000Total

36. Chapter Four المرابحـــة Nature and Case studies on Bai-el Murabaha financing form

37. (4/1) Bai-El Murabaha Meaning معنى بيع المرابحة It means : added an agreed margin of profit above the initial price, or above the initial cost of the goods which would be sold to the client. A person requests from another ……. A specific good and promise to buy it from him with a defined profit. This kind of transitions is permitted by Shari'a law. There are two main forms of Murabaha : cash and deferred. the second form is widely implemented by the Islamic banks, and it is our concern in this Note – Book.

38. (4/2) Shari'a principles of Murabaha (4/2) Shari'a principles of Murabaha Shari'a principles of Murabaha are : Shari'a principles of Murabaha are : the requested goods should be defined well. the requested goods should be defined well. the initial (established) price should be also well known to the applicant. the initial (established) price should be also well known to the applicant. the margin of profit should be defined. the margin of profit should be defined. the applicant who orders the goods may sign a promise to buy such goods when they are been sold and ready to deliver. the applicant who orders the goods may sign a promise to buy such goods when they are been sold and ready to deliver. the seller should own the goods before selling them again to the applicant. the seller should own the goods before selling them again to the applicant. the applicant may provide a down payment to commit his request. He may be also asked to provide some of guarantee in such postdated cheques for the deferred amount. the applicant may provide a down payment to commit his request. He may be also asked to provide some of guarantee in such postdated cheques for the deferred amount. the applicant should pay the installments in their due time. the applicant should pay the installments in their due time. Renewing the unpaid Balance of price (debt) through out increasing the debt is forbidding in Shari'a law. It is a sort of Usury ربا. Renewing the unpaid Balance of price (debt) through out increasing the debt is forbidding in Shari'a law. It is a sort of Usury ربا.

39. (4/3) Murabaha Procedures as implemented by Islamic Banks. (4/3) Murabaha Procedures as implemented by Islamic Banks. In the case of an applicant has the desire to by goods by Murabaha financing form through an Islamic Bank, the procedures should be followed are : proceeding a request to the Bank for financing purchasing goods through Murabaha form. He may be asked to provide some documents which are required by the Islamic Bank. the Bank will study the request and collect data and information about the financial position of the client. in the case of accepting the request, the client would sign a promise to buy such goods, and pay the advanced installment (a down- payment ) as a deposit to commit his request.

40. the Islamic Bank must buy and own the required goods before selling them to the client. the Islamic Bank must buy and own the required goods before selling them to the client. when the required goods are been ready, the client would sign the contract and provide the Guarantee and the post- dated cheques for the deferred amount. when the required goods are been ready, the client would sign the contract and provide the Guarantee and the post- dated cheques for the deferred amount. the Islamic Bank delivers the requested goods to the client as settled down at the contract. the Islamic Bank delivers the requested goods to the client as settled down at the contract. the client should pay the installments over the period of time been agreed upon. the client should pay the installments over the period of time been agreed upon.

41. (4/4) Case Studies on Murabaha financing form : Case (1) : Calculating the initial costs of goods : Case (1) : Calculating the initial costs of goods : قياس التكلفة الأصلية للبضاعة According to Shari'a Rules, the initial costs of goods consist of : the amount shown on the invoice. 1 000 000 S.R. Delivery costs 100 000 S.R. Insurance costs 50 000 S.R. Tax 250 000 S.R. Bank expenses 050 000 S.R. Other expenses 50 000 S.R. Total initial costs 1 500 000 S.R.

42. Case (2) : Calculating the margin profit and the installment : If a client has requested from an Islamic Bank to finance goods by Murabaha from they agreed on the following terms : the initial costs 1 500 000 S.R. the profit margin 10% the down-payment 250 000 S.R. Number of installments 10 According to the previous data and information the Murabaha Statement would be prepared as shown on the following page.

