1

READ IN THE NAME OF

ALMIGHTY ALLAH
WHO IS THE MOST BENEFICIAL & MERCIFUL
All praise is due to the Almighty Allah Blessings & Peace be upon

Holy Messenger of Allah

The Leader of the Magnificent Honorable

Essentials
For

Islamic Finance
Yousuf Ibnul Hasan
PROGRAM CONSULTANT ISLAMIC BANKING & APPLIED FINANCE
This document prepared through extensive research carried out since 1986. It is full of meaning and comprehensive information on the economic system guided by Almighty Allah for the mankind and for the better humanity. I dedicate this endeavor to my

IQRA University.
This is Islamic Economic & finance I am acquainted with in 30 years and still searching its great extent and new dimensions.

Essential of Islamic Finance

Course Outline
1. 2. 3. 4. 5. 6. 7. 8. 9. Economic System in Islam, Concept & Introduction Islamic Finance Introduction & Background Concept of Riba & Other Prohibited Activities Saving Conduct Investment Participation Modaraba Morabaha Musharaka

10. Ijarah 11. Musaqa Financing (Irrigation Financing) 12. Mussaja Financing (Agricultural Financing) 13. Havana Financing (Animal Farming) 14. Sukuk A Financial Instrument 15. Terms use in Islamic Financial Systems 16. 17. 18. 19. Numerical: Profit & Loss, Costing, Sharing, Financing Techniques Report Quiz Assignment

Assignment/Quiz/ Class Performance Mid Term Final Exam Total

Marks Distribution
35% 25% 40% 100%

Chapter 1 Economics System in Islam

What is Islamic Economics? What are the principles upon which Islamic Economy, its monetary and financial systems function? Islamic Economics is a system that defines the available resources blessed by Almighty Allah to the mankind. How these resources are utilized and distributed by man keeping in it the social justice and seeking best of these in participation and cooperation by applying the knowledge, experience, ability and efforts through the power of pen and book granted by Almighty Allah to men in confirmation of Unique among Creations and Custodian to all the resources that Almighty Allah owns it alone and absolute.

Islamic economics is as old as Islam itself. Islam is not a religion. It is a complete political, social, financial & economic system for
Islamic & non Islamic communities. Islam is Deen. It totally differs to the religions because of the definition, depth and details and interpreted as a Lifestyle. Its principles are comprehensively guided in Holy Quran, explained in Hadiath and practice by Holy Prophet Muhammad May Peace Be upon Him as Shariah

Almighty Allah identified The Aims, Objectives, Purpose, Way and Means of Islamic
Economics READ (IQRA) in the name of your Lord, who has created you with the clot of frozen blood and taught you with the power of pen . The word READ opens the chapter of an Islamic Economics; in RATIONAL, EFFORTS ,APPLICATION, DISCRIPTIVENESS.

20th Century Economists define Islamic Economics

Hasan-uz-Zaman Islamic economics is the knowledge and application of injunctions and rules of the Shari'ah that prevent injustice in the acquisition and disposal of material resources in order to provide satisfaction to human beings and enable them to perform their obligations to Allah and the society. M. Akram Khan Islamic economics aims at the study of human recovery achieved by organizing the

4 resources of earth on the basis of cooperation and participation. Dr. Nejatullah Siddiqi Role of Shariah define belief in justice and freedom, cooperation and sharing which are the fundamentals to Islamic economic philosophy within the total Islamic system. Key to Islamic economics philosophy lies in man's relationship with Allah, his universe and his people. The other human beings are the nature and purpose of man's life on earth.

The concept of economics

It was established on the day Adam who was senseless to his needs and desires at the time he was created, disobeyed Allah Almighty on temptation of Iblees. Adams act of disobedience created the principles of economics that revolve around Theory of Need, Want and Desire that lead to Act, Acquire and Accept. Prophet Adam (May Peace Be Upon Him) was sent to earth to develop mankind with a system of life that placed the Natural Economics as. Any activity that has a commercial, economical and financial purpose with the priority of social benefit to mankind is classified as Islamic Economics and the system that has basis on this classification leads to socio- economic development and not just the economic development.

The bases of Islamic economic

Resources are unlimited and efforts are limited. Needs and wants does not effect on the supply or resources. Availability of resources is dependent on efforts that develop the affordability in satisfying the needs. Nations were putting their efforts in achieving knowledge and seeking their rights in economic system are the leaders of economic growth. Nation that merges the economics growth with socio development Develop Communities For the people, By the people, and Of the people Socio Economics Development converts Peoples into Nation.

Islamic Economic regards three factors of productions. Man, Money and Commodity
MAN

COMMODITY

MONEY

These three basic factors bring other factors of productions keeping themselves as guide to socio economic system. Economic activity travels in triangle and in clock wise, The point of origin is the point of destination. Man is the source behind all activities that leads towards Islamic Economics System and its abilities, capabilities and control over is the key of efficiency and success that develop healthy communities.

Role of Man & Money in Islamic Economics

1. 2. 3. 4. The financial matters in the human life play a vital role These identify principles of finance including earnings, income, and distribution of wealth & utilization of the same. Matters pertaining to money must be fair and transparent and useful for developing socio-economic life of the community. Monopoly of a group or an individual who keeps a control on world monetary policies and gets most out of these resources by blocking wealth, crossing their jurisdictions to be eliminated. It does not impose limits on amount of wealth that an individual can acquire. It guides in maintaining of wealth in a proper form of distribution and incentives for work and efforts. It shows opposition & defends against misuse of exploitation in getting hold of wealth through unfair means. It clearly denies "free" market of Capitalism, which has led to the situation of survival of a part of the society. It emphasizes public revenue from natural resources is used to secure the needs of community and not to fill pockets of casino owners. It encourages state to provide public, essential resources to cover needs of every individual and family. It outlaw hoarding of wealth and eliminate copyright or patent laws that would open an avenue for potential monopoly to develop. It protects the ownership of businesses and companies by restricting it only to those who contributes both capital or effort It effectively puts a seal on such concepts as "corporate takeover" from ever becoming a reality. It classifies wealth in a systematic way to protect rights of individuals to access wealth. It protects the society and secures the needs of the people. It mandates vital and natural resources as public property while allowing for unlimited access to luxury items. It protects society by defining certain needs as a prohibited needs. It disregards corrupt man-made systems and protects honour, rights of woman, minor and orphans. It bans all forms of prostitution, pornography or any activities that exploit charms and physical attractiveness of women.

5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.

6 20. It prohibits alcohol, gambling, spiral of corruption, social turmoil and moral destruction

Relationship of Allah and Man

Tawhid (Oneness of Allah) Total commitment to the will of Allah by submission & the mission to mould human life in accordance with Allahs will.

4 Great ways of excepting Tawhid

1st Look back and thank Allah. 2nd Look forward and trust Allah 3rd Look Around and believe in Allah 4th Look within yourself and find Allah

Life on earth
It is a test and its purpose is to prove successfully by doing Allahs willed. For man entire universe with all the natural resources and powers is opens to exploitation, which Allah owns it alone. Provisions are available to man being the nature of trust on men.

Islam & Faith

Almighty Allah is absolute and Prophet Mohammad judge and Holy Quran is the code of conduct.
Peace be upon Him,

was an executive

Islam organizes
Mans life in its aspect of political, social, commercial, financial, legal, commercial, monetary or economy.

Islamic Economics is an Application of Deen (Principles of Lifestyle).

Through the Theory The Holy Quran, By the explanation of theory Hadiath and Practice and Implementation Shariah

Islamic economics is an independent system,

1. 2. 3. 4. It enjoys a separate identity. It is a self-contained system with its own economic policy, It covers interests at Private and Public as well as Material or Spiritual. It has given a complete system of lifestyle, Earning, Expenditure, Businesses, and Relationship with Legal Framework. 5. It emphasizes for all bases on Social Justice, Equality, Unity, love, Cooperation, Sharing, Transparencies in all affairs and respect.

Islamic Economics System guards

1. 2. 3. 4. 5. 1. 2. 3. 4. Rights of minorities and non-Muslims in the Islamic state. Rights of Women and Orphans Rights of employees Rights of Lenders and Borrowers Rights of everyone without Race-Religion-Language-Color or Sect All wealth belongs to Almighty Allah Man is the trustee of the wealth Hoarding of wealth is prohibited Wealth must be in circulation at all time

Islamic Economics system is based on four principles

Three parameters for day-to-day affairs and problems.

IJMA (Gathering), QIYAS (Discussion) AMAL (Act)

What Islamic Economic considers

1. 2. 3. 4. 5. Islamic Economics is specifically considering distribution as an economic problem. It differ application to capitalist & communist systems for production. It differentiates between basic needs and luxuries. It does not accept the concept of effective scarcity of resources. It does not accept concept of inflation

The Holy Quran identifies the resources are sufficient, unlimited and a number of qualities to fulfill the basic needs like food, clothing and shelter for over fifty billion human beings at all time and conventional economics misguides this reality with starvation, poverty, & economic backwardness because of misdistribution originated from man-made laws and systems.

Basic Principles of Islamic Economics

1. 2. 3. The principle of adaptable ownership The principle of economic freedom within a defined limit The principle of social justice. The individual ownership. The state ownership. The public ownership.

Islamic law permit three types of ownership,

Economic Freedom within a Defined Limit

1. Islamic law prohibits all such social and economic activities that differ to the teachings of Islam and principles and values approved by Islam. Such social and economical activities fall under the category of Riba 2. It defines the principles on which ruler sworn in for supervision of general activities

8 intervenes in any anti Islamic economic activities. 3. It guides State to protect and safeguard public interest through the control on individual freedom in the illegal and non-permitted actions they involve due to which the economic activity of the community and society suffer. 4. Men have no right to possess unlimited wealth and desire to obtain wealth by any means and way he may choose. 5. Right is given to every member of the society by appointing each one as a guardian of the public trust and the ownership is limited for the public welfare and for the betterment of mankind.

Social Justice in Islamic Economics

1. To give-and-take responsibility 2. To keep social balance 3. Prohibits growth in differences few live in extra luxury and rest were deprived of basic necessities of life and forced to live a life of misery, hunger, without shelter, illness and as neglected class of the society.

Tawhid (monotheism)
Definite acceptance of Almighty Allahs relationship with man and mans believes in supremacy of Almighty Allah with clear vision on Day of Judgment. The accomplishment of man depends on the belief and obeying the teachings of Islam and bringing healthy and peaceful community by synchronizing between morality and the material characteristic of life. Emphasize on independent legal judgment, effort and ability to figure out rules from sources that carry out social justice in accordance with Islamic Economics. Economical and social problems can be solved only through Ijtehad, particularly issues in regard to which, no definite injunction is available in the Quran, or Sunnah.

Ijtehad:

Ethics
1. It is third element for the enforcement of social justice. 2. Islamic economics considers ethics in relation to human lifestyle or religion. 3. Islamic Shariah defines social justice in Islamic Economic as the pillar of the concept that functions with a valid reason. 4. The concept of Zakat and prohibition of Riba practices in daily life of Islamic society bring the stability, peace, harmony and social development. 5. It gives the real value of Money 6. It defines the state responsibilities for income distribution as the basic principles of social justice

Muslim contribute for Economics

Ibn Khaldun,
Muslim Philosopher, Scholar & Economist and respected as father of Economic System

9 of all times, Adam Smith accepted him as the "father," of economics. Authenticated name in Islam for defining different fields of knowledge, specially science of civilization. He contributed theories and concept in economics that placed him above-board in the history of economics thought as a major predecessor. Planted seeds of classical economics in production, supply and cost Pioneered in consumption, demand, and utility, the bases of modern economic theory Believes in free market economy. Introduced labor theory of value. Free economy & for freedom of choice. Analyzed relationship of economic study, which are demand, supply, prices and profits First to put seed of modern demand theory which was further developed by Thomas Robert Malthusian, Alfred Marshall Logically role of cost of production on supply and prices Theory of profit as a reward for undertaking risk in a future of uncertainties Concept for traders maximize profits, "Buy cheap and sell valued," Concept of macroeconomics Theory of Growth based on capital accumulation through man's efforts Economic Development through Migration Tax Theory in history Theory for the best Rate of Taxation Explain advantages of trade among nations through foreign trade with people's satisfaction, merchants' profits, and countrys wealth and how all increased.

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Chapter 2

Islamic Financial System

Introduction & Background MAN, MONEY & COMMODITY
The three factors of production give birth to the exchange system and practice in the fulfillment of needs. The two exchange system are classified as

1. Lending and Borrowing 2. Financing and Participation Lending is base on principle amount in transaction by pricing it with the time value
without the concept of utilization of money and its impact on economic activity.

Financing is made available on the basis of Mans ability to use the money and to
multiply, divide, subtract and add the amount realize through the exercise of money.

Definition of Finance and Financing

1. Finance is the intermediary source having a value to act in production, trading and exchange of commodities, services and assets. 2. Financing is the source that makes the money service for specific purpose within specific period, in between person to person, person to institution or institution to institution with an understanding to share the result in profit and loss. 3. Financing is the source that develops ownership, support entrepreneurship and lineup procurement, production, distribution, utilization through participation and cooperation between skill and capital on the basis of profit and loss acceptability upon the maturity.

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4. Financing is the use of money by one who owns it and the other who has the ability to use it for a common purpose to make profit by participation and cooperation. 5. Financing is the act of money without the concept of liability, collateral or the guarantee. Its origin is investment and its end is ownership. 6. Financing is an act of money which is classified as the opposite to lending.

Difference of Financing & Lending

1. Financing is Equity and not Liability 2. Lending is liability and not participation. 3. Financing is made and Loan is given 4. Loan is secure financing is support. 5. Financing is an investment and loan is facility. 6. Loan cannot be financing until it is agreed on Profit and loss sharing 7. Financing cannot be a loan till return is guaranteed. 8. Loan is given at a price of money with the application of Rate 9. Financing ultimate outcome is profit that is be shared in an agreed Ratio. 10. Loan has to be secure by external factor of collateral 11. Financing is collateralize within its own system 12. Financing cannot be made until the user is able to use it 13. Lending is given against the confirmation of guarantee. 14. Lending leads to inflation and liquidation 15. Financing ends at ownership 16. Financing increase the capital base and net worth 17. Lending increase the liability, cost and decrease the net worth. 18. LENDING normally money for unstated purpose against the security without going through pros & cones of activity (Example; Betting, Gambling etc.) money is spent on. This gives fixed return either in cash or in the term mortgaged movable or non movable property/properties. 19. FINANCING is joining in the profitable operation (like Commercial vehicle purchase, acquiring business operation etc) for the acquirer with proper verification / validation of data submitted by seeker. In short the financier becomes the indirect partner in that venture with fixed unguaranteed returns.

The world of Money

First is the Monitory Market where money is bought and sold. In this system money is treated as the commodity and not the medium of exchange. This system which is based

12 on Interest and according to Islamic financial system it is commonly known as a one category of Riba. Second is the Financial Market that emerged on factual and authentic principles of Islam on the guidance of Holy Quran, explained in Hadiath. In this market the money is been served on the basis of capital or by skill with clear understanding of participation in responsibilities, duties, obligations, earning, income, risk and profit sharing.

Historical Background
Financial matters in Post Islamic era were commonly practiced on the basis of social priorities and Prophet (PBUH) too was involved in commercial and financial activities considering social obligations in financial matters It is authenticated by archives of the Islamic world that with the introduction of financing and discarding lending the most powerful community development on the basis of social development in first Islamic state under the guidance of Prophet Muhammad ( May Peace Be Upon Him) in the rule of four Caliph. Interest based system was dominating 98% monetary markets, controlling the market with its powerful grip and titled as the Conventional Monetary System Now reduce to almost 75% and it is gaining the momentum on daily basis. Financial system derived from Quran, Sunnah and Hadiath has a well defined title that signifies motive and concept of the system as

Socio-Financial System.
1. Islamic Finance was practice for the most part in the Muslim world throughout the middle ages. 2. In Spain, the Mediterranean and Baltic states, Islamic merchants became vital intermediaries for trading activities. 3. European financiers and businesspersons later adopted many concepts, techniques, and instruments of Islamic finance. 4. Term "Islamic finance is relatively new for commercial money market in a sense as it appearing only in the early 1960s through a movement that started from Egypt when the fist Social Bank was establish to bring the change in the money activities and unite money with ability with propose and period. 5. Commercial or business activities confirming to Islamic principles are made under the umbrella of either "interest-free" or "Islamic Banking which Islamic financial system simply as "interest-free" does not provide a true picture of the system as a whole. Prohibition of receiving and paying interest may be the base of this system, not all. 6. It works on Islamic set guidelines consisting of Risk Sharing, Individual Rights & Duties, Property Rights, Purity of Contracts, Commitments, Transparencies, Fair Deals and Employment Growth.

