2. What is Islamic Microfinance ? Abdul Samad Abdul Samad Shariah Advisor Shariah Advisor The Bank of Khyber The Bank of Khyber 2

3. Why Islamic Banking? The body which is promoted by Hiram sources is bound to hellfire. The body which is promoted by Hiram sources is bound to hellfire. On the Day of Judgment, a person will not be moved from the place where he stand until he is asked about the sources of his income and they way he spent it. On the Day of Judgment, a person will not be moved from the place where he stand until he is asked about the sources of his income and they way he spent it. Purifying of the needs of life (food, drink, clothes house etc) is one of the most important reason for the acceptance of prayers by Allah. Purifying of the needs of life (food, drink, clothes house etc) is one of the most important reason for the acceptance of prayers by Allah. 3

4. Rulings In Islam These 5 primary objectives follow by Shariah can be observed though the Al Ahkam (rulings) upon which Fiqh (Islamic Jurisprudence) rotate around. The rulings are categorized as follows: These 5 primary objectives follow by Shariah can be observed though the Al Ahkam (rulings) upon which Fiqh (Islamic Jurisprudence) rotate around. The rulings are categorized as follows: a. Wajib (obligatory) a. Wajib (obligatory) e. Haram (unlawful) e. Haram (unlawful) b. Mustahab (recommended) (Sunnat) b. Mustahab (recommended) (Sunnat) c. Mubah (permissible) c. Mubah (permissible) d. Makruh (disliked) d. Makruh (disliked) 4

5. Rulings Wajib- An obligatory action or something that shall be performed. Anyone who leave it is liable to gain the punishment of Allah s.w.t. in the Here after as well as a legal punishment in this world. Haram- An unlawful action or the one that shall not be performed and is strictly prohibited. Anyone who engages in it is liable to gain the punishment of Allah s.w.t. in the Here after as well as a legal punishment in this world. Mustahab- A recommended action or something that should be performed. Mubah- A permissible action or something that is neither encouraged nor discouraged. Makruh- A disliked action or something which is abominable and should be avoided but not in strictly prohibitory terms. 5

6. Islam and Shariah Islam Aqidah (Faith & Belief) Shariah (Practices & Activities) IBADAT (Man to God Worship) Muamalat (Man to Man Activities) Political Activities Economic Activities Banking & Financial Activities Social Activities Akhlaq (Morality & Ethics) 6

7. Human Financial Needs Fulfillment of Financial Needs Own CapitalOthers’ Capital Equity Financing Debt Financing 7

8. External (Equity & Debt) Financing Equity Financing Debt Financing Al-Musharakah (Joint Venture Profit Sharing) Uqud al-Muawadhat (Deferred Contracts of Exchange) Al-Mudarabah (Trustee Profit Sharing) Al-Bai’ Bithaman (Mu)Ajil (Deferred Installment Sale) Others Bai’ al-Murabaha (Cost Plus Profit Sale) Al-Ijarah (Leasing) Bai’ al-Salam (Commodity Sale) Bai’ al-Istisna’ (Sale on Order) Equity Market Debt Market 8

9. Most Important Islamic Teaching Related To Business 1. Elimination of Interest (Raba) 2. The prohibition of uncertainty (Gharar) 3. The prohibition of Gambling (Qimar) 4. The precipitation of games of chance (Maser) 5. Honesty and Fair Trade (Ghishsh and Khilabah) 6. Spending in the Good Cause 7. Buy Back 8. Two Mutually Conditional Contract 9. Entitlement to profit depends on liability for risk for risk 9

10. Interest Interest, Usury, or Riba is forbidden in almost all major religions of the world e.g. Interest, Usury, or Riba is forbidden in almost all major religions of the world e.g. Judaism Judaism Christianity Christianity Islam Islam 10

11. Riba in Quran God has permitted trade and forbidden interest….” God has permitted trade and forbidden interest….” (The Cow – Sura Al-Baqara 2:275) (The Cow – Sura Al-Baqara 2:275) O believers, fear Allah, and give up what is still due to your from the interest (usury), IF [indeed] you are true believers[!!!]. If you do not do so, then take O believers, fear Allah, and give up what is still due to your from the interest (usury), IF [indeed] you are true believers[!!!]. If you do not do so, then take Notice of War from Allah and his Messenger. But, if you repent, you can have your principal. But, if you repent, you can have your principal. Neither should you commit injustice, nor should you be subjected to it.” nor should you be subjected to it.” (The Cow – Sura Al-Baqara 2:278-9) (The Cow – Sura Al-Baqara 2:278-9) 11