43. Murabaha Statement First view : First view : calculating the profile margin as a % of the initial costs before deducting the down–payment. Items Monetary unit Initial costs1 500 000 Add : profit margin (1500000 x 10%)150 000 price1650 000 Less : down-payment(250 000) The amount of instalments1 400 000 Devided by 10 The amount of each installment140 000

44. Murabaha statement Second view : calculating the profit margin as a % of the initial costs after deducting the down-payment. Items Monetary unit Initial costs1 500 000 Less : down-payment(250 000) 1250 000 Add : profit margin (1 250 000 x 10%)125 000 - the amount of instalments1375 000 devided by 10 The amount of each instalment137 500

45. Case (3) : Setting up the profit margin : From the Bank view-point, the profit margin way be distributed amongst time intervals According to accrual Base. For example : If total amount of instatements due in year 2000 was (800 000) and in year 2001 was (600 000) and the profit margin was (250 000). so, 2001 as follows : Profit due to year 2000 = 250000/ 1400000 x 800000 = 142 857 S.R Profit due to year 2001 = 250000/ 1400000 x 600000 = 107 143 S.R. Total of profit margin = 250 000 S.R

46. Chapter Five بيـــع السلــم Nature and case studies on Bia-El-Salam financing form

47. (5/1) Bia-El-Salam meaning : معنى بيع السلم It is a form of financing agriculture goods. the defined price of a specified goods is paid in advance and the delivery would be curried out after a specified time. Goods, price and time of delivery should be defined well when the Salam contract is signed. ( 5/2) Shari'a principles of Bia-el-Salam: الضوابط الشرعية لبيع السلم ( 5/2) Shari'a principles of Bia-el-Salam: الضوابط الشرعية لبيع السلم They are : They are : the subject of Salam contract should and commodities, the time and the place of delivery to avoid ignorance Defining the sale price of goods and commodities, the time and the place of delivery to avoid ignorance. the subject (goods) of Salam contract could be available at the time of delivery. the applicant of Salam may be asked to provide some of Guarantee All documents and the contract should be signed and confirmed.

48. (5/2) Shari'a principles of Bia-el-Salam : الضوابط الشرعية لبيع السلم They are : They are : the subject of Salam contract should and commodities, the time and the place of delivery to avoid ignorance Defining the sale price of goods and commodities, the time and the place of delivery to avoid ignorance. the subject (goods) of Salam contract could be available at the time of delivery. the applicant of Salam may be asked to provide some of Guarantee All documents and the contract should be signed and confirmed.

49. (5/3) Bia-El-Salam procedures as implemented by Islamic Banks : In the case of an applicant has the desire to sell goods or commodities to an Islamic Bank by Bia-el-Salam form, the following procedures should be carried out : proceeding a request to the Bank for selling goods through Salam. He may be asked to provide some documents which have been required previously. the Bank will study the request and collect data and information about the applicant. in the case of accepting the request, the client would sign the Salam Contract and provide the Guarantee. the Bank would pay the defined price to the applicant. At the defined time of delivery, the applicant would deliver the goods to the defined place.

50. (5/3) A case study on Bia-el-Salam Financing Form : (5/3) A case study on Bia-el-Salam Financing Form : A Bia-el-Salam contract is settled down between an Islamic Bank and an applicant according to the following terms : The Bank would buy 100 tons of Beans. Price per Ton 1000 S.R. The time of delivery : after 6 months. Place of delivery : the Bank's address. According to the previous data and information the total sale price would be = 100 x 1000 S.R. = 100000 S.R. In the previous case, if the Bank have signed another separate contract with another client to sell 100 tons of Beens, price per Ton 1200 S.R. the profit of the Bank would be 20000 S.R.

51. Chapter Six بيع الاستصناع Nature and case studies on El- Estisnaa financing form

52. (6/1) El-Estisnaa meaning معنى بيع الاستصناع (6/1) El-Estisnaa meaning معنى بيع الاستصناع It is a contract between Al-Mostasnia ( المستصنع ) (the Buyer) and Al-Sania ( الصانع ) (the seller) in which the Sania would manufacture a specified goods for the Mostasnia at a certain price, which paid immediately or by installments or as they may agreed. The parts of El-Estisnaa contract : 1- Al Mostasnia – the Buyer. ( المستصنع ). 2- Al Sania - the Seller ( الصانع )

53. (6/2) Shari'a principles of El-Estisnaa : They are : the subject of El-Esitisnaa should be identified clearly to avoid ignorance. the sale price should also be determined clearly and how it should to be paid. the date and place of delivery should also be defined to avoid ignorance the subject of El-Estisnaa contract could be attainable or available at the time of delivery. Al- Mostrisnaa may ask the Sania to provide some of guarantee. The cost of the raw materials and labour must be paid by Al-Saina. The price could be paid in advance or installments or deferred, as they agreed. All documents and the contract should be signed and confirmed.

