CHAPTER # 6 ISLAMIC MODES OF FINANCING

1. CHAPTER# 6ISLAMIC MODES OF FINANCING BY KOKAB MANZOOR

2. CHAPTER`s OUTLINES • SHARAKAT( MUSHARAKAH) • MODARABA • BAI-SALAM • BAI-MURABAHA • BAI-MUAJJAL • IJARA

3. Introduction and Importance • Business require large financial resources to carry out production and related business operations. Such large scale monetary resources are sometimes beyond their own capacity. To obtain them it is inevitable to seek the cooperation of other individuals or organizations.

4. Cont`d… • Islamic economics provides several modes to secure such financial resources of which the following are particularly noteworthy; 1 Sharakat( Musharakah) 2 Modarbah 3 Bai-Salam 4 Bai-Murabaha 5 Bai-Muajjal 6 Ijarah

5. 1 Musharakah • Shirkah (partnership): It literally means sharing. The sharing may be of money, labor, or anything else. • Shirkah (partnership): is defined as a contract between partners on both capital and profit.

6. 1 Musharakah • Musharakah(partnership) is actually participation of two or more persons in a certain business with defined amount of capital invested according to a contract for jointly carrying out a business and for sharing profit and loss in specified proportions

7. Kinds of Partnerships 1 Shirkat ul-milk (partnership of ownership): It means joint ownership of two or more persons in a particular property. • This kind of Shirkah may come into existence in two different ways. • By the partners choice: • Without the partners choice:

8. Kinds of Partnerships 2 Shirakal al-aqd (partnership of a contract): which means a partnership effect by a mutual contract. This kind of Shirkah exists in three types:

9. Shirakal al-aqd • Shirkalul-amwal (partnership in trade): • Shirkatul-A`mal (partnership in services): • Shirkalul-wujooh (partnership in goodwill):

10. The proportion of profit to be distributed between the partners must be agreed upon at the time of the effecting of the contract. The ratio of profit for each partner must be determined in proportion to the actual profit accrued to the business, and not in proportion to the capital invested by him. Basic Rules of MusharakahA) Distribution of profit

11. B ) Sharing of Loss In the case of loss each partner shall suffer the loss exactly according to the ratio of his investment. If a partner has invested 40% of the capital, he must suffer 40% of the loss, not more, not less.

12. C ) The Nature of the Capital Most of the Muslim jurists are of the opinion that the capital of a joint venture must be in monetary form, but in some cases part of it can be contributed in commodities.

13. 2 Mudarabah • The word Modarbah comes from the Arabic root (Dharabahfi al ard), which means going and working to obtain livelihood. • The first partner is called “Mudarib,” (the manager) and the second partner is called “Rabb ul-mal.” (the one who invest money)

14. Mudharabah….. • Under mudharabah, one party provides capital and the other utilizes it for business purposes under the agreement that profit from the business will be shared according to a specified proportion

15. Types of Mudarabah • Al-Mudarabahal-muqayyadah (restricted Modarbah): • Al Mudarabah al mutlaqah (unrestricted Modarbah):

16. Distribution of the Profit It is necessary for the validity of Mudarabah that the parties agree right at the beginning on a definite proportion of the actual profit to which each one of them is entitled. They can share the profit in equal proportions, and they can also allocate different proportions for the Rabb-ul-mal and the Mudarib.

17. Termination of Mudarabah • The Mudarabah contract can be terminated at any time by either of the two parties. The only condition is for notice to be given to the other party. • If all the assets of the Mudarabah are in cash form at the time of termination, and some profit has been earned on the principal amount, it shall be distributed between the parties according to the agreed ratio.

18. Cont`d… • If the assets of the Mudarabah are not in cash form, the Mudarib shall be given an opportunity to sell and liquidate them, so that the actual profit may be determined.

19. 3 BAI-SALAM DEFINITION • Seller agrees to supply specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. • Price is in cash but the supply of goods is deferred.

20. Purpose of Salam • To meet the needs of small farmers who need money to grow their crops and to feed their family up to the time of harvest. • To meet the need of working capital. • To meet the needs of liquidity problem. • To meet the need of traders for import and export business.

21. Benefits • Salam is beneficial to the seller, because he receives the price in advance, and it is beneficial to the buyer also, because normally the price in salam used to be lower then the price in spot sales.

22. 4 Bai Murabaha • Murabaha is a particular kind of sale where the seller discloses its cost and profit charged thereon. • The price in this sale can be both on spot and deferred.

23. Murabaha • Involve purchase of commodities from third parties (through a bank as an agent of the fund) and reselling the same to the bank on deferred basis • Profit between the bank and the fund is comparable to returns from money market instruments

24. Difference b/w Salam & Murabaha Salam Murabaha purchased goods are delivered at spot, price may be either on spot or differed. price may be on spot or differed • purchased goods are defferred, price is paid on spot. • In Salam price has to be paid in full in advance

25. Difference b/w Salam & Murabaha Salam Murabaha It is executed in particular commodity. It can be executed in those things. • It can not be executed in the particular commodity but commodity is specified by specifications. • It cannot be effected in respect of things, which must be delivered at spot. e.g Salam b/w wheat barley .

26. 5 Ijarah (hire) Definition of Aqd al-Ijarah: • It is a contract on using the benefits or services in return for compensation.

27. Ijarah (hire) The term Ijarah is used for two different situations: • It means to employ the services of a person on wages given to him as a consideration for his hired services. • The employer is called Mustajir, the employee is called Ajir

28. CONT`D.. • Relates to the usufructs (right to use of a property) of assets and properties • Ijarah in this sense means to transfer the usufruct of a particular property to another person in exchange for a rent claimed from him. 

29. Conditions of Ijarah (Islamic Leasing) • The commencement of lease • Rent should be charged after the delivery of the leased asset to the lessee • Expenses consequent to ownership to the lessor • Lessee as Ameen • Penalty for late payment of Rent • Termination of Lease

30. 6 Bai Mu’ajjal(Sale on Deferred Payment Basis) • A sale in which the parties agree that the payment of price shall be deferred.

31. Shariah orders for Bai Muajjal • Item on sale must be owned in physical by seller. • Seller has right to ask for mortgage • Seller has right to take profit of that sold item if he bears the risk. • Possession of sold item must be transferred to purchaser at once. • The deferred price may be more than cash but it will be fixed at the time of sale.

32. Cont`d… • If the commodity is sold on installments, the seller may put a condition on the buyer that if he fails to pay any installment on its due date, the remaining installments will become due immediately. • In order to secure the payment of price the seller may ask the buyer to for a any kind of security. E.g mortgage or a lien etc.

33. Cont`d… • The buyer can also be asked to sign a promissory note or a bill of exchange but the note or the bill cannot be sold to a third party at a price different from its face value.

34. Thanks n bby `