12. Riba in Quran (Related in context to 2:278) The only reward of those Who make War upon Allah & his Messenger, and strive after corruption in the land, will be that they will be 1. Killed 2. Or, Crucified, 3. Or, have their Hands and Feet on alternate sides Cutoff, 4. Or, will be Expelled out of the land. Such will be their degradation in the world, and Such will be their degradation in the world, and in the hereafter, theirs will be an terrible doom.” in the hereafter, theirs will be an terrible doom.” (Quran: The Table Spread - Al-Maida Chapter 5: Verse 33) 12

13. Riba in Hadith The Prophet cursed the receiver and the payer of interest, the one who records it and the witnesses to the transaction and said: “They are all alike (in guilt).” (Sources: Jabir Ibn Abdullah, Muslim, Tirmidhi, Musnad Ahmed 13

14. RIBA RIBA Riba-Al- Fadl Riba-Al- Nasiyah Sarfi Sood Simple Sood Compound Sood Tijarti Sood Simple Sood Compound Sood 14

15. The prohibition of uncertainty (Gharar) There are strict rules in Islamic finance against transactions that are highly uncertain or may cause any injustice or dishonesty against any of the parties. There are strict rules in Islamic finance against transactions that are highly uncertain or may cause any injustice or dishonesty against any of the parties. The concept of Gharar has been broadly defined by the scholars in two ways. The concept of Gharar has been broadly defined by the scholars in two ways. First, Gharar implies uncertainty. First, Gharar implies uncertainty. Second, it implies dishonesty. Second, it implies dishonesty. 15

16. Classical Examples of Gharar Selling goods that the seller is unable to deliver Selling goods that the seller is unable to deliver Selling known or unknown goods against an unknown price, such as selling the contents of a sealed box Selling known or unknown goods against an unknown price, such as selling the contents of a sealed box Selling goods without proper description, such as shop owner selling clothes with unspecified sizes Selling goods without proper description, such as shop owner selling clothes with unspecified sizes Selling goods without specifying the price, such as selling at the 'going price' Selling goods without specifying the price, such as selling at the 'going price' Making a contract conditional on an unknown event, such as when my friend arrives if the time is not specified Making a contract conditional on an unknown event, such as when my friend arrives if the time is not specified Selling goods on the basis of false description Selling goods on the basis of false description Selling goods without allowing the buyer the properly examine the goods Selling goods without allowing the buyer the properly examine the goods The Prophet (pbuh) prohibited the pebble sale and the Gharar sale. The Prophet (pbuh) prohibited the pebble sale and the Gharar sale. 16

17. Qimar Qimar includes every form of gain or money, the achievement of which depends purely on luck and chance. All Lotteries and Prize schemes based purely on luck come under this prohibition. O ye who believe! Intoxicants and gambling, sacrificing to stones, and (divination by) arrows, are an abomination, of Satan’s handiwork…..: (5:90-91) He who played Qimar has disobeyed Allah and His Messenger.” (Ibn Majah ) 17

18. Honesty and Fair Trade (Ghishsh and Khilabah) Thus Manipulations and Mismanagement like Hoardings Thus Manipulations and Mismanagement like Hoardings Black marketing Black marketing Cheating Cheating Profiteering Profiteering Short weighting Short weighting Hiding the defective quality of the goods are prohibited in Islamic Financial System. Hiding the defective quality of the goods are prohibited in Islamic Financial System. The prophet (PBUH) said: the truthful The prophet (PBUH) said: the truthful honest merchants are with the prophets honest merchants are with the prophets In the Day of Judgment. In the Day of Judgment. 18

19. Spending in the Good Cause The Islamic economic approach is one, which is directed towards the achievement and actualization of justice in human relations. The Islamic economic approach is one, which is directed towards the achievement and actualization of justice in human relations. The result of this effort is falah or success and salvation, and hayah tayyibah or good life in this world and the hereafter. The result of this effort is falah or success and salvation, and hayah tayyibah or good life in this world and the hereafter. So Islamic banks don’t permute to establish any relation with commodities, services and individuals whose moral practices are doubtful So Islamic banks don’t permute to establish any relation with commodities, services and individuals whose moral practices are doubtful Some people spend Allah’s wealth (i.e. Muslim’s Wealth) in an unjust manner, such people will be put in the (Hell) fire on the day of resurrection” (Bukhari and Ahmad) Some people spend Allah’s wealth (i.e. Muslim’s Wealth) in an unjust manner, such people will be put in the (Hell) fire on the day of resurrection” (Bukhari and Ahmad) 19

20. Buy Back The financier sells an asset to the customer on a deferred-payment basis, and then the asset is immediately repurchased by the financier for cash at a discount. The financier sells an asset to the customer on a deferred-payment basis, and then the asset is immediately repurchased by the financier for cash at a discount. 20