13 7. Not limited to banking only but covers capital formation, capital markets, and all types of financial settlement. 8. The philosophical roots of an Islamic financial system originate from the relations of factors of production and economic activities. 9. Conventional financial system deals primarily with the economic lending and borrowing aspects of transactions. 10. Financial system equally emphasizes on the ethical, moral, social & religious proportions for enhancing equality and fairness for an ideal society. 11. It fully appreciates context of Islamic teachings on the work ethic, wealth distribution, social and economic justice as well as role of the state and responsibilities and duties of the citizen. . 12. It is established on absolute prohibition of payment or receipt of predetermined and guaranteed return rate. 13. Pre-agreed/ estimated share of profit or growth had been noticed in the archives, way back to post Islamic era and was practiced by Muhammad (May Peace Be Upon Him), the Caliphs and the Asahab (close associates of Prophet May Peace Be upon Him). 14. This ended the concept of interest and ruled out use of debt-based instruments. 15. The system encourages risk sharing, promotes entrepreneurship, discourages speculative behavior, and emphasizes the sanctity of contracts 16. Basic framework for Islamic financial system is enforcement of the rules for handling of economic, social, political, and cultural characteristic of Islamic societies

Basic principles of Islamic financial Prohibition of Riba

Any unjustifiable increase of capital through the use of the capital whether in financing, lending or sales is central belief of the system. Any positive, fixed, predetermined rate tied to maturity and amount of principal etc. i.e. guaranteed regardless of performance of the investment is prohibited

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.

Money as "potential" capital

1. Money is treated as "potential" capital 2. It becomes actual capital only when it joins hands with other resources to undertake a productive activity. 3. Islam recognizes the time value of money, only when it acts as capital, not when it is "potential" capital 4. Money cannot be treated as Capital if it is not in circulation.

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Prohibition of speculative behavior

An Islamic financial system discourages exhibition of wealth and prohibits transactions featuring extreme uncertainties, gambling, and risks

Transparency of contracts
Islam upholds contractual obligations and disclosure of information as a sacred duty. This feature is intended to reduce risk of information and moral hazards.

Shariah Approved Activities

Only those business activities that do not violate the rules of Shariah qualify for investment. For example, any investment in businesses dealing with alcohol, gambling, and casinos would be prohibited Concept of Finance defines Interest as price of money where lender charges borrower pays. Islam accepts that agreement between financier and user to be pre agreed on terms of transaction and fulfills obligations in rightful manner. Transactions encounter difference of opinion, when it starts entering into non transparent acts. Thus it affects relationship and harmony of two parties. In this condition monetary and financial affairs are forbidden.

Salient features of this order

1. Islam clearly characterizes difference between lawful and forbidden economic activities and permits the Muslims to make all efforts for their right in seeking their economic benefits. 2. Islam prohibits financial, economical, social and legal actions, which are morally, financially and socially damaging to the community life. 3. The Islamic financial system employs concept of participation in enterprise, utilizing funds at risk on a profit-and- loss-sharing basis. 4. It implies Careful investment policy, diversification of risk and careful management by Islamic financial institutions. 5. Potential profit in proportion to the risk assumed and to satisfy conflicting demands of participants in the current environment and within the guidelines of the Shariah.

How Finance is Appraise

Financing appraisal is base on straight line method, applying 12-P Formula

12-P Formula is pre-financing activities

1. 2. 3. 4. Person who is financing to whom? Purpose for which financing is work out? Project for which financing is required? Period for which finances to stay as financing?

15 5. 6. 7. 8. 9. 10. 11. 12. 13. Product that develop through financing? Process to be use for financing? Price is the volume of finance require? Place locations where finance shall be utilize? Participation, relationship and responsibilities of financier and user? Pact terms and condition of financing between parties of financing? Professionalism ability, experience, knowledge and expertise in purpose? Perfectness in Performances? Profitability by the application of twelve P formulas which is the RISK base perimeters

Chapter 3
Riba- Profit & Interest
Introduction & Difference
Almighty Allah clearly defines principles and means of goods and services, weight and measurement, time and period, increase and decrease, profit and loss, buying and selling, giving and taking, efforts and lethargy, success and failure, defeat and winner, richness and poverty, knowledge and ignorant, civilized and orthodox, traditions and customs, morals and ethics, transparencies and malice, honesty and fraud, crime and punishment, reward and penalty. The performance in the mans daily life is define only and only in the will of Almighty Allah for which the holy books are given to mankind and the messengers is sent to explain the evil and sins, the losses and distraction and the health wealth and happiness of mankind. For the betterment of humanity Allah have define the limits of everything that the men have in this daily life. Men have given unlimited power through achieving knowledge and store in human mind and act according to an organize system that is clearly explain in Holy Quran, Hadiath and Shariah Almighty Allah prohibited any object or any act that is harmful to humankind that

16 creates instability, bring injustice, become injurious to human life and considered as unconstructive to Socio Economic System.

RIBA.
Riba is an Arabic word drive from word RIBH which means Profit. Ribh means excess, increase or addition in accordance to the Islamic guidance for commercial and business practices and correctly interpreted according to Shariah terminology as Profit. But Riba is any earning, income, profit or benefits being earned, taken or received through wrong means, bad intentions, shady practices or wicked participation. Such earning, income, profit or benefits are classified as RIBA. Such earning, income, profit or benefits are not only treated as immoral, unjust and filthy but furthermore threat to socio economic life of society. Such earning, income, profit or benefits leads to crimes of various nature, cruelty, exploitation & self-importance. Riba is as a combination of evil and sins. Riba is bad practice to earn & gain.

Holy Quran Al-Baqarah 2:275-6

People who indulge in Riba shall be raised like those who have been Driven to madness by the touch of Devil. That is because they say that Riba-based transaction is just like trading, while Allah has permitted trade and prohibited Riba. Hence those who have received the warning from Allah and have stop accordingly, may have what has already passed, their case being entrust to Allah but those who revert to Riba-based dealings, shall be the inhabitants of the hell-fire and abide therein for ever. (You must know that) Allah deprives Riba from all blessings and blesses charity; He loves not any ungrateful sinners. Al-Baqarah 2:278-79 O you believers! Fear Allah and give up Riba that remains outstanding if you are true believers. Watch out! If you do not obey this directive, then Allah declares war against you from Himself and from His Prophet. But, if you give up your outstanding Riba, then you can claim your principals. Neither should you inflict harm with Riba to others, nor should others harm you.

Hadiath reinforce concept of Quranic Riba

The Prophet Muhammad (May Peace Be Upon Him) Said:

17 "There is no Riba except in loaning." (Nasaee 4504) "Verily Riba is in loaning." (Muslim 2991) "There is no Riba in hand to hand (spot) transactions." (Muslim)

At the last Pilgrimage,

"All of the Riba of Jahilliya is null and void. In this respect, the first Riba I (May Peace Be Upon Him) withdraw is the Riba that the borrowers owe to my uncle Abbas; it is cancelled completely. (Muslim) 3 See Shafi (1996). The Prophet (May Peace Be Upon Him) cursed all those who take Riba, who give Riba, who write a Riba contract and the two witnesses to a Riba contract. He (May Peace Be Upon Him) further said: "They are all alike (in fault)." (Muslim 2995)

Riba in Financial Affairs

1. Riba must be eliminated from the financial transactions. 2. No thing is more horrific as compared to Riba that Islam has prohibited. 3. Nothing is more dreadful than Riba, is remains in widespread threatening socio economic activities in both theory and practice. 4. Riba convert financing system into lending system that make the money as a commodity and owner of the wealth, a seller and user of the same as buyer. 5. Riba does not justify money to be a medium of exchange and brings the love of money instead of respect for the money.

Interest
When money become a commodity and bought and sold with guaranteed results of profitability or increase in volume of money being used for the transaction, such increase is the price of the money and this price of the money is classified as Interest which is the part of Riba There is confusion in understanding for the terms Interest & Riba (Usury).

The question arise Interest is Riba or Riba is Interest?

To make a distinction of terms with rational reasoning, Islam through definitions and interpretations, provides in Holy Quran and Hadiath, Riba is clearly explained where Interest is define by the scholars.

Abul Ala Maududi,

Interest is an earning through lending on money by lender from borrower on condition that lender shall charge a fixed amount of money in addition to the principal. Interest is prohibited in Islam and people are not allowed to make money by lending their capital on interest. Capital is to be invested in productive manner that increases the profits.

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Keynes

western economist defines "Interest has nothing to do with influencing volume of savings. Practically it is rate of return on investment that determines rate of saving
Greek researcher & philosopher define Interest in his book Money &

Aristotle Politics.

Interest is an artificial profit, which does not enter in legal trading. Using money as a commodity is selling, just a forged artificial transaction. Money has to be used as a means of sale and purchase and a measurement of a commodity to be sold or purchased. Money is just a means to ascertain value of commodity and it cannot be sold or purchased within similar quantities.

Interest
Any amount, earning or income that is taken over and above to principal amount, without any risk, efforts, activity, without loss sharing and the return is guaranteed within a specific time is called interest. The compulsory return, income, earning on a fixed term & fixed percentage, upon principal amount, is an Interest. Interest is the price of money whereas money is just an intermediary between exchanges of transaction. There are many categories of Riba. Interest is one of the categories of Riba.

Prophet Moses (May Peace be upon him) Torah 22nd versus of the Exodus
If you lend money to any of my people with you who are poor, you shall not be to him as an exact Riba from him.

Deuteronomy verse 23rd

You shall not lend upon Riba to your brother, Riba on money, Riba on virtual, Riba on anything that is lent for Riba.

Leviticus 25:35
"'If one of your countrymen becomes poor and is unable to support himself among you, help him as you would an alien or a temporary resident, so he can continue to live among you.

Judaism
Inn several Biblical passages in which the taking of interest is either forbidden, discouraged or disliked.

Roman Catholic Church

In fourth century AD prohibited taking of interest by Church Scholars. In the eighth century under Charlemagne it was declared usury to be a general criminal

19 offence.

(Timothy 6:10) "The love of money is the root of all evil." Ancient Hindu Religion
Vasishtha, a well known Hindu law-maker made a special law which forbade higher castes of Brahmans (priests) and Kshatriyas (warriors) from being usurers or lending at interest. Vedic texts of Ancient India (2000-1400BC) In the Jatakas, (600-400 BC). Usury is referred to in a humiliating manner: Two-Faced Elites accused of practicing Usury. Anti-usury movements gained momentum during early middle ages and reached its peak in 1311 when Pope Clement V forbade on usury absolutely and declared all secular legislation in its favor, null and void

Islam for Money Matter

Riba does not justify money to be a medium of exchange and develop the love of money in several ways that disrupt the entire system of mankind. Islam stresses a respect of money by disregard lending and borrowing and guide to financing on participation by uniting money and skill as equal in effort and utilization and value. Islam guides the point of origin and limit of destination of monetary transaction. Islam defines duties and responsibilities between money owner and money user. The combination and participation of money and effort brings the result which is share according to the pre-agreed terms of understanding is the creation of Profit

Profit Describe
Income on financing is determined not on financing amount, but takes principal amount, cost of transaction and applicable fee & charges as a part. Profit is the aim of financing and loss is acceptance. Appraisal, Precaution, Trust, Confidence, Experience, Knowledge, Purpose, Will and Sprit are business ethics that result in realizing profit on the transaction. Profit is an amount appreciates over and above to the principle amount of investment on the basis of profit and lost sharing between the two participants of the transaction upon the maturity as gross return. This gross return over to the principal amount of investment then be deducted with

20 applicable and agreed fee, expenses and charges which is classified as the cost of the transaction brings out Net Income on the transaction. The Net Income which is to be shared in an agreed ratio instead of confirms and guaranteed rate is the Profit. Profit is share in ratio and not divided in rates applied on principle.

Now the question? If Interest is eliminated from monetary system, would it be

possible that system & transactions would become transparent and clear? Answer is simple and straight: Filth remains in its hard and powe rful grip irrespective of other factors. Interest alone cannot be eliminated without eliminating categories that fall under term called Riba.

Categories of Riba
Some of the categories are mentioned and clearly defined in Islamic Economics. Islam strictly prohibits these as well as society disregards them due to their dreadful effect on social, moral, cultural, economical, financial and legal life styles of the society. The main classes of RIBA are as follows:1. Exploitation by taking advantage of status and position, 2. Irregular weight & measures for profitability, 3. Wrong declaration for higher return, 4. Misconduct (misbehavior), 5. Crime & Law breaking, 6. Mistrust, 7. Commit a breach 8. False commitment, 9. Manipulation of affairs for benefits at a cost and efforts of other, 10. Gambling in all form, 11. Promising to secure the benefit by covering honorable, nearest, dearest 12. Falsehood and Lies 13. Betting and gambling 14. Speculation, Conjecture, unfounded information, 15. Trading in commodities prohibited by Islam and law of the land, 16. Income from the practices or activities that are prohibited by Islam, 17. Breaking and abuse of state law for self benefit or for any purpose that is declared as punishable act. 18. Disobedience to the state law by declaration and submission of wrong information for self-benefits. 19. Disturbing the peace of community by using force. 20. Committing and involving in the illegal acts.

21 21. Interest that is the price of money taken in cruelty, exploitation, wrong means, false declaration, and advantage based on weak or wrong calculation, 22. Taking and giving return on loans or fixing amount without appraising the use of funds that are given to user. 23. Keeping deposit with person or institution having involved in Riba practices, 24. Using deposits as investments and declaring non-transparent results that lead to discrimination of sharing in accordance with investment percentage, 25. Holding and storing of currency that affects economic activities negatively. 26. Holding commodities that lead towards scarcity in the supplies against market demand. 27. Monopoly and monopolization of activity, transaction and business to taking sole benefit, stopping the growth of employment and earnings 28. Grabbing the wealth, 29. Illegal encroachment on the property that is not owned by encroacher. For example, construction of Mosque on the property that was not purchased, gifted or legally transferred to title made, 30. Using public money for luxuries and self-usage, 31. Misusage of rights belonging to minors, orphans, widows and women, 32. Misappropriations among share division on inherited wealth, 33. Miscalculation of share for inherited wealth under law of inheritance, 34. Income by power and cruelty, 35. Misuse of power and status, 36. Theft, 37. Burglary, 38. Smuggling, 39. Adultery, 40. Human trading, 41. Pressurizing and influencing of earning situation and taking benefits, 42. Misuse of public representation and obtaining benefit through status as Public Representative, 43. Misuse of ownership right on the commodity by charging over and above the prevailing price, furthermore, avoiding payment to state, that is its right toward revenue, by hiding the earning to such transaction. (Premium on commodity for extra benefit), 44. Abuse of labor, specially child and women. Above classes differentiate between status of Interest vis--vis Riba

Fundamental Facts on Riba

Basis of Islamic thoughts conflict directly with the Riba based system. As No Islam exists in a place where there is Riba based system. 1. Riba based system is a misery not only on humanity, faith, morals or imagination of life, but also in every core of economic and practical life. 2. It is the most hateful system, which eradicates human satisfaction and frustrates

22 its civilized and neutral developments. Islam has complete ethical system supported by realistic system as interlink. Ethics & reality cannot be separated in Islam & cannot be practiced alone. Islam has clearly stated benefits of following of ethics and reality that followers follow in daily life. Successful Islamic economics does not rise without Ethics which cannot be separated to reality of life and its rational approach. Practical life of people cannot prosper without proper ethics. Riba practices corrupt the individuals ethics, behavior, and feelings towards community and the society. It also corrupts the human life, culture and the relationship by spreading the spirit of greed, selfishness, sneakiness and gambling in general. Today investing capital on minimum risk basis over guaranteed return is commonly practiced including funds as deposit, invested on no risk with guaranteed return. Interest is paid at lower to the depositors investment and higher to investment managers and shareholders. Money lent to somebody on higher return or interest does not grow useful projects but seeks the most lucrative opportunity even if profit comes from the lowest nature and the meanest tendency. Islam is a connected system; it prohibits the dealing with Riba. It also defines all its systems based on providing the need to it. It organizes the aspects of social life on giving out means of dealing without touching growth of human, social & economic development. A true Muslim should have a firm belief that whatever Almighty Allah has prohibited, can develop human life in better and fair way. It must be kept as a firm belief to restrain from false and evil acts for the betterment of life with its development and growth in harmony. Almighty Allah is the Creator of this life and makes man, custodian to all the blessings for humanity. Mans determination towards the Almighty Allah overcomes all and guides the man to the right path. It is also impossible for the Muslims to raise the community in prosperity or the perception that wickedness can show the way to advancement, going against the prohibitions of Almighty Allah.

3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

13. 14. 15. 16. 17. 18. 19. 20.