54. (6/3) El-Estisnaa procedures as implemented by Islamic Banks : In the case of an applicant has the desire to manufacture a specified good (commodity – Machine – Building …) through Al-Estisnaa financing form through the Islamic Bank, the following procedures should be carried out In the case of an applicant has the desire to manufacture a specified good (commodity – Machine – Building …) through Al-Estisnaa financing form through the Islamic Bank, the following procedures should be carried out proceeding a request to the Bank for financing a specified Good through El-Estisnaa form, and the price would be paid according to the installment system. proceeding a request to the Bank for financing a specified Good through El-Estisnaa form, and the price would be paid according to the installment system. the Bank have to study the request and collect data and information about the applicant and about whom could manufacture the goods. the Bank have to study the request and collect data and information about the applicant and about whom could manufacture the goods. in the case of accepting the request, the Bank would sign two separate contracts. they are : in the case of accepting the request, the Bank would sign two separate contracts. they are : the first : Between the Bank (Al-Sania) الصانع and the Applicant which is called Al- Mustasnia-lah. ( المستصنع له ) the second : Between the Bank (Mustasnia) المستصنع and the Manufacturer which is called in this contract Al-Sania ( الصانع ) the Bank would ask Al-Mustasnia Lah( المستصنع له ) (the applicant) to provide: a down-payment. a Guarantee.

55. the Bank would also ask Al-Sania الصانع (the manufacturer) to provide some sort of Guarantee as agreed. the Bank would also ask Al-Sania الصانع (the manufacturer) to provide some sort of Guarantee as agreed. the Bank would pay the price of the manufactured good to Al- Sania in advance or on installments as they have agreed. the Bank would pay the price of the manufactured good to Al- Sania in advance or on installments as they have agreed. After finishing the Goods : Al-Sania would deliver the manufactured goods to the determined place. After finishing the Goods : Al-Sania would deliver the manufactured goods to the determined place. The Bank would take from the applicant post –dated cheques for the deferred amount before delivering the goods to him. The Bank would take from the applicant post –dated cheques for the deferred amount before delivering the goods to him. The applicant should pay the installments over the period of time been agreed. The applicant should pay the installments over the period of time been agreed.

56. (6/4) A case study on Al-Estisnaa Financing Form : If a client has requested from an Islamic Bank to finance building a House. they have agreed on the following terms : If a client has requested from an Islamic Bank to finance building a House. they have agreed on the following terms : the initial cost of building the House 5000 000 S.R. Over-head cost 300 000 S.R. The profit margin 1200 000 S.R. the down-payment 500 000 S.R. the deferred amount will be paid over 3 years (equal installments)

57. According to the previous data and information. the Al- Estisnaa Statement is prepared as follows : El-Estisnaa Statement for Building a House: The profit margin may be distributed over 3 years 1200000 ÷ 3 = 400000 The share of every year would be 400 000 S.R. which is transferred to the income statement. - initial cost of building5 000 000 - over-head costs300 000 Add : profit margin1200 000 Total price6 500 000 Less : Down-payment(500 000) Deferred amount6 000 000 Devided by 3 The amount of each installment2 000 000

58. Chapter Seven الإجـــــارة Nature and case studies on Al-Egara financing form

59. (7/1) Al-Egara meaning : معنى الإجارة It is a kind of leasing for fixed Assets over a specified period of time in reward a defined rate (free) according to Shari'a’s principles. There are two kinds of Al-Egara Normal leasing (Tashgheliya) ( التأجير التشغيلي ) Leasing ending by ownership. ( التأجير المنتهي بالتمليك )

60. (7/2) Shari'a's Principles of El-Egara: الضوابط الشرعية للإجارة They are : the subject of Al-Egara must be owned by the leaser (Al-Maagger). The subject of Egara should be attainable or available. The benefit from leasing should be legitimate (law full). The amount of leasing should be defined to avoid ignorance. The leasing contract should be signed and confirmed by both parties : the leaser and the leaser older.