21. Two Mutually Conditional Contract Two mutually contingent contract have been prohibited by the holy prohibited by the holy Prophet (pbuh). Two mutually contingent contract have been prohibited by the holy prohibited by the holy Prophet (pbuh). The sale of two item in such a way that one who intends to purchase good is obliged to purchase the other also at any given price. The sale of two item in such a way that one who intends to purchase good is obliged to purchase the other also at any given price. One sale transaction with tow prices. One sale transaction with tow prices. Combining sale and lending in one contract. Combining sale and lending in one contract. 21

22. WHAT IS ISLAMIC BANKING? 22

23. WHAT IS BANK? The name bank derives from the Italian word banco "desk/bench. The name bank derives from the Italian word banco "desk/bench.Italian In practice, the word “Bank” means an institution which borrows money from people and lends money to people for interest or profit and provided In practice, the word “Bank” means an institution which borrows money from people and lends money to people for interest or profit and provided other financial services. other financial services. 23

24. BANKS ENGAGE IN THE FOLLOWINNNG ACTIVITIES. Accepting money Accepting money Processing of payments by way of telegraphic transfer, internet banking, or other means; Processing of payments by way of telegraphic transfer, internet banking, or other means; Issuing bank drafts and bank cheques Issuing bank drafts and bank chequesbank draftsbank chequesbank draftsbank cheques Lending money Lending money Providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures Providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposuresletter of creditperformance bondsletter of creditperformance bonds Safekeeping of documents and other items in safe deposit boxes Safekeeping of documents and other items in safe deposit boxes safe deposit boxes safe deposit boxes 24

25. WHAT IS ISLAMIC BANKING? Islamic banking has been defined as banking in consonance with the ethos and value system of Islam and governed, in addition to the conventional good governance and rick management rules by the principle laid down by Islamic Shariah. Islamic banking has been defined as banking in consonance with the ethos and value system of Islam and governed, in addition to the conventional good governance and rick management rules by the principle laid down by Islamic Shariah. 25

26. Comparison of the Islamic and Conventional systems Conventional Banking Conventional Banks take deposit on interest basis and lend on the basis on interest. A part of interest is paid to the depositors and the remaining interest is left for the bank as its income. If this residual is more than its expenses, it will have Net Income otherwise it will have Net loss. Conventional Banks take deposit on interest basis and lend on the basis on interest. A part of interest is paid to the depositors and the remaining interest is left for the bank as its income. If this residual is more than its expenses, it will have Net Income otherwise it will have Net loss. Islamic Banking Islamic Banking accepts deposits on PLS basis and invest in Shariah based modes. Whatever is the profit, it is shared with depositors. If there is a loss it will also be shared. Islamic Banking accepts deposits on PLS basis and invest in Shariah based modes. Whatever is the profit, it is shared with depositors. If there is a loss it will also be shared. 26

27. OBJECTIVES OF ISLAMIC BANKING Shariah compliant banking, to enable Muslims to do their banking transaction – a Halal way. Shariah compliant banking, to enable Muslims to do their banking transaction – a Halal way. Achieving the goals and objectives of an Islamic economy. Achieving the goals and objectives of an Islamic economy. 27

28. Types of contract Trade Leasing Employment Partnership Paid agency Services against fee Compensatory / Financial Contract CONTRACT Gift Nikah Money lending Guarantee ( Damanat ) Non-paid agency Rights transfer (Hawalah) Non Compensatory / Social Contract 28

29. 29 COMPONENTS OF VALID SALE SALE CONTRACT SUBJECT MATTER PRICEPOSSESSION Offer/Acceptance Buyer/Seller Existence Ownership Possession Valuable Halal Purpose Certain Physical Constructive Instant and absolute Unconditional

30. 30 DERIVATION OF MURABAHA The word “Murabaha” has been derived from the Arabic word “Ribah”, which has literary meaning of profit. The Murabaha can be denoted as “Sale With Profit”.

31. DEFINITION OF MURABAHA Murabaha is a particular kind of sale where Seller expressly mentions the cost it has incurred on purchase of the Asset(s) to be sold and sells it to another person by adding some profit, which is known to Buyer. Murabaha is a particular kind of sale where Seller expressly mentions the cost it has incurred on purchase of the Asset(s) to be sold and sells it to another person by adding some profit, which is known to Buyer. 31

32. 32 Musawamah Musawamah is a general kind of sale in which price of the commodity to be traded is stipulated between seller and the buyer without any reference to the price paid or cost incurred by the former. Thus it is different from Murabaha in respect of pricing formula. Unlike Murabaha, seller in Musawamah is not obliged to reveal his cost. is not obliged to reveal his cost.