Riba Al Nassieah
Riba al Nassieah practiced before Islam as man paying his money to another for a pre agreed period. In return, he took from him a certain amount every month without taking the principal amount. When date of payment came, he asked him for his capital and if he was unable to repay would increase in his fund and the term of repayment.

23

Riba Al Fadi
1. A man sells an article in exchange of another article having same quality and nature with an increase or decrease like gold sold for gold, rupee for a rupee, corn for corn and barley for barley. 2. This kind is considered as Riba, as commodities are similar to each with different values not ascertain. 3. Such transaction has the involvement of exploitation and injustice on any ones part of the two. 4. Riba system emerges initially on a rule that there is no relationship between the determination of Allah and the life of man. 5. Riba creates the false feeling in the mind of men that wealth ownership would bring the power to become the master of this earth. It instructs the men to not to get bound by a pledge himself from Allah and to ignore the importance of following the commandments of Allah. 6. Riba establishes a feeling of liberty among humans for ways and means of obtaining wealth, encouraging to adopt more unfair means to multiply it. 7. Riba provides an individual a feeling that he is free to enjoy his wealth without abiding the contract of faith and trust in Almighty Allah or obeying any condition as holder of wealth, for which he is not bound to keep the interest of others.

Gharar is uncertainty, hazard, chance or risk and technically it is sale of a thing which
is not present at hand or the sale of a thing whose consequence or outcome is not known or a sale involving risk or hazard in which one does not know whether it will come to be or not. Such as fish in water or a bird in the air which are dishonesty through ignorance by one or more parties to a contract. There are several types of Gharar, all of which are Haram. The following are some examples: 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 5. Making a contract conditional on an unknown event 6. Selling goods on the basis of false description 7. Selling goods without allowing buyer to properly examine the goods 8. Gambling is a form of Gharar because the gambler is ignorant of the result of his gamble

Chapter 4
SAVING AND SAVING CONDUCT
Saving leads to investment through participation and goals in the Islamic financial System in spreading the saving awareness and developing it Saving, investment and

24 participation is an individual decision which change into profit and loss sharing in economic activity that leads toward socio-economic development. 1. Saving deposit is a decision that is taken by an individual. 2. Saving is a part of income that is kept aside for spending to a later time. 3. Islamic Finance gives particular importance and care to saving deposits. . 4. Reasons that encourage taking decision for avoiding un-necessary spending of income and use saving for better purpose. 5. Saving distinguish a commitment that define individual of realizing his own interest and the betterment of economic activities. 6. Islamic Financial System defines a way to saving funds. 7. Saving is employed according to the requirements and means of incentives that give individual to practice saving application. 8. It do not neglect individual and guided to lead his saving motives as a caution to ensure safety for him for future. 9. It rises to the individual standard of living. 10. They caution towards wastage and guide to make profit.

The cross road

Saving is one of the qualities of the member of healthy and welfare community. Saver do not spend wastefully in regards to what he receive funds in his hand. Saving Conduct is the saving for future of community for common goals. To apply the directives Islam called for in Holy Quran IX, 34 Chapter the Regret means:

And as for those who store up gold and silver and do not spend those in Allahs cause announce to them a painful destiny
1. 2. 3. 4. Islamic Financial System do not neglect saving motives of saving. It does not stick on to Islam and nature of human beings and their character. It makes clear to individual step by step as when he makes his saving interest. It exercises a practical devotion of worshipping.

Savings operations in Islamic Finance

1. Do not differ with conventional that system that focus all efforts on class of savings. 2. It does not care about size of savings that is conventional system practice of discourage savings which are below a minimum limit. 3. It stresses on the continuous and timely investment savings that are collected in any size of amount. 4. Islamic System emphasis on benefit for the community and does not remain to make profit at all ways through funds colleted. 5. It cares saving conduct and not the individual interest by guiding the ways and benefits of saving. 6. Saving and Spending is the social conduct and un-necessary saving is discouraged and moderate spending is encouraged. 7. Saving is a part of broad Islamic Financial System and provide individual to take part in shaping its individual character to adapt himself for welfare of Community as a whole.

25 8. More saving activity becomes a habit; it expands large number of community balance to community requirements and increases community in becoming strong and number of needy persons decreases.

Conventional system better then Islamic System for Savings?

1. In their ability to attract savings by offering interest on savings rather Islamic system does not offer any interest 2. Risk free investment 3. It is easy to investment in any form of currency and in any product or services. 4. Verity of saving products that gives a choice to saver to save. 5. Inter-lending support in investment of savings 6. Multi currency conversion of saving funds. 7. Saving on the basis of earning on compound interest return increases the volume of saving returns and it is the attraction and temptation. 8. Saving in conventional system do not need obligation on declaration of details of saving results by saving managers

BUT in Islamic Financial System

1. 2. 3. 4. 5. 6. 7. Restrict saving to be invested in illegal form. Compounding of saving return are prohibited. Savings are invested on Profit & Loss Basis. Restricted saving products are available to the saver. Limited numbers of financial institutions operating on Riba free. Saving cannot be invested in prohibited products and practices. Savings results are transparent, short tenure and with clear understanding of Profit & Loss. 8. Human ego avoid pain whenever it finds the way to that. 9. Conventionally it is found that savers have higher participation in investment and lesser in receiving in return. 10. Savers are less important in saving operation whereas the savings are the real players that generate the interest. 11. Conventional system restrict higher ratio of saver on the saving return and allow higher return to the saving fund operators. 12. Besides social and educational effects for spreading saving conduct, are there are economic reasons in which Islamic Financial play great notice to spread the saving conduct. 13. Voluntarily an individual savings is a part of individuals income for which he temporarily postpones his spending. 14. The saving he made help in financing the economic activities for socio economic development.

Chapter 5

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INVESTMENT
There are common apprehension & economic principles which can be taken as guiding rules of the Islamic Financial System for investment. Saving leads to Investment 1. Rule of Profit & Loss sharing is Participation. 2. Loan leads to seeking price of money that increase in capital. 3. Financing is made on principle of safety for capital and obtaining profit. 4. Expenditure is deducted from profit and not from capital. 5. Profit which can be distributed is net profit and not gross profit. 6. Islamic Financial System allow participation in Joint Stock Companies or Limited Liability Companies from its accounts or can participate in a part of the capital of existing companies 7. It implies financing the working capital in the projects for short term financing on the basis of participation which is not the lending on interest, but made on profit and loss sharing on Net Earning on investment. 8. Legitimate participation is a way of seeking profit through money from the money owner and work close of participator at a common purpose among each participant for earning profit. 9. Riba Free Financial House can may be the money owner and saver the participator or vice versa. 10. The Riba Free Financial Houses are permitted to be a participator from employer to re-participate with the previous participated funds on a Profit & Loss basis. 11. The Riba Free Financial Houses can be the second participator if it receives participation from the first participator. 12. The Riba Free Bank may be the second participator if it receives participation from the first participator. 13. The Riba Free Finance House as money owner bears loss alone as long as the participator does not exceed his role. 14. If the Riba Free Finance House works as a participator it does not bear loss as is sufficient that the Riba Free Finance Houses effort and work are of no return. 15. It is allowed that the profit between money owner and participator is pre agreed. But if it is determined sum of principal amount of money with the condition of no loss then participation becomes null and void. 16. Riba Free Finance House can trade its funding precious stone and in foreign currencies on its conditions written down in the exchange contract. 17. Investment in financial securities is only valid in shares and not in debentures.

In Conventional System traditions do not approve the Finance Houses or the lenders to perform investments by it whereas Riba Free Finance House breaks the tradition in three stages.

27

Firstly
Rule known to us that every person is taken by his words. Allahs word revealed in written form and by traditions of Prophet (May Peace be upon him) as considering Riba Free Finance Houses and their systems are the blessings and in purity which cannot be break, provided these are followed in according to its pure soul.

Secondly
With no doubt Finance Houses with their present forms and existing functions rose up in response to different environments and non Islamic philosophies in their present form and they serve these environments which are not necessarily convenient for serving Islamic communities in achieving the Rules approved by Almighty Allah

Thirdly
1. Riba Free Financial System guide to perform direct investments or financing by participation and stop all practices of other nature that deviate to its system. 2. In case if continues its operations in style of usurious banks and follow the lending of saving funds by covering its administrative expenses from these funds, this damage the investment and create a difference between the two system. 3. Financing by participation means sharing Investor (banks) capital o f productive project becomes a partner in the ownership project, partner in management, running and supervision and partner in all what it yields from profit or loss according to proportions agreed upon. 4. The Investor (bank) can sell its share to a limit restore only the price agreed upon in the selling contract either it is less or more than its capital. 5. Justice must be secured and there should not be exploitation as in the case of loan at interest where the lender obtains all its capital completely with an increase in its capital equal to the mount of interest either the project which borrowed makes a loss or profit. 6. Participation should exist on joint liability between the financier and the financing in case of loss and in case of profit. 7. Financier or Islamic Bank is a partner in the financing on the condition to accept loss or profit as the condition of participation. 8. From here comes the glorious reference and great wisdom, thus this participation in the two cases (loss and profit) obliges the two partners (every of them) to make the project prosper, and to do every effort to supervise it to participate in its success and therefore the efforts of the two partners should be faithfully directed to its development

Chapter 6 PARTICIPATION
Participation operations lead at the end to an ownership that is applied in projects or transactions. Islamic Financial System through its Banking System contributes in solving

28 the problems. Diminishing participation or participation leading at the end to ownership. In participation were the financer or bank gives the partner the right to replace it by ownership. It is either at once or in parts according to pre-agreed conditions on a basis of organized arrangement by keeping a part of income as an installment to repay financing.

Method of diminishing participation

1. 2. 3. 4. 5. Entrepreneur presents the project to Financier. Financier sees its viability of the project. Financier finances as the partner of the project. Entrepreneur pay through earning of profit in parts. If entrepreneur owner keeps it ownership to him, the profit is distributed between financier and entrepreneur according to the proportions agreed upon. 6. In case entrepreneur pay the financing either at once or in installments financier has no right to obtain any privilege because of the increase in prices. 7. The financier or bank invest in project with the capital and therefore it is treated as a partner in the transaction either equally or in part and any change in value of the transaction the working partner has always choice either to sell and earn profit or buy himself according to market price. 8. In hire selling method the financer has to participate in construction on the land then rents the housing units. 9. The land owner pays the ownership and rent and finally become an ownership to its hirer after a period of time. 10. Rent installment includes a calculated part of costing.

Rules for the participation which financier follow with partner in project or in transactions.
1. Each participation transaction is under a contract and conditions that specify investment and profit in proportion of each partner and instruct two matters: 2. First: The participator should keep accounts for the business operation. 3. Second: The accounts of the participation transaction should be checked by the expert accountant to approve their results. 4. Islamic Finance has a social target. 5. Participation in the course of financing for the purpose is to enlarge economic base and to open doors for all who wish for work in production, distribution and services. 6. For small worker who needs a small financing forcing him to keep accounting books is asking him impossible act which could makes him reject financing. 7. Keeping accounting books and auditing exceed the value of the financing. 8. The expense of this checks are treated as the cost of the transaction.

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How financier determine profits on investment

First stage: Every participation understanding determines the share according to the rules of participation contract. Second Stage: By preparing Profit & Loss account of investment operations and determining the portion resulting from participation transactions and from the results of investment projects which the financier operates alone. Third Stage: The distribution of net profit and loss of investments among the group of investors and the financier or bank and everyone according to his share in investment, as the shares with a sum of its funds in transactions. After that it is distributed among every one of investors.

Profit portion of every investor from the profit determined

1. Every investor obtains his portion of profit according to pre-agreed terms as regards to investing operations. 2. By mixing of total fund participated or deposited by the investor in the bank to the time of investment: 3. The profit is only shared for the period in which the funds are being invested. 4. Mixing of fund that forms the capital of the transaction leads to a fair distribution as regards the share of investors from profits distributor.

Is it possible that the result of investment is a loss

There are chances that the fund managers (Islamic Bank) for the sake of eliminating the possibility of loss from investment operations. Keeping such possibility there are ways to keep investors secure and in banking provisions are made for the purpose of safeguarding such possibilities by way of. 1. Technical pre- study of the investment projects before their execution. 2. The qualitative and geographical distribution of investments is kept as important to the pre-study. 3. The refusal of conditional investment in a certain project that has whole operations of is a distribution of risk. 4. Formation of appropriate provisions and reserves

Forming appropriated provisions & reserves.

1. Provision or reserve is a part of profit that is put aside to encounter probable loss or to strengthen the financial standing. 2. The reserve is of the right of the profit owner from which the reserve is deducted. 3. Reserve or provision made to encounter losses and are deducted from investment profits before distribution. 4. Reserves are the right of investors and the bank (participators) together.

30 5. Investor is not a permanent and may finish his participation is a natural matter. 6. Casual problem is seen on withdrawal but it could be overcome with in-build system of diminishing ownership. 7. In order to investment operations without disputes, the bank make a reserve or an investment provision from the proportion the bank charges in return for its efforts and for managing investments. 8. Therefore this reserve is employed to encounter any emergency and the balance is still be owned by the bank.

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Chapter 7
Riba Free Mode of Financing

MODARABA
Modaraba Commenda- Qarad the three distinct concepts appropriate for Riba Free Economic Activities. Three names with an ancient background of transactions used for economic activities classified as business activities under a contract of Money and Ability The owner of money, the financier is called Rab-Al-Maal and the worker is called Modarib Commenda It is a pre-Islamic word from Italy Qarad It is a Hegari word generally found in Imam Maliks and Imam Shafeis schools of thought. Modaraba It is of Iraqi origin and found mostly in Imam Abu Hanifas and Imam Ibn Hambals schools of thought. According to Fuqaha Modaraba It is a partnership contract between two parties, persons or organizations in which one brings the capital, the other shares his time and skill for a specified project or transaction. Upon the maturity, profit is divided according to the agreement, which will either be equal or one third, in proportion. In case of loss the Rab-Al-Maal (financier) looses the capital investment and Modarib (skill) lose its time, efforts and reputation

The history of Modaraba reveals that the business under the concept of Modaraba
was in practice before the rise of Islam, emerging from Italian city of Rome, which was the center for trade and culture in the Christian world. When Christian traders entered the Arab world, they chose Baghdad as the place for business. As a capital of Iraq, Baghdad was the center of trade, education and culture. Business communities of Iraq acknowledged the Commenda mode of business and started practicing it. Iraq developed the system and named it Quard, which spread in the Arab and Persian world, and eventually penetrated to all places where the religion of Islam reached, either through traders or by the Muslim conquerors. Credit goes to Islam in the developing a proper shape for the concept of Modaraba by prohibiting Riba in financial dealings. The Holy Quran says, Whereas Allah permitted trading forbid Riba . The Prophet Mohammad (Peace Be Upon Him) left on a trading trip to Syria and used Modaraba method by making a contract with Hazrat Khadija Al Kubra, who financed the

32 transactions before the Prophet Mohammad (Peace Be Upon Him) married her. Therefore, Modaraba is treated as Sunnah Al Ijma.

In Islamic jurisprudence
Modaraba is a contract between persons, between persons and institutions, and between institutions, through which finances are given for trading or manufacturing purpose. Profit sharing is agreed upon beforehand at a predetermined ratio and not the rate. In case of loss, the financier loses the money used to finance and the worker loses his time, efforts and talent. Islamic jurisprudence show the legal demonstration in accordance with the Quran, Hadith, Seerat of the Prophet (May Peace Be Upon Him) and the practice of Ashab (companions of Prophet May Peace Be upon Him).

The Great Fuqaha (Religious Scholars)

Modaraba on the basis of Qiyas (fixed return or wages) is not allowed. The reason for this is the unknown salary for an unknown activity. Al KASSANI says Modaraba becomes invalid if it is on the basis of Qiyas as it involves an unknown salary for an unknown amount of work. Qiyas is only allowed in accordance with the teachings of the Holy Quran, Sunnah and Ijma. IBNE TAYMIYA Modaraba is valid on the basis of Qiyas. Fuqaha had invalidated Modaraba on the basis of Qiyas (wages). IBNE GHAZI says Modaraba is permissible as an exception to Gharar (fraud) and unknown remuneration Modaraba falls in the partnership type of contract, which has a vague similarity to Mufawadah. It differs because money is the main objective in Modaraba and work in the second. Rab-Al-Maal (the financier) does not have to take an active part in the daily operations as in the case of employment. There will be no return for Modarib if a profit does not result in the transaction. In case of loss Rab-Al-Maal has the right to investigate the cause of loss, whereas, in case of any negligence or misappropriation or a purposeful mistake by the Modarib, financier can claim the financing. Al-Baghis definition Money that can be fructifying through work should not be lent for higher return, but can be traded for generating a profit.