61. (7/3) Al-Egara procedures as implemented by Islamic Banks [ we will stress on Al-Egara ending by ownership by the leaseholder] In the case of an applicant (client) has the desire to rent a fixed asset from an Islamic Bank according to Egara ending and ownership. this Bank should have acquire and own the asset and lease it to the client. the following procedures should be carried out: proceeding a request to the Bank for financing a fixed asset and lease it. the Bank have to study the request and collect data and information about the applicant and about the fixed asset which will be leased. In the case of accepting the request, the bank would as the applicant to provide some sort of Guarantee to lease the asset.

62. The Bank would pay the fixed asset and should have the right to use or dispose or lease it. The Bank would pay the fixed asset and should have the right to use or dispose or lease it. The Bank would as the applicant to provide a Guarantee as agreed. The Bank would as the applicant to provide a Guarantee as agreed. The leasing contract is signed and confirmed, which implies the following items : The leasing contract is signed and confirmed, which implies the following items : the amount of rent. the amount of rent. the period of leasing the period of leasing the maintenance and insurance terms and costs. the maintenance and insurance terms and costs. A promise of selling the asset at the end of the leasing contract. A promise of selling the asset at the end of the leasing contract. Any other information. Any other information. At the end of leasing contract period, the procedures of selling the asset would be carried out. At the end of leasing contract period, the procedures of selling the asset would be carried out.

63. (7/4) A Case Study on leasing ended by ownership : If a client has requested from an Islamic Bank to sell an asset and lease it for him with a promise to buy it a t the end of lease period. They have agreed on the following terms : the total cost of the asset 500 000 S.R. Annual depreciation installment 250 000 S.R. Annual Maintenance cost 250 000 S.R. Rate of Retain (RR.)10% Net residual value zero

64. According to the previous data and information, the required rent could be calculated as follows : The annual rent consists of the following items Annual retain on investment. 5000000 x 10% 500 000 S.R. Annual maintenance cost 250 000 S.R. The Annual rent 1 000 000 S.R.

65. Chapter Eight القوائم المالية في المصارف الإسلامية Financial Statements of Islamic Banks as reflecting Investments Activities

66. (8/1) Financial Statements meaning : They reflect the results of the various activities of the Islamic Bank over a period of time, and its financial position at the end of this period. They should also reflect the main functions of the Islamic Bank as an investor and its role in economic and social development.

67. (8/2) Financial Statements of Islamic Banks : Financial statements of Islamic Banks include the following : Statement of Financial position. Statement of Income. Statement of Cash Flows. Statement of changes in owner's Equity. Statement of sources and uses of Zakah funds. Statement of sources and uses of Qard Funds. These Statements should be prepared according to Islamic Accounting principles and standards. We well concentrate only on the statement of financial position and the Statement of Income and how the reflect the activities of Islamic investments.

68. ( 8/3) The Statement of Financial Position : It should be prepared to present the financial position of the Islamic Bank at the end of the financial period. It should include the Islamic bank's assets, its liabilities, equity of its unrestricted investment account holders and their equivalent and its owner's equity. Disclosure should be made on the face of the Statement of Financial Position or on the attached note of the investments and investment account holders. A model of the statement of financial position of an Islamic Bank is shown on the following Slide.

69. Fisal Islamic Bank Consolidated Statement of Financed position As at / /

71. 8/4) The Income Statement (8/4) The Income Statement It should reflect the final results of the Islamic Bank's activities over a period of time, such as a year. This statement should present : Revenues, Expenses, gains, Losses, Return on undirected investment accounts and net profit or net loss. A model of the Income Statement of an Islamic Bank is shown on the following Slide

72. Fisal Islamic Bank Income statement For the year ended / / 200 ItemsMonetary unit  Income from investments such as : - Mudaraba - Musharaka - Murabaha - Trading - Salam - Estinna - Egara - Other xxxx xxxxx xxxx xxxxxxx  Less : Return on unrestricted investment accounts عائد حقوق أصحاب الحسابات الاسثتمارية (xxxxxx)  Bank's share of investments income Such as : -Banks income from its own investments -Bank's share of restricted investment income. -Bank's fee as an investment agent -Revenue from banking services -Other Revenues xx xxxx  Total Bank's Income & Revenues  Less: -Administrative expenditures -General expenditures -Depreciation -Provisions Net profit & Loss xxx xxxxx xxxx