33. 33 VARIOUS MODELS OF MURABAHA FINANCE

34. 34 MODEL - I TWO PARTY REALTIONSHIP Bank – Customer Bank – Customer MODEL - II THREE PARTY RELATIONSHIP (Bank-Vendor) and Customer (Bank-Vendor) and Customer MODEL - III THREE PARTY RELATIONSHIP Bank and (Vendor-Customer) Bank and (Vendor-Customer)

35. 35 MODEL - I The simplest possible Model emerges when the transaction involves two parties only, i.e Bank and the Customer. The simplest possible Model emerges when the transaction involves two parties only, i.e Bank and the Customer. The Bank is also vendor and sells the Asset(s) to its Customers on deferred payment basis. The Bank is also vendor and sells the Asset(s) to its Customers on deferred payment basis. From Shari’ah perspective it is an ideal Model and its profits are fully justified because Bank assumes all risks as Vendor/Trader. From Shari’ah perspective it is an ideal Model and its profits are fully justified because Bank assumes all risks as Vendor/Trader.

36. 36 Bank/Vendor Customer 1 2 3 MODEL I – GRAPHICAL PRESENTATION

37. 37 MODEL I - PHASES Phase 1: The customer approaches Bank (Vendor) and identifies Asset(s) and collects relevant information including cost and profit. Phase 2: Bank sells Asset(s) to the Customer, transfer risk and ownership to the Customer at certain Murabaha Price. Phase 3: Customer pays Murabaha Price in lump sum or in installments on agreed dates.

38. 38 MODEL - II In most cases Murabaha Transaction involves a third party (i.e. Vendor) because Bank is not expected to engage in sale of variety of products required for variety of Customers. In most cases Murabaha Transaction involves a third party (i.e. Vendor) because Bank is not expected to engage in sale of variety of products required for variety of Customers. The Bank directly deals with the Vendor and purchases the Asset(s). The Bank directly deals with the Vendor and purchases the Asset(s).

39. 39 MODEL II The Bank sells the purchased Asset(s) to the customer on cost plus basis. The Bank sells the purchased Asset(s) to the customer on cost plus basis. There are two distinct sale contracts at different point of times. First between Bank and Vendor and second between Bank and the Customer. There are two distinct sale contracts at different point of times. First between Bank and Vendor and second between Bank and the Customer.

40. 40 CustomerBank Vendor 1 2 3 4 6 5 MODEL II – GRAPHICAL PRESENTATION

41. 41 MODEL II - PHASES Phase 1: Customer identifies and approaches the Vendor or Supplier of the Asset(s) and collects all relevant information. Phase 2: Customer approaches the Bank for Murabaha Financing and promises to buy the Asset(s). Phase 3: The Bank makes payment to vendor directly.

42. 42 MODEL II – PHASES Phase 4: Vendor delivers the Asset(s) & transfers the ownership of Asset(s) to the Bank. Phase 5: Bank sells the Asset(s) to Customer on cost plus basis and transfers ownership. Phase 6: Customer pays Murabaha Price in lump sum or in installments on agreed dates.

43. 43 MODEL III – BANKING MURABAHA This Murabaha Model is mostly practiced model in Banking now a days and therefore we will look at it in more detail. This Murabaha Model is mostly practiced model in Banking now a days and therefore we will look at it in more detail. We will also look at the documentation required at different stages of the transaction. It is also a three-party structure but it is bit complicated than previous ones. It is also a three-party structure but it is bit complicated than previous ones.

44. 44 MODEL III – BANKING MURABAHA The product of Murabaha that is being used in Islamic Banking as a mode of finance is something different from the Murabaha used in normal trade. The product of Murabaha that is being used in Islamic Banking as a mode of finance is something different from the Murabaha used in normal trade. It is called Murabaha to the Purchase Orderer. It is called Murabaha to the Purchase Orderer.

45. 45 MODEL III – BANKING MURABAHA It is a bunch of contracts completed in steps and ultimately suffices the financial needs of the client. It is a bunch of contracts completed in steps and ultimately suffices the financial needs of the client. THE SEQUENCE OF THEIR EXECUTION IS EXTREMELY IMPORTANT TO MAKE THE TRANSACTION SHARIA’H COMPLIANT. THE SEQUENCE OF THEIR EXECUTION IS EXTREMELY IMPORTANT TO MAKE THE TRANSACTION SHARIA’H COMPLIANT.