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Modaraba Formation
1. Only money in shape of Dirham, Dinars, Rupees, Dollars or any other currency is used as a medium of exchange in the Modaraba mode. 2. Commodity in exchange of another commodity (i.e. barter trade) is not permissible. On the other hand, Modaraba contract cannot be established with just anybody. 3. Experience, knowledge and skill of related business processes are an essential condition of the contract. 4. Return on financing with a condition of profit & loss sharing is the legitimate and allowed by Shariah. 5. There is no harm in investigating the cause of loss in Modaraba. 6. Modarib is bound to provide the justification to the satisfaction of Rab-Al-Maal on loss. 7. In case of any dispute over the causes of a loss, the jurists permit the arbitration clause in the agreement. 8. Capital is the soul of Modaraba and it should be in the form of currency instead of a commodity. As the Modaraba mode penetrated in the economic activities and Shariah accepted the mode, scholars laid down Modaraba conditions & rules. Though rules and conditions of Modaraba are in accordance with the teachings of the Holy Quran and Sunnah, different scholars have interpreted them differently.

The Four School of Thoughts

IMAM ABU HANIFA He was flexible on the conditions of Modaraba. He was a trader and made several transoceanic voyages in connection with trading & preaching. He faced countless problems of hardship of traveling; Imam Abu Hanifas justified the flexibility in certain conditions. His teaching on the legal framework of Modaraba is treated as the most rational approach IMAM MALIK and IMAM SHAFEI The two were more rigid in terms of the limitations of economic activities. They had adhered to the Shariah rules theoretically. The Four Imams agreed on certain conditions and differed on some.

Currency of Modaraba
Currency is the origin of price and value of goods. The Market value of currency does not change that is why almost all Fuqaha had invalidated Modaraba with commodities. This condition is explained an example: Superior quality dates presented to Prophet (Peace Be Upon Him). These dates obtained in exchange with inferior quality dates. Prophet (Peace Be upon Him) refused to accept the gift and asked to return the superior dates to its original owner. Prophet (Peace Be

34 upon Him) stressed on sale of inferior dates, first. Then, with the amount received from the sale of the inferior dates, superior dates were to be purchased. When transaction was completed, quantity was lesser then it was before.

Accordance to Prophets (Peace Be upon Him) a commodity cannot be the capital of a Modaraba contract. As far as coins are concerned, their restrictions are due to involvement of metal, which is also a commodity. Any commodity should be exchanged with another of the same quality and the same quantity, or it has to be bought through a currency that acts as a medium of exchange in the economic affairs of Islam. Islamic economics does not treat money as a commodity. All the Four Imams have forbidden Modaraba between coins and commodities Metal Coins too cannot be the capital of Modaraba as coins are restricted due to involvement of metal, which is also a commodity. Commodity must be exchanged by another of same quality & quantity. It has to be bought through a currency that acts as a medium of exchange in the economic affairs of Islam.

All Four Imams forbidden Modaraba between coins and commodities and with this clarification, it is set that the capital of the Modaraba must be in currency and not in coin form and the most preferred form of currency should be paper because it establishes value that is easily traded and the market value is infrequently changed SAMARKANDI has given his views that capital should consist of consummate value. Here is the reason: Modaraba transaction with paper currency is permissible. Even gold, silver and precious metals are not permitted for the capital of Modaraba

RESTRICTIONS AND PERMISSIONS

1. 2. 3. 4. 5. 6. 7. 8. Liabilities cannot be the capital. Return on capital is not guaranteed. The capital of Modaraba should be deposited in cash with the Modarib in full trust and confidence Modaraba becomes invalid if the return of finance is guaranteed. It should be of known in quality and quantity. Ignorance leads to differences and disputes. Profit Sharing should be at maturity of transaction. It should not be paid in parts before the maturity of the transaction because payment might exceed the share and any one of the two partners might devour all the profit. Modaraba is only achieved through participation because of profit & loss sharing

9.

35 contract, based on justice and trust among the partners. 10. It is not justice that all profit goes to one and other suffers.

Imam Malik
1. 2. 3. 4. Refund of liabilities that could be delayed purposely for making more money is prohibited. Modarib has to return the capital and Rab-Al-Maal has a choice to invest money that is returned on maturity of Modaraba. Capital cannot be Roll-over under same agreement. Modarib in a monetary constraint and wish to keep money for longer has to first end the agreement and enter into fresh agreement either with same terms or additional mutually agreed upon.

AL BASHI says that it might be Modarib intention for benefit in order to prolong
payment of his liabilities which cannot be permitted. Almost all scholars have forbidden the usage of debts as Modaraba capital.

IBN KADAMA There is no wrongdoing if the Liabilities taken as Modaraba Capital with
the permission of Rab-Al-Maal who has settled the price with a clear conscience. In another way, it is like a commodity given to Modarib which can be used as a capital of the transaction. All Fuqaha agreed that only capital be in the form of cash as it is the Participation of Rab-Al-Maal. The debts remain in the possession of debtor. Participation with Cash is different from debts, as it remains the property of RabAl-Maal even when it is with Modarib. Cash Participation is the capital of Modaraba and remains with Modarib in trust.

Essential conditions of Modaraba financing

1. For differentiating Modaraba mode of financing and interest mode of loans, principals should be kept in mind before establishing financial transaction that in normal banking and lending practice, money is made available to borrower against guaranteed return of principle with profit. In such practice collateral is the cover against the lending that ultimately liquidated in case of loss by lender. In Modaraba, profit and loss is the end of the contract and profit and loss sharing is the key In case of a loss, the Rab-Al-Maal suffers the financial loss and Modarib faces loss in time, effort and his name. Capital has to be surrendered to Modarib who is free to utilize it in business mutually agreed between Modarib and Rab-Al-Maal. According to Imam Ibn Hambal, this condition satisfies Modarib for his free actions to Capital utilization and can take better way to earn best. Rab-Al-Maal interference in the working disrupts the connection between

2. 3. 4. 5. 6. 7.

36 Capital and Modarib. But the cooperation of Rab-Al-Maal is accepted. Relationship as an employee and an employer between the two parties which are Rab-Al-Maal and Modarib invalidate Modaraba transaction. Share of profit has to be pre-agreed at the pre-agreed ration and not the rate applied on the principle amount but on Net Profit. Modarib is entitling for Modaraba management fee out of Gross profit and not from the capital of Modaraba. Modarib fee must be pre- agreed and terms have to in the agreement. Rab-Al-Maal cannot impose the amount of percentage. The ignorance and discriminative distribution share of profit invalidates the Modaraba. Profit is the essence of contract and its ignorance invalidate the terms of the contract. Profit has to be divided by half or by third after deduction of pre-agreed Cost and Expenses including Modarib fee. Rab-Al-Maal gets share of his Capital investment and Modarib gets the share for his efforts. In loss, Modarib has no share nor cant Rab-Al-Maal claim his capital. Assets shall be the right of Rab-Al-Maal.

8. 9. 10. 11. 12. 13.

14. 15. 16. 17.

Classification of Modaraba
1. Modaraba can be classified as, General purpose and Specific Modaraba. 2. In General purpose Modaraba, the operation is not restricted to activity, partner and place. 3. General purpose Modaraba is mostly used between Modarib and Rab-Al-Maal in which Rab-Al-Maal empowers, Modarib to act, invest or activate capital for earning profit. 4. Specific Modaraba is limited by one or several aforementioned restrictions. Modaraba can be restricted to certain conditions and has to commit for the noncompliance.

Multiple Modaraba
1. One Rab-Al-Maal finances several Modarib at one time with different terms and conditions of contract. 2. Several Rab-Al-Maal finance to one Modarib as an individual worker or as in group by pool of capital under single agreement between Modarib and Rab-alMall either in group or by proxy to single person in representation. 3. One Rab-al-Maal finance to several Modarib and each Modarib using the financing amount investing in several transaction for specified period under single agreement.

HAKIM IBN HAZAM Close Companion of Prophet (May Peace be upon him) Says and
it has to be taken as the authentic condition in the present practices

I lay down conditions in Modaraba that if my money is left in a humid

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place or taken across the sea or washed between fast-moving water, Modarib will be responsible for the non-compliance of the conditions.

Fuqaha Belief
1. All activities pertain to Modaraba should be agreed in witting including functions and operation in proper record, supported with documentary proof. 2. Modarib can invest the Capital by self or by making similar contract with other person, institute or organization without the permission of Rab-al-Maal but keeping him in confidence. 3. Modarib status could be change to Rab-al-Maal and Rab-al-Maal could be Modarib too with the condition of contract and agreement in transaction.

Banking & Financial Institutes

1. Banks can finance their funds or from their deposits for financing someone to carry out Modaraba. 2. Banks can be Modarib for their Depositors and Rab-al-Maal for Modarib seeking financing. 3. The contract shall be two separate. 4. The first contract with the Depositor as Modarib and second contract with Modarib whom financed. 5. The contracts can have different terms and different profit sharing. 6. Both the contract should be matured on the pre agreed date and bank cannot payoff without realizing the profit of its financing or from own source. 7. Banks can specify the purpose of Modaraba to safeguard depositors capital. 8. Bank can enter into a General Purpose Modaraba. But in case of being a Rab-alMaal it only enters into Specific Modaraba Contract. 9. Banks are not permitted to ask for guarantee against the loss of capital, but participate in the transaction as partner by holding the assets of transaction excluding Capital. 10. Modaraba can be in consolidation with other mode of financing permitted like Musharaka, Morabaha, Ijarah, Havana, Musaqa or Mussaja.

Al Mighty Allah instruct

Oh you misuse your wealth in self-importance among them. This wealth should be used for trade on mutual consent. Those who believe in Allah should observe their duty to Allah and give up what remains from Riba, if they are true believers. If they do not, then they are warned for a war with Allah and his Prophet (Peace be upon him) and if you ask forgiveness, then you have your principal without interest. Wrong not and you shall not be wronged.

Summary
A profit-sharing agreement between two parties, in which one provides the finance, and the other provides entrepreneurial and management skills. Profits are divided on a pre-determined ratio.

38 Losses are borne by the provider of capital and Modarib loose its reputation, time and efforts. Financing is made in the absolute trust on the skills, experience, reputation, capability and feasibility of Modaraba transaction or project. Modaraba agreement is made only to the transaction purely based free from all the classifications and categories of the Riba.

Chapter 8

Morabaha Financing
Trade Financing The word Morabaha is taken from the Arabic word Ribh which means Profit. Originally, 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. Modern form of Morabaha has become the single most popular technique of financing all over the world. Morabaha is a financing mode for trading activities on basis of sale on profit. Technically, it is a contract of sale in which seller declares his cost and profit. It is an ancient practice which was seen in archives prior to horizon of Islam. Morabaha practice developed in Islamic financial system with guidance of Islamic Shariah. Morabaha is a financing technique that involves a request by the Morahib (Worker) to the financier (Rab-al-Maal) for the purchase of a certain goods or equipment for him. The financier after the appraisal of the price and cost estimates its profit over the cost which is settled as purchase price in advance. The financier pay on behalf of the Morahib and deliver the goods after taking acceptance of receiving the goods as per request There is a question on the legality on Morabaha financing technique due to its similarity with Interest of Riba. In reality it is wise to settle all the terms in pre-agreed as saying of Prophet Muhammad, May Peace Be Upon Him.

39

You must settle your terms in writing and in agreeing prior to your trading and in trust and for better profitability.

Confirmation
Conference on Islamic Banking held at Dubai in 1979 endorsed the terms & condition of contract between two parties of Morabaha as:

This conference concluded that the Morabaha transaction comprises a promise to purchase on behalf of the Morahib according to condition agreed upon and promise by the financier to conclude the sales after purchasing the commodity based on the decided condition.

Morabaha Key Notes

Financier is Rab-al-Maal & financing is made for the procurement of goods and commodities. Morahib is the party of contract to sell the goods that Rab-al-Maal financed under the contract. It is not capital base contract and funds are use as financing for purchases of goods. Morahib has to prove and satisfy the Rab-al-Maal of capabilities know-how of goods requested and marketing and selling plans of the goods that are financed.

How Morabaha mode of finance operates?

Morahib needs goods and approaches financier to get the required goods or commodities through financing In interest-based system, money is landed on interest to the borrower who would go and buy the required commodity from the market. This option is not available in Morabaha. Money cannot be lent directly to Morahib. Financing against the procurement of goods or commodity requested, directly paid to supplier in accordance to request of Morahib. Morahib approach Rab-al-Maal with his request to acquire goods for trading purpose. The request must be in writing with clear specification of goods required along with the supplier identification and prices declare by the supplier. Rab-al-Maal by self or through agent enters into purchase deal with the supplier of Morahib and negotiates the price to a minimum possible level. Supplier final price and Morahib declare price if differ this difference is part of earning for Rab-al-Maal as efforts involve to be compensated Morahib cannot claim a part of this earning, however Rab-al-Maal as good gesture can reduce the profit on the commodity that he add on procured price declare by Morahib.

40 Morahib upon receiving the goods from supplier issue an acceptance confirming the quality and quantity of goods received from the supplier as well as issue detail of stock kept at place. Rab-al-Maal can also appoint its Moqqadum (agent) who is allowed to receive the delivery of goods and commodities on behalf of Rab-al-Maal. Moqqadum (agent) may keep the goods and commodities under his control and release upon the delivery order issued by Rab-al-Maal to the Morahib either upon the payment or under differ payment terms. It is compulsory that goods transfer from Rab-al-Maal to Morahib should be on the pre-agreed price which was incorporated in the Morabaha Financing Contract supported by Local or Foreign Purchase Order duly signed by Morahib..

Morabaha transaction completed in two stages!

Firstly, the Morahib requests the Rab-al-Maal to undertake a Morabaha transaction and promises to buy the commodity specified by him. The promise is not a legal binding and Morahib may go back on his promise and the Rab-al-Maal takes the risks of the amount financed. In this situation the Arboon amount is kept as the stake of Morahib, subsequently is used to cover the price margin where Rab-al-Maal can sell the goods by reducing the price to attract the buyer. Secondly, Morahib purchases good acquired by Rab-Al-Maal on a deferred payments basis and agrees to a payment schedule on various dates. On such arrangements the profitability of Rab-Al-Maal shall not be change and pre-agreed price of resale of goods between the two parties of Morabaha contract shall remain constant. Morabaha sale contracts allow the commodity sold it to the Morahib or in case if these are refuses to purchase by Morahib then Rab-Al-Maal can sell buy at best suitable price taking the advantage of Arboon. This prime clause of the contracts and it should be accepted by Morahib.

Morabaha mode of financing is widely used by Islamic banks for various financing requirements.
To provide finance in various and diverse sectors To consumer finance for purchase of consumer durable such as cars and household appliances To real estate to provide housing finance To the manufacturing sector for the purchase of machinery, equipment and raw material etc. To finance short-term trade for which it is eminently suitable. To issue letters of credit for local and international procurements on behalf of Morahib. To finance import trade in today form of FIM (Finance Imported merchandise)

41

Fuqaha (Islamic Scholars)

Imam Malik Both parties in Morabaha Contract are legally bound to fulfill the terms of contract. Any mis-declaration or mis-commitment from any party towards the contract, offender would be liable to legal proceedings. Other schools took it as religious obligation and legal binding if it is to the interest of the public. Contract of such nature needs great technical accuracy and a sound knowledge of Shariah. The binding nature of the Morabaha contract might require the endorsement of the legislations in some Islamic countries where such transactions are in practice.

Imam Baghi Contract concluded toward who purchases the camel because of need
of others and then sell at a higher price. Such contracts end in two sales, Firstly, they are purchased in cash. Secondly, they are sold on credit. Financier pays cash for commodity at the request of Morahib then sells same to Morahib on credit after adding its profit. In other words, financier by adding its profit loan excess to original purchase price as interest which Morahib will have to pay even if price of commodity falls. Such transactions fall under classification of Riba as interest.

Imam Al Shafai
If a man sees a commodity in the possession of another and agrees to purchase the commodity with the profit set by seller; such transaction is valid, as it is not binding to any of the party of the contract till the close of the transaction. If a man purchases the commodity and agree to pay the profit, then sale is valid as the purchaser himself agrees to offer the profit. If Morahib requests Rab-al-Maal to purchased separately the goods on cash and then he shall buy in installments at later stage. The cash based sales accepted. Under second installation scenario sales would become valid provided Morahib purchase on installment or at cash at an agreed price of contract

Imam Ibn Rashid

Morabaha sales are approved sales, but sales by mutual consent are preferable. Sales by mutual consent are permitted because Morabaha sales according to Imam Ahmed require honesty and integrity on the part of the seller.
Temptations have the possibility of being led into inaccuracy in ones favor of sales which is agreed by mutual consent. In case seller cheats with price or capital, sale remains valid, but buyer get entitlement to claim the difference from the seller or drop the sale.

42 Some Fuqaha say that the buyer has no choice but is entitled to deduct the difference. Morabaha sales are governed by the same conditions applied to sales in general with most important aspect that both buyers and sellers should know the amount of the financing and the yield.

The seller must declare,

I bought for 100 and claim it for with a profit of ten which then is 110. Selling in Installments of Differed Sales Time has to be agreeing on the price based on the period of credit term. Morahib must agree to pay on maturity. If unable to fulfill financier has the right to claim the goods by confiscating his Arboon which ultimately covers the price including the compensation for the loss of time. Morahib have to reveal quantity of stock in hand to financier. Any discrepancy to original delivered quantity would be paid by Morahib. In case of failure to pay, Morahib can be legally punished for misappropriation and theft. Some Fuqaha forbid such types of sale, considering the increase in price as Interest, a category of Riba. While some of the Fuqaha permit such sales as it is based on mutual agreement, and agree with Allah as said in Holy Quran:

Whereas Allah permitted trading and forbidden usury and O ye who believe! Misuse not yours wealth among your selves in pride, except it be a trade by mutual consent.

Financial institutions use Morabaha financing in both ways,

Differed sales of cost price for those who need the commodity for their personal use and not for trade as seen in Consumer Financing. On short term basis with limited installments provided to those who cannot afford to pay in one go but with an ability to pay in installments. This is a contract of sale between Financier and Morahib at a price which includes a profit margin agreed by both parties. As a financing technique, it involves the purchase of goods by financier on requested by Morahib. Goods then sold to Morahib with a built-in profit. Repayments in installments are specified in the contract as Morabaha Cost-Plus Financing. Differed sales or sales by installment could be carried out on the basis of the cost price of commodity.

Morabaha Cost-plus Financing

Selling in Installments of Differed Sales

43 No disagreement on such type of sale carried out and allowed. Differed sale could be at a higher price than actual one of the commodity. Some Fuqaha disagree on that type of sale. But most agree to such sales as seller informs the buyer of cash price and price on deferred payment terms as clear terms for two types of sales transaction. Islamic jurists proposed forms of partnership to provide credit & finance for Agricultural, Manufacturing and for trading purposes. These are:

Consecutive Partnership
This instrument of financing is a real innovation on part of Islamic banks. Islamic banks take depositors of one financial year as partners in the proceeds of that financial year without matching with the periods of projects in which depositors funds are invested. Pending proceeds from previous years, for which accruals or provisions were made, are included in the proceeds of the year in question. Yields corresponding to the same financial year are excluded if they are not yet due and left to a future year. This accounting system is necessary to reconcile the depositors' withdraw regardless liquidation of investment in which their funds are used. Continuity of the bank's investments which constantly flow in a mixed basket to make regular accounts every financial year, as an accounting unit for this basket

Agricultural Partnerships
Privately owned agricultural land could be utilized one of the three ways: Directly by the owner, Indirectly by renting it (Ijarah) Through agricultural partnership. The two main frameworks in traditional Islamic law for agricultural enterprise and both these techniques typically afford a partnership between capital and labor. These techniques are Muzara a (share cropping) Musaqa (water partnership or tree-sharing).

Sharecropping Muzara' a (sharecropping or crop partnership) is a contract whereby landlord puts his
agricultural land at farmer's disposal to farm. Farmer undertakes to give owner an amount of agricultural products. This framework is based on a partnership between capital and labor.

Tree-sharing

44

Musaqa (water partnership or tree-sharing) is a contract whereby one person trim and
water fruit trees own by other person or are at his disposal, in exchange for an amount of realize through the sale of the fruits on pre-agreed upon. If a contract of Musaqa or tree sharing is related to fruitless trees, like willows and sycophants, it is not valid. However, it would be valid in such trees as henna whose leaves are used or trees whose flowers are used.

Chapter 9

Musharka financing
(Equity Participation or Venture Financing Introduction
Musharka or Shirkah can be defined as a form of partnership where two or more persons combine either their capital or labor together to share the profits & enjoying similar rights and liabilities. It is a contract between two or more persons who launch a business or financial enterprise to make profit.

Introduction & Back ground

1. Dilemma in this modern world for entrepreneur is his capability to initiate his idea for a new business. 2. He look to raise equity, capital or financing to enter business venture. 3. Firstly loan need collaterals arrangements, keeping in mind the impossibility. 4. Secondly borrowing that is made for the purpose is subject to the cost to be paid in shape of interest ranges to 6% to 20% or more. 5. Thirdly cost to be paid on loan has to be determining on the volume of risk and success. 6. If interest rate is 6% but the venture has a 10% chance of failing within a year, the

45 lender will probably charge interest at a rate of 16%. 7. High interest on compounding imposes heavy costs on the venture from the start. 8. It increases the danger of failure and rise interest rate. If venture's prospects can not be predicted with confidence, it is difficult to calculate an appropriate interest rate. 9. Alternative for entrepreneur is admitting a partner to the business that is entitled to receive a portion of profits from the venture in exchange for contributing capital. 10. The partner's contribution and participation is pre determined. 11. There is no need to compute an interest rate and there are no fixed costs of debt. 12. The partner will receive profits only if earned

Condition of Musharka
1. Musharka is a technique of financing used as a partnership. 2. Two or more parties provide finance for a project. 3. All partners are entitled to a share in the profits resulting from the project in a ratio which is mutually agreed upon. 4. In case of loss it is shared exactly in the proportion of capital. 5. All partners have a right to participate in managing the project. 6. Any one can waive the right of participation in favor of partner or partners.

Historical Background Musharka

1. From the beginning of human society methods to meet day to day needs have been changing with the change of social, economic, scientific, cultural and political circumstances. 2. Especially habits, fashions and the standard of living. 3. These methods regulate the commercial activities and vary from place to place and time to time. 4. The Arab society at the time of the rise of Islam had very simple financing methods and forms of business peculiar to that society 5. Birth of Islam saw Musharka practice in Arabia in commercial activities. 6. Islam endorse and Prophet May Peace be upon Him perform business on the basis of Musharka. 7. After Hijra Muhajireen and Ansar were declared by Prophet May Peace be upon Him to be brothers. 8. Subsequently they joined as partners on Musharka, Muzara and Mussaqa form trade and commerce. 9. Nature of transactions in the different forms was identical. These forms were so developed that they became independent institutions. 10. Jurists formed detailed rules about the form. 11. There is a consensus of opinion among the jurists of all schools- of thought that Musharka is a valid and legitimate contract in Islam. 12. The jurists, however differ over its form conditions and other details

46

Islamic Perspective
1. Islam stress on the socio economic development that tie individuals with brotherhood and care like members of one single family. 2. This brotherhood is universal and not narrow-minded. 3. It is not tie by any geographical boundaries and take whole of mankind group, tribe or race into one relation and that is universal partners for better earth. 4. The concept of brotherhood and equal treatment in society and before the law is not meaningful unless accompanied by economic justice. 5. Receiving dues for individual who contribute to economic activity in society or to the social product without any kind of exploitation of one by another. The Prophet May Peace Be Upon Him warned:

"Beware of injustice for injustice will be equivalent to darkness on the Day of judgment".
1. This warning is against injustice and exploitation and to protect the rights of all individuals whether consumers, producers, distributors, employers or employees with aim to promote welfare and ultimate goal of Islam. 2. Special significance is given to the relationship between the employer and the employee which Islam places in a proper setting and specifies norms for the mutual treatment of both so as to establish justice between them. 3. An employee is entitled to a "just" wage for his contribution to output and it is unlawful for the employer to exploit his employee.

In case is with trader and consumer the dealing fair and transparent.

Two main forms of Musharka

Permanent Musharka
1. In this form the parties of Musharka participates in the equity of a project or transaction and receives a share of profit on a pro rata basis. 2. The period of contract is not specified. 3. It can continue so long as the will of the parties. 4. This technique suits for long terms projects as funds and development are committed and protracted.

Diminishing Musharka
1. It allows equity participation on a pro-rata basis 2. System by which equity of parties keeps on reducing ultimately the ownership of the asset on any one or more participants is transfers. 3. Partners gets dividend on their equity and if any of the partner sell or buy other partner some of its equity, it is allowed to do so. 4. Equity held by partner progressively reduced and at a certain time equity held by any partner reach to ZERO. 5. Disposal of total equity an end of Musharka

47

6. Musharka form of financing is being used by Islamic banks to finance Project

Financing and Working Capital.

Types of Musharka
Shirkah -Al-Milk (non-contractual)
It involves co-ownership and form when two or more persons get joint-ownership of some asset without a formal partnership agreement. It is a proper partnership as the parties concerned willingly entered into a contractual agreement for joint investment and the sharing of profits and risks. Example 1. Two persons receiving an inheritance or a gift of property which mayor may not be divisible? 2. Partners have to share property or its income in accordance with their share until they decide to divide. 3. If the property is divisible and partners still decide to stick together, It is Shirkah al-Milk Ikhtiyariyyah (voluntary). 4. If it is indivisible and they are forced to stay together it is characterized as Jabriyyah (involuntary).

Shirkah al-Uqood (contractual partnership)

1. The agreement need not necessarily be formal and written, it could be informal and oral. 2. Just as in Modaraba, the profits can be shared in any equitably agreed proportion. 3. Losses must, however, be shared in proportion to the capital contribution.

Type of Al-Uqood:
In Fiqh Shirkah al-Uqood divided into four kinds: Al-Mufawada (full authority & obligation) 1. In Mufawada partners are adults, 2. Equal in their capital contribution, 3. Their ability to undertake responsibility along with their share of profits and losses on the transactions. 4. They have full authority to act on behalf of the others 5. Jointly and severally responsible for the liabilities of their partnership business, provided that such liabilities have been incurred in the ordinary course of business. 6. Each partner can act as an agent (Wakil) for the partnership business and stand as surety or guarantor (Kafil) for the other partners Al-Inan (restricted authority & obligation) 1. Inan involve all partners need not be adults or have an equal share in the capital. 2. They are not equally responsible for the management of the business. 3. Their share in profits may be unequal, but this must be clearly specified in the

48 partnership contract. 4. Their share in losses would be in accordance with their capital contributions. 5. Shirkah Al-Inan the partners act as agents but not as sureties for their colleagues. Al-Abdan (labor, skill and management) 1. Shirkah al-Abdan is where the partners contribute their skills and efforts to the management of the business without contributing to the capital. 2. They use their expertise, experience and goodwill that give confidence and strength to the venture either on profit or wages.. Al-Wujuh (goodwill, credit-worthiness and 1. Partners use their goodwill, their credit-worthiness and their contacts for promoting their business without contributing to the capital. 2. Both these forms for partnership, where the partners do not contribute any capital, would remain confined essentially to small-scale businesses only. These are of course models. In practice, however, the partners may contribute not only finance but also labor, management and skills, and credit and goodwill, although not necessarily equally

Modern Musharka and its Conditions

1. 2. 3. 4. The modern business concerns being run on the basis of Musharka Partnership: It is regulated by Partnership: It is regulated byPartnership rules framed by the government, Business practices prevailing in the business community.

Limited Company 5. This type of Musharka is strictly controlled by the statutory rules framed by the government Its commercial activities are, however, influenced by the business practices. Co-operative societies 6. This Musharka is also governed by statutory rules. 7. Its commercial activities are influenced by the practices prevailing in the business community. 8. The modern Musharka principally resembles Shirkah al-Inan. The details are, however, considerably different due to change of Urf and other factors including modem commercial techniques, economic conditions and legal requirements.

49 9. Let us discuss briefly the conditions of Musharka, which are those of Shirkah al-Inan. Other types of Musharka mentioned by jurists are nearly obsolete nowadays. 10. Capital invested by partners may be unequal. 11. Majority of jurists, capital should be in shape of currency and not the goods. 12. Condition for capital in form of currency was imposed when it was difficult to refer goods in terms of currency. 13. In barter systems jurists framed the rules, now goods are generally referred or accounted for in terms of currency. 14. This condition is waived in limited companies and co-operative societies as the capital is invested in the form of equal units of currency called shares and the intended partners buy as many shares as they wish. 15. This practice has universally been accepted as urf and is therefore according to Islamic principles.

Chapter 10

Ijarah Financing
(Asset Financing) Definition
Leasing is a contract in which asset is transfers to user for an agreed period on an agreed consideration Ijarah is a lease contract as well as a hire contract. Both the contract are similar to each In Islamic Finance Ijarah is a lease contract under which financial institution leases

50 equipment or a building to one of its clients against agreed rentals or installments equal to the value of the assets. The financier is known as Rab-al-Maal who financer equipment to Ijeer (User or Tenant) or the equipment provider through financing is LESSOR and The equipment user is LESSEE

Ijarah
Ijarah basically facilitate the cost to be spread for large purchases into affordably installments for payment. In Ijarah either the end of the transaction is the ownership of assets that acquired through lease financing or in another case the equipment is returned to financier. Ijarah Financing is a contract in which a lessee request for an equipment or a property and lesser provide through its financing the specified and requested equipment or property. The Lessee agree to pays a monthly, quarterly, semi-annual or annual rent to lesser for the right to use equipment a specific amount within agreed time of time i.e. 12, 24, 36, 48, or 60 months OR what ever time agreed.

Historical Perspective
Though leasing began in 2010 BC but modern leasing began in early fifties. Creation of the Investment Tax Credit in 1962 encourages growth through "taxoriented" leasing and new products were quickly developed to meet the growing demand. Over the last 50 years, many leasing companies developed non-tax oriented products such as income funds, operating leases, limited partnerships, vendor programs, and end sharing in order to remain competitive.

Equipment leasing blossomed over the last 20 years

Banking industry started leasing by giving credibility to a market place which had been previously regarded as a last-resort financing alternative. Accounting profession produced a document to help standardize lease reporting in financial statements. Internal Revenue Service issued guidelines to aid lesser and lessees in structuring leasing transactions.

Why do Lease Business?

Cash flow - Monthly payments are generally smaller for leases than for loans and they usually require a smaller or no down payment. Use vs. ownership - Many businesses have discovered they don't need to own the equipment they use. In past renting and leasing were limited, today's psychology it more to economics rather than moralities of ownership

51

The Modern Concept of Ijarah

Ijarah is an ancient technique which can be seen as leasing which is the modem technique which can be compared with Islamic technique of Ijarah. Leasing is based on fundamental concept of Ijarah, according to which one does not have to own an asset in order to enjoy benefits of it. There are business examples which benefited from their investment in fixed assets and made substantial capital profits from the sale of assets or been able to improve their balance sheets by the revaluation of assets. Primarily profitability of a business lies in the effective utilization of its resources. Therefore USE is important rather OWNERSHIP.

For example
Investment appraisal made on some new venture. The choice of purchasing or leasing is partially a matter of arithmetic and partially a question of the availability of the capital. Ijarah provide usage by paying a rent with understanding to acquire the ownership right on the equipment under Ijarah mode of financing.

Cross Road of Ijarah

1. Ijarah is a financing facility in which the Rab-al- Maal on the request of user agree to finance the asset of any nature. 2. Ijarah is financing mode in which finance cannot be disburse directly to the user of the finance. 3. An asset is arranged and handed over on the condition that user will pay the rentals for its usage to a certain period and then return the assets upon maturity back to the financer. 4. Ijarah can also be financed in which the price of the assets are taken in installment over a certain period and assets is been given to the user to use it and pay the rentals of the usage. 5. The rental is the earning of the user and payment of installments leads towards ownership of the assets of user. 6. The early user pays the price of the assets the lesser number of rentals he pay and less is the expense on him. 7. The financing amount is determined in accordance to the portion of gross income of the user which he can afford to pay as rental and installment. 8. The gross income is declared by user and has to prove the authentic proof of the income. 9. The financing amount base on the affordable level determines on the gross monthly income of the user then divided into financing and equity. 10. The equity of the user is called as ARBOON (up-front or advance) and the financing is added to the ARBOON that make the total financing amount. 11. The financing amount is inclusive of the direct and indirect cost on the purchase of the assets and the installment is workout on the amount of total cost and

52 price less Arboon in number of equal installment which are spread over the financing period. The user repay in two parts which are Installment that give right of ownership on the asset which are also consider users saving Rentals that are user expenses that he or she bears of using the asset. the two agreements signed between user and financer have amounts of financing, installments, rentals and cost. Ijarah financing due to its special features supplement existing conventional forms of lending and further increase speed investment in the private sector. Ijarah financing improve the capacity utilization, quality, production cost, profitability, internal generation of cash for future investment, improve saving conduct and international competitive capability to increase construction industry. Ijarah financing also suited to the programs of balancing, modernization and replacement of common man need. It involves a small dosage of investment which would carry relatively smaller investment risks but would result in a quick value added. It increase capacity utilization and thus contributes to the growth of the economy and develops saving conduct by converting expenses into compulsory saving. It is asset transfer to another for use on an agreed period with financial consideration according to the affordability level of the user. Ijarah financing must have a useable asset. It is necessary for a Ijarah contracts that body of property remains in the ownership of the seller and only its usage is transferred to the user and then over an agreed period he buys out the ownership of using property. Ijarah Financing cannot be affected in respect of disbursement of money, to user to acquire himself due to consuming nature of money. If anything of this nature is acquired by the user, it would be consider as a loan with all rules concerning the transaction of loan that would accordingly be applied. Any increase or decrease in the rental or financing on valid contract would be treated as interest that is usually charged on a loan. The figure of installment never changes however the number of rentals is increase or decrease according to repayment practice. All the liabilities emerging from the ownership shall be borne by the financier, but the liabilities referable to the use of the property shall be borne by the user.