46. 46 Bank Customer Vendor 4 3 MODEL III – GRAPHICAL PRESENTAION 2 1 5 5 6 OfferAcceptance 7

47. 47 PHASE I – PROMISE TO PURCHASE AND SELL The Customer approaches the Bank for Murabaha Finance and promises to purchase the Asset(s) from the Bank which, the Customer will purchase as an Agent of the Bank. The Customer approaches the Bank for Murabaha Finance and promises to purchase the Asset(s) from the Bank which, the Customer will purchase as an Agent of the Bank. Master Murabaha Finance Agreement (MMFA) shall be signed by the Bank and the Customer at this stage. This is basically a Memorandum of Understanding between two parties. Master Murabaha Finance Agreement (MMFA) shall be signed by the Bank and the Customer at this stage. This is basically a Memorandum of Understanding between two parties.

48. 48 PHASE II – APPOINTMENT OF AGENT In the absence of expertise required to purchase particular kind of Asset(s), the Bank appoints Customer as its Agent to buy Asset(s) on its behalf In the absence of expertise required to purchase particular kind of Asset(s), the Bank appoints Customer as its Agent to buy Asset(s) on its behalf Types of Agency Agreement Types of Agency Agreement Global Agency Specific Agency ON ASSET BASIS ON TIME BASIS Limited Period Open Ended

49. 49 PHASE III & IV – PURCHAHSE OF ASSETS BY AGENT The Customer identifies the Vendor, selects the Asset(s) on behalf of the Bank and advice its particulars, including the Vendor’s name and purchase price to the Bank. The Customer identifies the Vendor, selects the Asset(s) on behalf of the Bank and advice its particulars, including the Vendor’s name and purchase price to the Bank. If the supplier is nominated by the Customer itself, guarantee for good performance can be demanded from If the supplier is nominated by the Customer itself, guarantee for good performance can be demanded from the Customer. the Customer.

50. 50 PHASE III & IV – PURCHAHSE OF ASSETS BY AGENT The Customer takes possession of the Asset(s) as an Agent of the Bank. The Customer takes possession of the Asset(s) as an Agent of the Bank. It is the obligation of the Customer(Agent) to ensure, at this stage, that Asset(s) supplied is in accordance with the given specifications. It is the obligation of the Customer(Agent) to ensure, at this stage, that Asset(s) supplied is in accordance with the given specifications. To ensure that a fresh Asset(s) are purchased by the Agent, Bank’s staff should verify actual purchase of Asset(s). To ensure that a fresh Asset(s) are purchased by the Agent, Bank’s staff should verify actual purchase of Asset(s).

51. 51 PHASE III & IV–DOCUMENTATION DECLARATION FROM CUSTOMER (AGENT) The Customer (Agent) will inform the Bank, through this document, that it has taken the possession of Asset(s) on behalf of the Bank. The Customer (Agent) will inform the Bank, through this document, that it has taken the possession of Asset(s) on behalf of the Bank. This Transactional Document shall be an integral part of Master Murabaha Financing Agreement (MMFA). This Transactional Document shall be an integral part of Master Murabaha Financing Agreement (MMFA). This declaration must contain the statement that Customer has inspected the Asset(s) to ensure that its appropriateness and suitability to the customer. This declaration must contain the statement that Customer has inspected the Asset(s) to ensure that its appropriateness and suitability to the customer.

52. Steps Of Banking Murabaha MOU  Order Form  Agency Agreement  Purchase  Payment of Purchase Price‌  Possession  Offer and Acceptance (Declaration)  Payment of Murabaha Price 52

53. Short/ Medium Term Financing (Murabaha) Supplier Customer Bank 3. Customer buys the goods as Bank’s agent. Cost: $100 1. Execution of Murabaha Agreement. 4. Disbursement of the Facility. Facility Amount: $100 2. Bank appoints the Customer as its agent to buy the goods. 5. Under the Murabaha Agreement the Bank will immediately sell the goods at $110 (cost plus a profit margin) payable on a deferred payment terms. Sale Features: Fixed rate financing only Uses: Inventory Financing Financing commodity purchase Tenor: 12-18 months Risks: Credit Risk 53

54. SALAM 54

55. INTRODUCTION There are three basic conditions for validity of a sale in Shariah : There are three basic conditions for validity of a sale in Shariah : The purchased commodity must be existing; The purchased commodity must be existing; The seller should have acquired the ownership of that commodity; and The seller should have acquired the ownership of that commodity; and The commodity must be in the physical or constructive possession of the seller. The commodity must be in the physical or constructive possession of the seller. There are only two exceptions to this principle in Shariah: There are only two exceptions to this principle in Shariah: Salam (which is also called as Salaf); and Salam (which is also called as Salaf); and Istisna. Istisna. 55

56. DEFINITION The seller undertakes to supply specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. The seller undertakes to supply specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. The price is paid immediately in cash but the supply of purchased goods is deferred to a fixed date. The price is paid immediately in cash but the supply of purchased goods is deferred to a fixed date. 56

57. FROM WHERE SALAM STARTED Before prohibition of interest farmers used to get interest based loans for growing crops and harvesting. After prohibition of interest, they were allowed to do Salam transactions. This helped them to get money in advance for their needs. Before prohibition of interest farmers used to get interest based loans for growing crops and harvesting. After prohibition of interest, they were allowed to do Salam transactions. This helped them to get money in advance for their needs. During the days of our prophet (SAAWS), the merchants going with caravans used to get interest based loans for purchasing the commodities. After prohibition of interest, they were allowed to do Salam. During the days of our prophet (SAAWS), the merchants going with caravans used to get interest based loans for purchasing the commodities. After prohibition of interest, they were allowed to do Salam. 57

58. BENEFIT TO THE SELLER The seller gets in advance the money he wants in exchange of his obligation to deliver the commodity later. The seller gets in advance the money he wants in exchange of his obligation to deliver the commodity later. He benefits from the Salam sale by covering his financial needs whether these are personal expenses or expenses for productive or trading activity. He benefits from the Salam sale by covering his financial needs whether these are personal expenses or expenses for productive or trading activity. 58

59. BENEFIT TO THE BUYER The purchaser or the Bank gets the commodity it is planning to trade on the time it decides. The purchaser or the Bank gets the commodity it is planning to trade on the time it decides. The Bank will also benefit from the cheap prices because usually the Salam sale is cheaper than the cash sale. This way the Bank will also be secured against the fluctuations of price. The Bank will also benefit from the cheap prices because usually the Salam sale is cheaper than the cash sale. This way the Bank will also be secured against the fluctuations of price. 59

60. PARALLEL SALAM The Bank being the purchaser of Salam commodity can further sell on Parallel Salam in a similar manner as it has previously purchased on first Salam without making one contract dependent on the other. However, in such case, the date of delivery shall not be earlier than the date of receipt of such commodity. The Bank being the purchaser of Salam commodity can further sell on Parallel Salam in a similar manner as it has previously purchased on first Salam without making one contract dependent on the other. However, in such case, the date of delivery shall not be earlier than the date of receipt of such commodity. The Bank also has the option of waiting to receive the commodity and then sell it for cash or deferred payment. The Bank also has the option of waiting to receive the commodity and then sell it for cash or deferred payment. 60

61. FLOW OF SALAM TRANSACTION SALAM PURCHASER SALAM SELLER Delivery of Commodity Salam on Credit Salam Sale ISLAMIC BANK Purchaser Seller 2 1 3 61

62. SALAM BASED FINANCIAL PRODUCTS Agriculture financing Agriculture financing Working Capital Financing Working Capital Financing Commercial and industrial financing Commercial and industrial financing Export financing Export financing Operations and capital cost financing Operations and capital cost financing 62

63. DIFFERENCE BETWEEN SALAM AND MURABAHA SalamMurabaha In Salam, delivery of purchased goods is deferred, price is paid on spot. In Murabaha, purchased goods are delivered at spot, price may be either on spot or deferred. In Salam price has to be paid in full in advance. In Murabaha price may be paid on spot or deferred. Salam is not executed in the particular commodity but commodity is specified by specifications. Murabaha is executed in particular commodity. Salam cannot be effected in respect of things, which must be delivered at spot. e.g. Salam between wheat and barley. Murabaha can be executed in those things, subject to the conditions of hand to hand transfer and equal quantities. 63

64. BASIC RULES 64

65. SPECIFICATION OF COMMODITY The commodity (Al-Muslam fihi) should be known. It must be monitored by specifications to the maximum possible degree, only negligible variation is tolerated. The commodity (Al-Muslam fihi) should be known. It must be monitored by specifications to the maximum possible degree, only negligible variation is tolerated. It must also be ensured that the commodity is possible to be delivered when it is due. It must also be ensured that the commodity is possible to be delivered when it is due. 65

66. SPECIFICATION OF COMMODITY Only those goods can be sold through Salam contract in which the quality and quantity can be exactly specified. In other words it can be done only in such items which can be weighed, measured or counted. Only those goods can be sold through Salam contract in which the quality and quantity can be exactly specified. In other words it can be done only in such items which can be weighed, measured or counted. Salam can only be carried out in the items in which variations in numbers make no difference. Salam can only be carried out in the items in which variations in numbers make no difference. 66

67. DELIVERY CONDITIONS Due date of delivery must be agreed at the commencement of the contract. Due date of delivery must be agreed at the commencement of the contract. The place of delivery should also be known. If it is not known, the place where the contract took place shall be considered to be the place of delivery, unless it is impracticable. In such a case, the place of delivery shall be decided according to customary practices. The place of delivery should also be known. If it is not known, the place where the contract took place shall be considered to be the place of delivery, unless it is impracticable. In such a case, the place of delivery shall be decided according to customary practices. 67