12. 13. 14. 15. 16.

17. 18. 19.

20. 21. 22.

23.

24.

25.

Example of the contract in Property Ijarah

Ahmed graduated and joins the professional life at the age of 22 years. His monthly income is estimated to Rs.20,000 in which he get 40% home allowance that is Rs.8,000. After three years he decided to buy a property and applied for LA Riba Home Financing under Riba free financing mode.

53

He approach the Home Financing Company who explain his that he can afford 40% of his income for acquiring his home. Ahmed need a property at a value of Rs.1,000,000 with total cost and expenses added to Rs.50,000. Thus the price of the property reaches to 1,050,000. Home Financing Company and Ahmed reach to an agreement that Ahmed will contribute the 30% and Financing Company shall invest 70%.

Contract:
Property value: Tax 2%: Documentation: Fee, Commission: Equity 30%: Financing: Monthly Income: House Allowance Installment 70%: Rental 30%: Period: Rs.1,000,000 Rs. 20,000 Rs. 10,000 Rs. 30,000 Total Price Rs.1,050,000 Rs. 315,000 Rs. 735,000 Rs. 20,000 : Rs. 8,000 Rs. 5,600 Rs. 2,400 131.25 Installments = 10 years 11 months

After 10 years Ahmed paid Rs.735,000 + Rs.314,400 = Rs.1,049,400 This is approximately 42.775% excess to financing facility. As he takes over the ownership of his home he make a valuation of his home and found that the value has increase by 30% and his home is now valued to Rs.1,300,000. His expenses to own the home decrease and he turn into premium from expenses of 42.775% to premium at 23.880% Home that he bought through LA RIBA Home Financing at a total cost of Rs.1,313,920 which deducted from the present value of the property Rs.1,300,000 shall only burden him Rs.13,920 in 10 years 11 month. If the value decrease then he still hold a property that allow him to live in it and the House Allowance convert into his monthly income instead of rental expenses. He will still be beneficial. In developing countries, house allowances are non-taxable and this give the Ahmed a benefit of Rs.800 per month as tax rebate on Rs.8,000. Rs.800 in 10 years 11 month benefits him to user minimum of Rs. 104,800 additionally. On the other side if he pay early in 10 years instead of 10 years 11 month he save 11 rental amount which equal to Rs. 24,400.

54 Summery The product base on the affordability + Gross Income + Payment Schedule application which means pay early is the profit to the user and loss to the financier in profitability and pay late is income to financier and loss to user.

Comparison
1. 2. A comparison between leasing and other similar forms of transactions, such as rental, will give a clearer picture. "Rent a Car business is a contract according to which the objects are leased to individuals or a number of users for a much shorter period than their actual useful life. In contract law, the "rental contract" specifies the lease and the usage for an indefinite period. Like IBM's computer sales system which has an overwhelming world market share. To promote sales in an attempt to outstrip its competitors, with the belief that it could control the progress of technological innovation of computers. Users of equipment leased on a rental system are major enterprises with continuous usage of rented equipment in a short-lived, but the lesser is charged with the responsibility for maintenance. In the case of "rental" the lesser is moreover charged with the responsibility for coping with the products obsolescence, so that it may be termed as a service-oriented business. Lease financing due to its special features supplement existing conventional forms of financing and further increase speed investment in the private sector. There is a large requirement of balancing and modernizing for existing industry. Lease financing through balancing and modernization of existing industry improve the capacity utilization, quality, production cost, profitability, internal generation of cash for future investment and international competitive capability to increase exports. Lease financing is most suited to the programs of balancing, modernization and replacement. It would involve a small dosage of investment which would carry relatively smaller investment risks but would result in a quick value added production. It would increase capacity utilization and thus contribute to the growth of the economy. Leasing is the contract Asset transfer to another person for use on an agreed period with financial consideration. The subject of lease must have a valuable use. It is necessary for a lease contract that body of leased property remains in the ownership of the seller and only its usage is transferred to the lessee. Any thing that cannot be used cannot be leased.

3. 4. 5. 6.

7.

Economic Role of Ijarah

1. 2. 3.

4.

5. 6. 7. 8. 9.

55 10. Lease cannot be affected in respect of money, edibles, fuel and ammunition etc. due to consuming nature of products. 11. If anything of this nature is leased out, it would be consider as a loan with all rules concerning the transaction of loan that would accordingly be applied. 12. Any rent charges on this invalid lease would be treated as interest that is usually charged on a loan. 13. All the liabilities emerging from the ownership shall be borne by the lesser, but the liabilities referable to the use of the property shall be borne by the lessee. Example Mr. Ahmed leased his House to Mr. Badar. All taxes on the house shall be borne by Mr. Ahmed as he is the owner While water tax, electric bills and all expenses pertain to the use of house shall be borne by Mr. Badar the lessee. Example A said to B I lease you out my cars. Lease is void unless leased car is clearly identified. Rental must be determined for whole period of lease at the time of contracting a lease. It is permissible that different amounts of rent are fixed for different phases during the lease period, provided that the amount of rent for each phase is specifically agreed upon at the time of lease agreement. If the rent for a prior phase of the lease period has not been determined or left at the option for the lesser, the lease will not be valid. Example Mr. A leases his house to Mr. B for a period of 5 years. The rent for the first period is fix at an amount on monthly basis and it is also agreed that the rent of every subsequent year shall be 10% more than the previous one. The leases remains valid In this example Mr. A laid down a condition in the agreement that rent of an amount per month is fixed for the first year only. Rent for subsequent year shall be fixed each year at the option of the lesser. The lease is void, because the rent would be uncertain. Mostly in the long-term lease agreement it is not in the benefit of the lesser to fix one amount of rent for the whole period due to the fact the market conditions differ from time to time. In this case, the lesser has two options, either (a) He can contract a lease with a condition that the rent shall be increased at a specified proportion after a specified period. Like six months or one year. Or (b) He can contract the lease for a shorter period after which the parties of lease

56 in fresh terms and conditions, but the renewal shall be affected by mutual consent with full liberty to each one of them to refuse the renewal. In such case the lessee is bound to vacate the leased assets and return it back to the lesser. Lesser cannot raise rent unilaterally for that reason any agreement to the contrary is null and void. Rent or part thereof may be payable in advance before delivery of asset, but the amount collected by lesser shall remain with him as account payment and shall be adjusted to the rent after it is due. Lease period shall commence from the date on which leased asset has been delivered to lessee, no matter whether the lessee has started using it or not.

If leased asset has totally lost the function for which it was leased for and no repair is possible then lease shall terminate on the day on which such loss has been caused. However, if the loss caused by the misuse or by the negligence of the lessee he will be liable to compensate the lesser with the depreciated value of the asset as it was immediately before the loss. 1. Like other modes of financing, lease is not originally treated as one. 2. It is simply a transaction meant to transfer the use of an asset from one person to another for an agreed consideration. 3. Certain financial institutions have adopted leasing as a mode of finance used in place of interest. 4. This kind of lease, generally known as the financial lease notable from the operating lease that has many basic features of actual leasing transactions with which it is distributed with. 5. When the financial institutions on interest free modes established in the recent past they found that leasing was a recognized mode of finance throughout the world. 6. On the other hand, they realized that leasing was a lawful transaction according to Shariah and it could be used as an interest free mode of finance. 7. Leasing has been adopted by the Islamic Financial Institutions, yet very few of them paid attention to the fact that the financial lease has a number of characteristics more similar to interest as the actual lease transaction. 8. They started using same model agreements for leasing as were in vogue among the traditional financial institutions without any modification, while a number of their provision was not in conformity with the Shariah. 9. The primary advantage of Ijarah over the conventional forms of borrowing to finance equipment is that the ownership of the asset remains with the lesser. 10. The financing is largely unrelated to the size of assets and the capital base of the lessee, depending principally on the ability of cash flow to service payments of lease rentals.

11.

Ijarah is probably the most suitable mean to raise investment funds

57 especially for industries where rapid technological innovation is either underway or desired, top class firms which are quickly expanding their business or small & medium enterprises and firms which have normally insufficient assets and capital base to meet normal collateral requirements of most other forms of long term financing. The basic security under the Ijarah arrangement is the "ownership of the equipment". The title of ownership to the equipment remains with the leasing company but in case of serious default, the equipment is repossessed

Chapter 10

Sukuk Financial Instrument

Sukuk is an Arabic word and plural of a word Sakk. It signifies legal instrument, deed or

58 Cheque. It is an Arabic name for a financial certificate which can be taken similar to Bond. Islamic Jurisprudence Sukuk A financial product that develops input methods for capital resources. It structure and engineered. It is an Islamic financial products bases of output Fixed and guaranteed Income or interest bearing bonds are not permissible in Islam. Sukuk is profit base instrument that declare its outcome on the utilization of the money collected on maturity of the term of investment. Profitability: It profit is not pre-agreed, pre-determines or fixed. The total investment is deducted from the cost to determine the Net Profit of the transaction for which the Sukuk been issued. Upon realization of the Net profit the total amount is distributed according the ratio of the investment in the capital of the invested amount Sukuk are securities Meeting terms of Islamic Financial law and investment principles which prohibits charging, paying interest & involvement of Riba. Sukuk is a Financial Assets Act in accordance with Islamic law and classified in accordance with their tradability and non-tradability in the secondary markets Islamic Investment Principles IIP: IIP is the part of Shariah, indirectly to be an Islamic Law. Actually it is extensive to law as it cover general body of spiritual and moral obligations and duties in Islam A time-honored instrument for a contemporary use in post Islamic era Sakk which are now called Sukuk were similar with Conventional Cheque. It is a document representing a contract, Conveyance of rights, obligations or financial transaction in conformity with the Shariah. Practical evidence in archives indicates Sukuk as a product extensively used during medieval Islam for transferring financial obligations originating from trade and other commercial activities. Fundamental nature of Sukuk in modern Islamic perspective lies in concept of asset monetization and Securitization that is achieved through the process of issuance of Sukuk (Taskeek). Its great potential is in transforming an assets future Cash Flow into present cash flow. . Sukuk may be issued on existing as well as specific assets that may become available at a future date. Sukuk is the key to structure capital as well cover the liquidity requirement for

59 permanent or temporary requirement The need for tangible assets Shariah Rule Financing should only be raised for purpose specific and identifiable which must have the Economical and social viability. Transactions under indebtedness are prohibited as a result conventional bonds or debenture are not permitted. Sukuk returns and cash flows are linked to transaction workout Net Profit of transaction without any guarantee of return. User of funds needs to utilize financing along with contributing its equity in transaction. Contribution of Equity is the share of risk that user confirm in the transaction. Sukuk funds are Equity of Sukuk owners that form into finance or funds for venture Shariah accept with risk and return guideline of Islam.

Problem with interest or Riba Bad Earning Shariah Rule

Money is considers as measuring tool for value. Money is not a commodity. Money cannot be bought and sold in similar quality. Money to remain in circulation and cannot to be stagnant or in holding Money must have support of equal value with authentication. Money issuance on goodwill is an artificial value and such issuance is just a paper printing. Money requires to be utilized to receive income or anything that has the type of money alone. Money in exchange of money in similar quality is Interest a price of Money which is Riba. Implication for Islamic financial institution is trading and financing, receivables for anything other than equality. Conventional loan, lending, borrowing or debt base plastic currencies are not permissible. Ambiguity in contractual terms or uncertainty in existence of an original asset consider as unoriginal. Shariah add in the concept of Public benefit, that, overwhelmingly in the public good may yet be transacted Hedging or mitigation of avoidable business risks may fall into this category of Gharar but there is still much discussion yet to come.

Problem of uncertainty Gharar

Profit and acceptance of Loss

Declaration of Results Financing is made available on 8 P formula

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Financing to be in clear confirmation: Term and condition to pre-agreed Duties and Responsibilities to define Decision to be witness by active witnesses Arbitration to be integral part of agreement Agreement to be made by third person. Monitor to be external body. All matters to be in writing Sukuk is the source of financing Sukuk is the source for structuring Capital Sukuk is encouragement of saving conduct Sukuk is a trading instrument without excess to the face value Sukuk is specific and in general. Sukuk must be in clear period and validity. Sukuk return are declared on maturity. Sukuk are widely regarded as controversial due to their visible purpose of evading limits on Riba Traditional scholars do not believe that this is effective, referring to the fact that Sukuk requires payment for Time Value of Money This consider as the basic application of Interest Present Sukuk offer fixed and guaranteed rate of return on investments, similar to interest and it is risks free of particular venture for which Sukuk were issued. In reality banks invest in assets and return from investment is spread over the period. This flow of income is "fixed" and Rate is pre declare without utilization of investment amount which given to investors. There is an asset in the background. There is more security for the investor. This security makes Sukuk increasingly appealing to global investors including Muslims and non-Muslims. The soul of the Sukuk is not what is been practice and the return is simply an Interest which deviate the principal of participation.

Sukuk for Financing

Controversy

Chapter 11
Important Terms use in Islamic Finance & Banking
Al Ajr: A commission, fees or wages levied for services. Arboon: Margin, Advance or up-front

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Amanah: Reliability or trustworthiness. Important value of Islamic society in mutual dealings. It also refers to deposits in trust. A person may hold property in trust for another, sometimes by implication of a contract. Al Wadiah: Resale of goods at a discount to the original cost. Al Wakala: Absolute power of attorney. Al Rahn Al: Arrangement where a valuable asset is placed as a collateral for a debt. The collateral is disposable in the event of a default. Pawn Broking. Al Wadiah: Safe keeping. Awkaf/Awqaf: A religious foundation set up to assist the poor and needy. Bai Muajjal (Deferred Payment Contract) A contract involving the sale of goods on a deferred payment basis. Bai al Dayn Debt financing: Bai al-Dayn is a short-term facility with a maturity of not more than a year. Only documents evidencing debts arising from bona fide commercial transactions can be traded. Bai al Salam This term refers to advance payment for goods which are to be delivered later. Bai Bithaman Ajil: This contract refers to the sale of goods on a deferred payment basis. The client may be allowed to settle payment by installments within a pre-agreed period, or in a lump sum. Similar to a Morabaha contract, but with payment on a deferred basis. Baitul Mal: Treasury. Fatwah: A religious decree. Fiqh: Islamic jurisprudence. The science of the Shariah. It is an important source of Islamic economics. Farman: Order or directives Gharar: Uncertainty, hazard, chance or risk. Technically, sale of a thing which is not present at hand; or the sale of a thing whose consequence or outcome is not known; or a sale involving risk or hazard in which one does not know whether it will come to be or not, such as fish in water or a bird in the air. Deception through ignorance by one or more parties to a contract. There are several types of Gharar, all of which are Haram. The following are some examples: Selling goods that the seller is unable to deliver Selling known or unknown goods against an unknown price Selling goods without proper description Selling goods without specifying the price Making a contract conditional on an unknown event Selling goods on the basis of false description Selling goods without allowing the buyer to properly examine the goods Gambling is a form of Gharar because the gambler is ignorant of the result of his gamble .Halal:That which is permissible. In Islam there are activities, professions, contracts and transactions which are explicitly prohibited (Haram) by the Qur'an or the Sunnah. Barring them, all other activities, professions, contracts, and transactions etc. are Halal. An activity may be economically sound but may not be allowed in the Islamic society if it is not permitted by the Shari'ah. Hawala:Lit: bill of exchange, promissory note, cheque or draft. Technically, a debtor passes on the responsibility of payment of his debt to a third party who owes the former as debt. Thus

62
the responsibility of payment is ultimately shifted to a third party. Hawala is a mechanism for settling international accounts, by book transfers. HaramUnlawful. Ijarah (Leasing) A contract where the bank or financier buys and leases equipment or other assets to the business owner for a fee. Ijarah Wa Iqtina (Lease to Purchase) This term refers to a mode of financing adopted by Islamic banks. It is a contract under which the Islamic bank finances equipment, a building or other facility for the client against an agreed rental together with an undertaking from the client to purchase the equipment or the facility. The rental as well as the purchase price is fixed in such a manner that the bank gets back its principal sum along with some profit which is usually determined in advance. Ijtehad: effort, exertion, industry, diligence. Technically try of a jurist to derive or formulate a rule of law on the basis of evidence found in the sources. Istisnaa (Progressive Financing) A contract of acquisition of goods by specification or order where the price is paid progressively in accordance with the progress of a job. An example would be for the purchase of a house to be constructed, payments are made to the developer or builder according to the stage of work completed. This type of financing along with Bai salaam are used as purchasing mechanisms, and Morabaha and Bai Muajjal are for financing sales. Jualal: Predetermined price for performing any service. Modaraba (Trust Financing to skill) Modarib: Entrepreneur, a person having skills Muamalat: Economic transaction or commercial activity. Morabaha (Cost+Plus Financing in Trading) Morahib: Trader Musharaka: Venture or Equity Financing that become part of the Capital. Mushariks: Partner Musaqa: A contract in which the owner of the garden shares its produce with another person in return for his services in irrigating the garden. Muzara: A contract in which one person agrees to till the land of the other person in return for a part of the produce of the land. Qard Hasan: Financial assistance without profit on the condition that the amount shall be paid back or the services shall be given against the financial assistance. Qimer: gambling. An agreement in which possession of a property is conditional upon the happening of an uncertain event. By implication it applies to those agreements in which there is a definite loss for one party and definite gain for the other without specifying which party will gain and which party will lose. Rab-al-Maal: In a Modaraba contract the person who invests the capital. Riba: This term literally means an increase or addition. Technically it denotes any increase or advantage obtained by the lender as a condition of the loan. Any risk-free or "guaranteed" rate of return on a loan or investment is Riba. Riba, in all forms, is prohibited in Islam. In conventional terms, Riba and "interest" are used interchangeably. Ruqa: Cheque or pay-order Sadaqah: Charitable giving.