68. DELIVERY CONDITIONS Before delivery, goods will remain at the risk of seller. Before delivery, goods will remain at the risk of seller. After delivery, risk will be transferred to the purchaser. After delivery, risk will be transferred to the purchaser. Possession of goods can be physical or constructive. Possession of goods can be physical or constructive. Transferring of risk and authority of use and utilization / consumption are the basic ingredients of constructive possession. Transferring of risk and authority of use and utilization / consumption are the basic ingredients of constructive possession. 68

69. SALE BEFORE POSSESSION Commodity purchased under Salam can not be sold earlier than taking possession thereof. However, a very small school of though is of the view that this restriction should apply to the food commodities only. Commodity purchased under Salam can not be sold earlier than taking possession thereof. However, a very small school of though is of the view that this restriction should apply to the food commodities only. These commodities can, however, be sold under parallel Salam or may be promised to be sold at a future date. These commodities can, however, be sold under parallel Salam or may be promised to be sold at a future date. 69

70. PARALLEL SALAM There must be two separate and independent contracts, one where the Bank acts as buyer and other in which it is a seller. There must be two separate and independent contracts, one where the Bank acts as buyer and other in which it is a seller. The two contracts cannot be tied up and performance of one should not be contingent on other. The two contracts cannot be tied up and performance of one should not be contingent on other. 70

71. BUY BACK Salam arrangement cannot be used as a buy back facility where the seller in the first contract is also the purchaser in the second. Salam arrangement cannot be used as a buy back facility where the seller in the first contract is also the purchaser in the second. Even if the purchaser in the second contract is a separate legal entity but owned by the seller in the first contract, it would not tantamount to a valid Parallel Salam agreement. Even if the purchaser in the second contract is a separate legal entity but owned by the seller in the first contract, it would not tantamount to a valid Parallel Salam agreement. 71

72. An Ijara is a lease purchase contract in which a financial institution purchases capital equipment or property and leases it to an enterprise. The financial institution may either rent the equipment or receive a share of the profits earned through its use. An Ijara is a lease purchase contract in which a financial institution purchases capital equipment or property and leases it to an enterprise. The financial institution may either rent the equipment or receive a share of the profits earned through its use. Ijara wa-Iqtina is the same as Ijara except that the lessees can acquire ownership of the asset by making installment payments. The responsibilities of the various parties to an Ijara wa-Iqtina contract are given below: Ijara wa-Iqtina is the same as Ijara except that the lessees can acquire ownership of the asset by making installment payments. The responsibilities of the various parties to an Ijara wa-Iqtina contract are given below: The bank buys the assets from the vendor The bank buys the assets from the vendor The bank then leases the asset to the customer The bank then leases the asset to the customer The bank collects periodic rentals The bank collects periodic rentals The title of the asset remains with the bank under an operating Ijara. The title of the asset remains with the bank under an operating Ijara. Title passes to the customer under an Ijara muntahia bittamleek, either gradually over the period of the contract or at the end. Title passes to the customer under an Ijara muntahia bittamleek, either gradually over the period of the contract or at the end. Ijarah- Concepts 72

73. Procedure of Banking Ijarah Undertaking to Ijarah  Agency Agreement Purchase Payment of Purchase Price  Lease Agreement 73

74. Finance Lease (Ijarah) Manufacturer / Supplier Customer Bank 1. Customer buys the property as Bank’s agent. Cost: $100 2. Execution of Ijara Agreement 3. Disbursement of the Facility. Facility Amount: $100 4. Bank appoints the Customer as its agent to buy the property. 5. Under the Ijara Agreement the Bank will lease the property immediately. Lease Features: Floating rate financing possible Can be used for refinancing Uses: Financing Capital Expenditure Financing Big Ticket items like Aircraft, VLCCs, LNG Carriers, etc. Tenor: 5-7 years Risks: Credit Risk Performance Risk Cost Overruns Ownership Risk 74

75. Ijara is used to raise finance against an asset XYZ Real Estate Deal : Sale/leaseback of existing properties to fund construction of new buildings Client sells its existing asset to the Bank. The sale can be a beneficial transfer of ownership or actual legal title transfer Bank leases the asset back to the client for the period of financing, against periodic lease rentals. The rentals will comprise of only profit (during grace period) and both profit and principal payments (during amortisation period). The profit can be linked to a floating rate index, such as Libor. At the end of the term, Bank transfers the asset back to the client either as a gift or at a nominal sum or at the termination price (if bullet repayment). During the lease period, Bank is liable for insurance and major maintenance as owner of the property. However, Bank can appoint the client as its agent to perform these tasks Ijarah…illustrative deal 75