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Shariah / Sharia: Islamic law derived from 3 Primary sources: the Quran; the Hadiath (sayings of the Prophet Muhammad); and the Sunnah (practice and traditions of the Prophet Muhammad) and three Secondary sources Qiyas (Analogical deductions and reasoning), Ijma (consent of Islamic Scholars) and Ijtehad (Legal reasoning). Shirkah A contract between two or more persons who launch a business or financial enterprise to make profit. Shirkah = Musharaka. Suftajal: Bill of exchange or a banking instrument used for payable at a future fixed date and in other cases they were payable on sight. Suftajah is distinct from the modem bill of exchange in some respects. Firstly, a sum of money transferred by Suftajah had to keep its identity and payment had to be made in the same currency. Exchange of currencies could not take place in this case. Secondly, Suftajah usually involved three persons. 'A' pays a certain sum of money to 'B' for agreeing to give an order to 'C' to pay back to 'A'. Third, a Suftajah could be endorsed. Sukuk is an investment certificate with specific purpose for a specific period in which the owner title is endorse on the face and it is non-negotiable, not to be use for collateral, not use as cash and non transferable. It is a certificate entitling the holder to the benefits of the income stream of the assets backing the certificate. Equivalent to a fixed income bond. Takaful: This is a form of Islamic insurance based on the Quranic principle of Ta'awon or mutual assistance. It provides mutual protection of assets and property and offers joint risk sharing in the event of a loss by one of its members. Takaful is similar to mutual insurance in that members are the insurers as well as the insured. Waqf: detention appropriation or tying-up of a property in time without end so that no propriety rights can be exercised over the usufruct. The Waqf property can neither be sold nor inherited or donated to anyone. Awqaf consists of religious foundations set up for the benefit of the poor. Zakat: contribution which is prescribed by Islam on all persons having wealth above an exemption limit at a rate fixed by the Shariah. According to the Islamic belief Zakat purifies wealth and souls. The objective is to take a part of the wealth and distribute it among the poor and the needy. It is levied on cash, cattle, agricultural produce, minerals, capital invested in industry, and business etc. The distribution of Zakat fund has been laid down in the Quran (9:60) and is for the poor, the needy, Zakat collectors, new converts to Islam, travelers in difficulty, captives and debtors etc. It is payable if the owner is a Muslim and sensible. Zakat is the third pillar of Islam. It is an obligatory contribution which every well-off Muslim is required to pay to the Islamic state, in the absence of which individuals are required to distribute the Zakat among the poor and the needy as prescribed by the Shariah.

QUIZ EXERCISE
1. True/False Islam is only a religion; it is not a complete political, social, financial & economic system for the Islamic & Non Islamic Community. F

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2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. An Islamic economic system is very new system based on social justice and equality in all respect. F Islamic economic system is an independent system. T In Islamic financial system compounding of saving return are not prohibited. F Conventionally it is found that savers have higher participation in investment and lesser in receiving in return. F Conventional system restrict low ratio of saver on the saving return and allow higher return to the saving fund operators. F The Islamic economy is composed of three basic components. T Islamic laws dont permits three types of ownership, the individual ownership, the state ownership and the public ownership. F Islam is Deen and not the Religion. T Islamic Economic system is based on five principles. F Post Islam Era financial matters were commonly practiced system on the bases on economical priorities (False) System derived from Quran, Sunnah and Hadiath has the better title that signify motive and concept of the system as Conventional Financial System (False) Islamic Banking is limited to banking only and doesnt cover capital formation, capital markets, and all types of financial arbitration (False) Conventional financial system deals primarily with the economic and financial aspects of transactions (True) Interest is an earning on lending of money by lender from Brower on condition that lender shall charge a fixed amount of money in addition to the principal. (False) Riba has nothing to do with influencing volume of savings. Practically it is rate of return on investment that determines rate of saving (False) Islamic Financial System do not neglect saving motives and does not stick on to Islam and nature of human beings and their character (True) In Islamic Financial System Compounding of saving return are not prohibited (False) Exploitation by taking advantage of status and position is an example of interest (False) The Islamic financial system employs concept of participation in enterprise, utilizing funds at risk on a profit-and- loss-sharing basis (True)

Quiz on Islamic Financial Products

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 NAME THE FINANCIAL PRODUCTS Profit determined on rents & volume of profit link to payment schedule Selling expenses are the part of cost of the product Arboon is the part of risk participation in trade transaction. Loss of 1st term is cover through 2nd term of profitability in share price The Capital of efforts is paid through Management Fee. Affordability a combination of saving & expense of gross monthly income In cost plus principle financing profit is pre agreed ratio on Net Profit Venture Financing is made under the transaction mode Assets financing is made under the transaction mode of Inflation, holding and price growth can be curtail through Sarif is the partner in financing mode Capital cannot be in commodity of metal currency BMR suits to financing mode fall under Financing is made on the sale and purchase of net worth Financier cannot interfere till the maturity of the transaction Financing cannot be return it is adjusted by profitability Capital contribution through issuance of financial instrument

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18 Goods purchased & supplied and profit shared at pre agreed ratio after taking out Management fee from GP 19 Capital cannot be structured until issuer contribute its equity 21 Rehen 22 Ruqa 23 Hawala 24 Shirakat al Anan 25 Shirakat al Wujuh 26 Jiberia Contract 27 Hawania Financing 28 Contract for water 29 Can be traded in secondary market but cannot be exchange not can be sold 30 The period of contract is not specified, it can continue so long as the will of the parties. 31 Purchase empty boxes from Bank at Rs.40 each and bank made profit of Rs.5 each 32 Karim enter as partner & purchase shares of company at a price of Rs.12,000 & Bank Muslim & Zafar earn Rs.1000 each on every share Mr. Zafar applied for banking facilities from Bank Muslim. After detail appraisal the Bank Muslim sanction the following facilities Name the Financial Products 33 Rs.10 million for the procurement of Raw Material 33 Rs.10 million for Capital Assets 34 Rs.10 million short terms financing on case to case basis on 60:40 profit transaction against viability of the transaction with A, B & C. 35 Rs.20 million working capital for 3 years on buy back agreement under diminishing method. 36 Amount invested at 20:80 and imported Sugar Rs.200 mil & purchased from bank at Rs.210 mil. (2 Transactions) 37 Added additional boiler at a cost of Rs.300,000 for 3 years. 38 Premium received on each share Rs.15 upon sale to issuer. 39 Acquired delivery van Rs.300,000 on three years payment terms. 40 Capital contributed and invested under BMR (2 Transactions) 1 In cost plus principle financing profit is pre agreed ratio on Net Profit 2 Cost of the product include the Selling expenses 3 Financier is responsible and worker is dutiable in the transaction. 4 Installment less affordable amount is the rent of the month 5 Net divided by base price is per unit share in transaction. 6 Affordability a combination of saving & expense of gross monthly income 7 Total Rent into number of facility month is the Profit of financier 8 Equity Financing develop Venture Financing in a transaction mode 9 Financier is allowed to take profit for buy and sell in the transaction 10 Inflation, holding and price growth can be curtail through 11 Sarif is the partner in financing mode 12 Capital cannot be in commodity or metal currency 13 BMR facility suits to financing mode fall under 14 Financing is made on the sale and purchase of net worth of venture 15 Financier cannot interfere till the maturity of the transaction 16 Financing cannot be return it is adjusted through by profitability 17 Financial instrument for Capital cannot be issued without Equity 18 Profit is share at pre-agreed ratio after deduction of management fee 19 Profit is divided by number of units to ascertain the current unit price 20 Both partner reduce their profit to sell goods less then agreed sale price 21 Capital cannot be in commodity and always in currency

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22 23 24 25 26 27 B 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 Management fee shared among working partners if any partner is silent Musharka financing is for Morabaha Financing is for Ijarah Financing is for Modaraba Financing is for Combination of Ribh and Riba is Chose the suitable words from below given words Opposite to Rehen is Rate is applied in the money matter relates to Differed payment against delivery of goods Money is a medium of exchange and not the The value of commodity is determine to the moneys Lending is liability and financing is Advance against delivery of goods P-S=GP-C=NP/ROI = Landing lead to liquidation and financing end at Man money and commodity are the three factors of Financing is an act of money which is classified as the opposite to 43Market where money is bought and sold is known as Financing increase capital base and decrease Landing leads to liquidation and Money is Potential capital, b joining with factor of production it become Money cannot be treated as capital it is not in Bad practice to earn and gain is called Income over to money share in ration is Part of income that is kept aside to be spent at later time Money is bought and sold and its price is called Shirakat for Good will. Shirakat for Management Capabilities Shirakat with Authority is for Shirakat Contract for Minor Partner Financing of irrigation Financing for Agricultural Financing for Animal Farming Saving exercises a practical devotion of Rule of Profit & Loss is Investment in financial securities is only valid in shares and not in The purpose of Islamic Banking Trading and these banks called as In investment expenditure are not deducted from capital but from Provision made to encounter losses and are deducted from profit are Right Words to select Arboon, By Muajjal, Profit , Lending, inflation , Circulation, Profit, Interest , ownership, Lending, Commodity, By Salaam, Ownership, Productions, Monitory, Riba, Volume, Capital , Profit, Saving, Muzarat, Massraf, Participation, Al Wajuh , Al Inan , , Al Abdan, Hawania, Al Mufawadah, Reserve, Debentures, Musaqqa , Worship, Profit

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Comparison
Modaraba Musharak Morabaha Ijarah Modarib Modarib Musharak Sarif Rehen Arboon Shirakat Al Wajooh Shirakat Al Anan Shirakat Al Abdan Shirakat Al Mufadah Suftaja Ruqa Hawala Zarkari Quarz Hawania Muzarat Musaqqa Qarz-e-Hasana Zakat Ability Financing Equity Financing Commodity Financing Assets Financing Entrepreneur Trader Partner User or Client Security or Collateral Equity or Advance against transaction Partnership on Goowill Partnership with Minor Partnership on the basis of Skills and Capability Partnership in Authority to Financier in Modaraba Mode Bill of Exchange Cheque or Receipt Money Transfer Financing Loan Financing for Animal Farming Financing for Agriculture Financing for irrigation and water need and use Loan for Human Ability Development Socio uplifting of Men to be productive part of community

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Numerical & Solution MORABAHA

Bank Muslim enter into the import and sale of5000 Mobile phone at a value of Rs.3800 each with additional cost of Per Piece Rs.400 for freight, Insurance Rs.350, Storage 300, Tax Rs.100 and Selling Expenses Rs.250. Morahib added Rs.380 per peace as ARBOON Bank Muslim issue Sukuk @ Rs.1000 each and Mr. Khalid brought 4100, Mr. Muhammad 3800, Mr. Ahad 7600 Mr.Hasan 5100, Mr,Khan 3500. Morahib sold 4000 sets at Rs.6500 and 1000 set at Rs.6100. The Net profit was shared at the ratio of 50:50 which Bank Muslim converted into per Sukuk profit and distributed among investors What is the each Sukuk profit? Rs.128.63 1. 2. 3. 4. 5. What is the profit earned by each investor? What is the average Sale price of each Mobile phone? What is the total purchase price? What is the Total Cost over to the price of the Mobile? What is ROI over to the total purchase amount? Total Sukuk Price 1,000.0 Sukuk Sukuk Subscription 24,100,000.0 24,100.0 Mr. Khalid 4,100,000.0 4,100.0 Mr. Muhammad 3,800,000.0 3,800.0 Mr. Ahad 7,600,000.0 7,600.0 Mr.Hasan 5,100,000.0 5,100.0 Mr. Khan 3,500,000.0 3,500.0 Profit /Loss on Sukuk 3,100,000 128.63 Second Form LPO Amount Freight Insurance Storage Tax Selling Expenses Bank financing Arboon Bank Financing Total Purchase Price Sale Price Sale Price Total Sale Price Less Financing Gross Profit Quantity 5,000 5,000 5,000 5,000 5,000 5,000 5,000 10 5,000 5,000 4,000 1,000 5,000 5,000 5,000 Per Piece 3,800 400 350 300 100 250 5,200 380 5,200 5,580 6,500 6,200 6,440 5,200 1,620

3,100,000.0 527,385.9 488,796.7 977,593.4 656,016.6 450,207.5 3,100,000 Total Amount 19,000,000 2,000,000 1,750,000 1,500,000 500,000 1,250,000 26,000,000 1,900,000 24,100,000 27,900,000 26,000,000 6,200,000 32,200,000 24,100,000 8,100,000

ROI 12.86 12.86 12.86 12.86 12.86 12.86

Add

Less

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Less Arboon Net Profit Morahib Bank ROI 5,000 5,000 50 50 380 1,240 (1,900,000) 6,200,000 3,100,000 3,100,000 22.22

Modaraba
Bank Islami enter into the import and sale of 4000 Watches at a value of Rs.1000 each with additional cost of Per Piece Rs.100 for freight, Insurance Rs.200, Storage 150, Tax Rs.50 and Selling Expenses Rs.250. Morahib added Rs.400 per peace as ARBOON. Bank Muslim issue Sukuk @ Rs.1000 each and Mr. Khalid brought 1800, Mr. Muhammad 1500, Mr. Ahad500 Mr.Hasan 600, Mr,Khan 1000 giving the total financing amount of Rs.5.4 Million. Morahib sold 4000 sets at Rs.2400 and 1000 set at Rs.2100. The Net profit was shared at the ratio of 50:50 which Bank Muslim converted into per Sukuk profit and distributed the profit to the investors. 1. What is the each Sukuk profit? 2. What is the profit earned by each investor? 3. What is the average Sale price of each Mobile phone? 4. What is the total purchase price? 5. What is the Total Cost over to the price of the Mobile? 6. What is ROI over to the total purchase amount? Sukuk Price 100.0 Total Sukuk Sukuk Subscription 5,400,000.0 5,400.0 245,000.0 ROI Mr. Khalid 1,800,000.0 1,800.0 231,535.3 12.86 Mr. Muhammad 1,500,000.0 1,500.0 192,946.1 12.86 Mr. Ahad 500,000.0 500.0 64,315.4 12.86 Mr.Hasan 600,000.0 600.0 77,178.4 12.86 Mr. Khan 1,000,000.0 1,000.0 128,630.7 12.86 Profit /Loss on Sukuk 245,000 45.37 694,606 12.86 Second Form Quantity Per Piece Total Amount LPO Amount 4,000 1,000 4,000,000 Freight 4,000 100 400,000 Insurance 4,000 200 800,000 Storage 4,000 150 600,000 Tax 4,000 50 200,000 Selling Expenses 4,000 250 1,000,000 Total Purchase Price 4,000 1,750 7,000,000 Arboon 4,000 400 1,600,000 Bank Financing Amount 4,000 1,350 5,400,000 Sale Price 3,000 2,400 7,200,000 Sale Price 1,000 2,100 2,100,000 Total Sale Price 4,000 2,325 9,300,000 Less Financing 4,000 1,750 7,000,000 Gross Profit 4,000 575 2,300,000 Arboon 4,000 400 1,600,000 Net Profit 4,000 175 700,000 Morahib 35 245,000 Bank 65 455,000