76. MUZARA'A Muzara’a is partnership in crops in which one party presents land to another for cultivation and maintenance in consideration for a common defined share in the crop. Muzara’a is partnership in crops in which one party presents land to another for cultivation and maintenance in consideration for a common defined share in the crop. 76

77. MUZARA'A It can take several forms. It can take several forms. 1. For instance, contract based arrangement can specify that land and other physical factors of production for the enterprise could come from one party while labor could be provided by the other party. 2. Incidence of a three-party in which the first party provides land, the second provides a combination of required physical inputs, and the third provides labor. 77

78. MUZARA'A The location and characteristics of the land to be cultivated under Muzara'a must be clearly identified and submitted to the party that is to implement the operation. The location and characteristics of the land to be cultivated under Muzara'a must be clearly identified and submitted to the party that is to implement the operation. The production goal of the enterprise must be defined in terms of end products i.e. crops or live stock to be grown. The production goal of the enterprise must be defined in terms of end products i.e. crops or live stock to be grown. The period in which the Muzara'a contract is to be effective must be defined. The period in which the Muzara'a contract is to be effective must be defined. 78

79. MUGHARASA Mugharasa (agricultural) partnership is a partnership in which one party presents a treeless piece of land to another to plant trees on it on the condition that they share the trees and fruits in accordance with a defined percentage. Mugharasa (agricultural) partnership is a partnership in which one party presents a treeless piece of land to another to plant trees on it on the condition that they share the trees and fruits in accordance with a defined percentage. 79

80. MUGHARASA The functions and obligations of each individual or party in the contract must be clearly and unambiguously defined. The functions and obligations of each individual or party in the contract must be clearly and unambiguously defined. The location and characteristics of the land to be cultivated under Mugharasa must be clearly identified. The location and characteristics of the land to be cultivated under Mugharasa must be clearly identified. The production goal of the arrangement must be defined in terms of end products. The production goal of the arrangement must be defined in terms of end products. The period in which the Mugharasa contract is to be effective must be defined. The period in which the Mugharasa contract is to be effective must be defined. Method of distribution of output must be stated clearly in the contract. Method of distribution of output must be stated clearly in the contract. 80

81. Summary of the Presentation Islamic Banking is a system where deposits collected on profit & loss sharing basis are invested in profitable Projects using any Shariah based mode and their net income/loss is shared between the depositor and the bank. Islamic Banking is a system where deposits collected on profit & loss sharing basis are invested in profitable Projects using any Shariah based mode and their net income/loss is shared between the depositor and the bank. It has three parts. It has three parts. Collection of deposits on pls basis. Collection of deposits on pls basis. Investing deposits in profitable ventures using shariah based modes. Investing deposits in profitable ventures using shariah based modes. Distributing profit and loss among depositors and the bank. Distributing profit and loss among depositors and the bank. 81

82. (From Economists Point Of View) It is the pooling of cash resources (means) of the economy and diverting it to projects which have the greatest positive impact on the GNP and distributing the benefits of increased GNP among the segments of the economy. It is the pooling of cash resources (means) of the economy and diverting it to projects which have the greatest positive impact on the GNP and distributing the benefits of increased GNP among the segments of the economy. It has three parts. It has three parts. Pooling of cash resources. Pooling of cash resources. Diverting it to projects which have positive impact on GNP Diverting it to projects which have positive impact on GNP Distributing GNP benefits to resource providers Distributing GNP benefits to resource providers Benefiting the Different segments of the economy through increased GNP Benefiting the Different segments of the economy through increased GNP 82

83. Funds supply – summary of possible ways in Islam 83

84. ISLAMIC BANKING MODEL ISLAMIC BANKING MODEL Current Dep osit SBP Operational Expenses Income/L oss from Invest ment Income from non fund busines s POOL OF FUND S PLS Deposito rs Bank Equity Reserves Distributabl e Income Equity Depositors PLS Idle fund Investmen t Current Depo sit 84

85. Comparison of the Islamic and Conventional systems Conventional Banking Equation of Banks Failure Equation of Banks Failure Admn Exp + Interest Exp > Total Income + Reserves Equation of Banking System Failure Equation of Banking System Failure Admn Exp + Interest Exp > Total Income + Reserves + Equity Islamic Banking Equation of Banks Failure Equation of Banks Failure Operational Losses > Reserves + PLS Deposits Equation of Banking System Failure Equation of Banking System Failure Operational Losses > Reserves + PLS Deposits + Equity Operational Losses Operational Losses Operational Losses = Income (Losses) from Invest ± Admn Exp 85

86. Thank You 86