70
ROI 12.96

Modaraba
Gulf Textile enters into Cotton Morabaha with Bank East & West for the amount of Rs.100 million against the Arboon participation of 20%. The Bank East & West floated Cotton Trading Sukuk at a Base Price of Rs.100 each Sukuk. University Bank, Bank Community, Bank Army, United Finance, Money Maker bought and Gulf Textile bought No of Sukuk 10,000, 15,000, 20,000, 20,000, 15,000, 20,000 respectively. Gulf Textile declare the cost over to the price per bail at Rs.24,000 and cost Freight 250, Insurance 180, Storage 150, Tax 120, Selling Expenses Rs.300. Te Sale Price of 3000 Bails was reported at Rs. 26,000 per bail and 1000 Bails at Rs. 25,950. The transacted reported profit which was distributed according to Sukuk holding by applying Sukuk Profitability Sharing method. Give the following information separately: 1. What is the each Sukuk profit? 2. What is the profit earned by each investor? 3. What is the average Sale price of each Mobile phone? 4. What is the total purchase price? 5. What is the Total Cost over to the price of the Mobile? 6. What is ROI over to the total purchase amount? Sukuk Price 1,000.0 Total Sukuk Profit ROI Sukuk Subscription 100,000,000 100,000.0 3,800,000.0 University Bank 10,000,000 10,000.0 1,286,307.1 12.86 Bank Community 15,000,000 15,000.0 1,929,460.6 12.86 Bank Army 20,000,000 20,000.0 2,572,614.1 12.86 United Finance 20,000,000 20,000.0 2,572,614.1 12.86 Money Maker 15,000,000 15,000.0 1,929,460.6 12.86 Gulf Textile 20,000,000 20,000.0 2,572,614.1 12.86 Profit /Loss on Sukuk 3,800,000 38.00 10,290,456 10.29 Second Form Quantity Per Piece Total Amount LPO Amount 4,000 24,000 96,000,000 Freight 4,000 250 1,000,000 Insurance 4,000 180 720,000 Storage 4,000 150 600,000 Tax 4,000 120 480,000 Selling Expenses 4,000 300 1,200,000 Total Purchase Price 4,000 25,000 100,000,000 Bank Financing Amount 4,000 20,000 80,000,000 Sale Price 3,000 26,000 78,000,000 Sale Price 1,000 25,800 25,800,000 Total Sale Price 4,000 25,950 103,800,000 Less Financing 4,000 25,000 100,000,000

71
Net Profit 4,000 950 3,800,000

Ijarah
Bank Islami enter into Ijarah financing through syndicate financing and received contribution of Rs.1 Million from NBP, Rs.1.75 Million from MCB, Rs.1 Million from HBL, Rs.2.5 Million from FIB and self Investment Rs.5 million. Gull Fabric agrees pay Arboon 25% of total syndicate contribution and agree the Repayment period of 48 months at 25% of GMI turnover Rs.1 million. The equipment was purchase at cost of Rs.15 Million. Workout the transaction and reply the below given questions in support of your working: 1. What is the Syndicate Amount? Rs.11.25 Mil 2. What is the Ratio of Investment of each investor? 8.89, 15.56, 8.89, 22.22, 44.44 3. What is the Price of the Equipment? Rs.15 mil 4. What is the Affordability Amount against Gross Monthly Turnover? Rs.330,000 5. What is the financing amount against total cost of the equipment? Rs.11,250,000 6. What is Ratio of Investment between Financier and Sarif? 25:75 7. What is the total amount paid by the Sarif for the equipment? 19,590,000 8. What is the saving and investment percentage? 23.44% & 9.56% 9. What is each investor share in profit percentage? 3.63%, 6.35%, 3.63, 9.07, 18.13 10. What is repayment amount? Rs.330,000 Investors Amount Earned % Share 1 NBP 8.89 1,000,000 408,000 40.80 3.63 2 MCB 15.56 1,750,000 714,000 40.80 6.35 3 HBL 8.89 1,000,000 408,000 40.80 3.63 4 FIB 22.22 2,500,000 1,020,000 40.80 9.07 5 Bank Islami 44.44 5,000,000 2,040,000 40.80 18.13 Principle Investment 100 11,250,000 4,590,000 40.80 Total Installment 48 Market Price 15,000,000 Tax Insurance Cost of Equipment 15,000,000 Less Equity (In %) 25.0 3,750,000 Financing % Ijarah Financing Amount 11,250,000 75.00 Installments for Ownership 48 234,375.00 Profit PA Rentals in % of Installment 40.80 95,625.00 10.20 Total Monthly Payment 330,000.0 Cost of the Equipment 15,000,000.0 Total Rentals 4,590,000.0

72
Total payment Total Cost to Sarif Gross Monthly Income Recovery Level Saving Expenses Total Burden on Income 19,590,000.0 23,340,000.0 1,000,000.0 330,000.0 23.44 9.56 33.00

33.00

Ijarah
Bank Islami enter into Ijarah financing through syndicate financing and received contribution of Rs.1 Million for NBP, Rs.1.5 Million from MCB, Rs.1.250 Million from HBL, Rs.3 Million from FIB and self Investment Rs.4.5 million. Gull Fabric agrees to invest 25% of total syndicate contribution and agree the Repayment period of 48 months at 25% of Gross Monthly Turnover of Rs.1.5 million. The equipment was purchase by paying 1% Tax and 4% insurance equal to 1% per year. Workout the transaction and reply the below given questions in support of your working What is the Syndicate Amount? 1. What is the Ratio of Investment of each investor 2. What is the Cost Price of the Equipment? 3. What is the Affordability Amount against Gross Monthly Turnover? 4. What is the financing amount against total cost of the equipment? 5. What is Ratio of Investment between Financier and Sarif? 6. What is the total amount paid by the Sarif for the equipment? 7. What is the saving and investment percentage? 8. What is each investor share in profit percentage? 9. What is repayment amount? Investors Amount Earned % Share 1 NBP 8.89 1,000,000 408,000 40.80 3.63 2 MCB 13.33 1,500,000 612,000 40.80 5.44 3 HBL 11.11 1,250,000 510,000 40.80 4.53 4 FIB 26.67 3,000,000 1,224,000 40.80 10.88 5 Massraf Pakistan 40.00 4,500,000 1,836,000 40.80 16.32 Principle Investment 100 11,250,000 4,590,000 40.80 Total Installment 48 Market Price 15,000,000 Tax Insurance Cost of Equipment 15,000,000 Less Equity (In %) 25.0 3,750,000 Financing % Ijarah Financing Amount 11,250,000 75.00 Installments for Ownership 48 234,375.00 Rentals in % of Installment 60.00 140,625.00

73
Total Monthly Payment Cost of the Equipment Total Rentals Total payment Total Cost to Sarif Gross Monthly Income Recovery Level Saving Expenses Total Burden on Income 375,000.0 15,000,000.0 6,750,000.0 21,750,000.0 25,500,000.0 1,500,000.0 375,000.0 15.63 9.38 25.00

25.00

Ijarah
NBP. HBL, UBL, ABL and Massraf Pakistan enter into syndicate financing to facilitate PTCL Telecommunication Instrument under Ijarah mode at a cost of Rs.12 million. Each bank participated with Rs. 1 mil, Rs.2 mil, Rs.2.5 Mil, Rs.3 Mil and Rs.1.5 mil. Profit and loss is agreed in according to the ratio of participation. PTCL contributed 20% and declared its GMI through this instrument Rs.1,000,000. Period of facility is 5 and affordability value declared at 30% of GMI . In addition PTCL agree to pay Insurance and Taxes at their own cost and expense. 1. What are the Ratio of Investment of each investor 2. What is the Cost Price of the Equipment? 3. What is the Affordability Amount against Gross Monthly Turnover? 4. What is the financing amount against total cost of the equipment? 5. What is Ratio of Investment between Financier and Sarif? 6. What is the total amount paid by the Sarif for the equipment? 7. What is the saving and investment percentage? 8. What is each investor share in profit percentage? 9. What is repayment amount? 10. What is repayment amount Investors 1 2 3 4 5 NBP MCB HBL FIB Massraf Pakistan Principle Investment Total Installment Market Price Cost of Equipment 11.76 19.61 24.51 29.41 14.71 100 60 Amount 1,200,000 2,000,000 2,500,000 3,000,000 1,500,000 10,200,000 12,000,000 12,000,000 Earned 540,000 900,000 1,125,000 1,350,000 675,000 4,590,000 % 45.00 45.00 45.00 45.00 45.00 Share 4.80 8.00 10.00 12.00 6.00 40.80

74
Less Equity (In %) Ijarah Financing Amount Installments for Ownership Rentals in % of Installment Total Monthly Payment Cost of the Equipment Total Rentals Total payment Total Cost to Sarif Gross Monthly Income Recovery Level Saving Expenses Total Burden on Income 15.0 60 76.47 1,800,000 10,200,000 170,000.00 130,000.00 300,000.0 12,000,000.0 7,800,000.0 19,800,000.0 21,600,000.0 1,000,000.0 300,000.0 17.00 13.00 30.00

76.47 6.37

30.00

Modaraba
Muslim Bank Finance Mr. Ahad Rs.10 million, Mr. Hasan 12 million, Mr. Muhammad Rs.15 million and Mr. Siddiqi Rs.7 million For their transaction under 10% Management Fee and Profit Sharing at 40:60, 50:50, 60:40 and 30:70 respectively. After Maturity the sales proceeds reported as Rs.15.5 million, Rs.14 million, Rs.19 million and Rs.4.5 million respectively. Make the necessary entries to work out the profit and loss sharing and give the following answers. 1. What is Bank Muslim Profit Rs.640,000 2. What is the loss reported by Mr. Siddiqi Rs.5,500,000 3. What is the Profit % of Bank Muslim 9.48% 4. What is the total earning of each Modarib Rs.3.13 Mi, Rs.1.7M , Rs.3.16 M 5. Write step by step process of this transaction each Bank Muslim Investment Bank Muslim Profit Investment Amount 1 2 Mr. Ahad Bank Muslim Investment 1 Mr. Hasan Bank Muslim 3 Investment 2 50 50 40 60 37,000,000 3,510,000 10,000,000 1,580,000 2,370,000 12,000,000 300,000 300,000 15,000,000 4,000,000 2,000,000 600,000 5,500,000 3,950,000

75
Mr. Muhammad Bank Muslim 4 Investment 3 Mr. Siddiqi Bank Muslim 1 2 3 4 Mr. Ahad Mr. Hasan Mr. Muhammad Mr. Siddiqi 30 70 Sales Proceed Reported at Maturity 10 10 10 10 15,500,000 14,000,000 19,000,000 4,500,000 1,550,000 1,400,000 1,900,000 (2,500,000) 60 40 1,260,000 840,000 7,000,000 (2,500,000) 2,100,000

Modaraba
Mr. Ayub Finance Mr. Ahad Rs.15 million, Mr. Hasan 15 million, Mr. Muhammad Rs.15 million and Mr. Siddiqi Rs.15 million For their transaction under 10% Management Fee and Profit Sharing at 60:40, 30:70, 45:55 and 20:80 respectively. After Maturity the sales proceeds reported as Rs.21 million, Rs.19 million, Rs.29 million and Rs.10 million respectively. Make the necessary entries to workout the profit and loss sharing and give the following answers. 1. What is Mr. Ahad Profit 2. What is the loss reported by Mr. Siddiqi 3. What is the Profit % of Mr. Ahad 4. What is the total earning of each Modarib 5. Write step by step process of this transaction each Mr. Ayub Investment 60,000,000 Mr. Ayub Profit 2,965,000 Mr. Ayub Investment 15,000,000 6,000,000 1 Muslim Bank 60 2,340,000 3,900,000 Mr. Ahad 40 1,560,000 2 Investment 1 15,000,000 4,000,000 Mr. Ayub Investment 30 630,000 2,100,000 Mr. Hasan 70 1,470,000 3 Investment 2 15,000,000 14,000,000

76
Mr. Ayub Investment Mr. Muhammad Investment 3 Mr. Ayub Investment Mr. Siddiqi Sales Proceed Reported at Maturity Mr. Ahad Mr. Hasan Mr. Muhammad Mr. Siddiqi 45 55 20 80 4,995,000 6,105,000 15,000,000 11,100,000 (5,000,000)

1 2 3 4

10 10 10 10

21,000,000 19,000,000 29,000,000 10,000,000

2,100,000 1,900,000 2,900,000 (5,000,000)

Modaraba
Mutamid Modaraba enter into Modaraba Financing with Mr. Salem for Rs.50 million at 60:40 without management fee. Mr. Salem enter into three financing transaction with Mr. Hasan Rs.10 million at 10% Management Fee, 60:40 profit sharing. Mr. Sultan Rs.15 million at 45:55 profit sharing and 10 % Management fee Mr. Qasim Rs.25 million at 30:70 profit sharing and 10% Management fee. On maturity the sales proceeds declared by the three Modarib were Rs.15 million, Rs.26 million &d Rs.19 million respectively. Workout profit & loss sharing and answer below given answers. 1. What is Mutamid Modaraba Profit Amount & % 2. What is the loss Amount and % reported by Mr. Qasim 3. What is the total profit amount and % reported in the transaction by Modarib 4. What is the total earning of each Modarib 5. Write step by step process of this transaction each Investment amount 50,000,000 6,020,000 Mutamid Modaraba Mr. Salem Modarib 60 40 1,212,000 808,000 (4,000,000) 2,020,000

77
Investment Mr. Hasan Mr. Salem Investment Mr. Sultan Mr. Salem Investment Mr. Qasim Mr. Salem Mr. Hasan Mr. Sultan Mr. Qasim 10,000,000 2,100,000 1,400,000 15,000,000 3,780,000 4,620,000 25,000,000 15,000,000 26,000,000 21,000,000 5,000,000 3,500,000 11,000,000 8,400,000 (4,000,000)

1 2

60 40 45 55 20 80 10 10 10

1 2 3

1,500,000 2,600,000 (4,000,000)

Musharka
Iqra Corp. applied Working Capital financing of Rs.20 million from Massraf Al Pakistan and declared its net worth of Rs.100 million divided into Unit at a value of Rs.100 each. During the facility period the following results were reported by the company. 1st Year Profit Rs.500,000, 2nd Year Profit Rs.600,000, 3rd Year loss Rs.700,000 and 4th Year Profit Rs.900,000. After receiving the 4th Year Profit Iqra Corp. purchase the total units from Massraf Al Pakistan at the prevailing rate of the year of purchase. Net worth of Sponsors Financier Sponsors 1st Year Profit/loss 2nd Year Profit/loss 3rd Year Profit/loss 4th Year Profit/Loss 100,000,000 20,000,000 1,000,000 200,000 800,000 500,000.0 600,000.0 (700,000.0) 900,000.0 Base Share Price 100.00

78

Description 1st Year Profit/loss Financier Net worth after Finance Profit 2nd Year Profit/loss Financier Net worth after Finance Profit 3rd Year Profit/loss Financier Net worth after Finance Profit 4th Year Profit/loss Financier Net worth after Finance Profit

Share Holding 1,000,000 200,000 800,000 500,000.0 1,000,000 200,000 800,000 600,000.0 1,000,000 200,000 800,000 (700,000.0) 1,000,000 200,000 800,000 900,000.0

Share Profit 100.00 100.50000 100.50000 0.500 100.00 100.60000 100.60000 0.600 100.00 99.30000 99.30000 (0.700) 99.30 100.20000 100.20000 0.900

Profit 100.500 20,100,000 80,400,000

100.600 20,120,000 80,480,000

99.300 19,860,000 79,440,000

100.200 20,040,000 80,160,000

Sukuk
Scan Industries received an order from its principles for the value of Rs.1.910 million for a supply of machinery parts. Scan with the assistance of its Bank Islami enter into Sukuk subscription and set a base price per Sukuk at Rs.1000 and issued 1910 Sukuk out of which Scan Industries purchase 250 Sukuk as an equity of the transaction and rest were sold to the below given buyer. At the maturity the profit was realized and distributed at per Sukuk value. Working of the transaction is given below. Sukuk Price 1,000.00 1,270.29 Number of Sukuk 1,910.00 Per Sukuk Profit 270.29 Total Sukuk Holders Amount No of Sukuk Profit Earn PAR Amount Hasan 140,000 140.00 37,840.31 1.981 177,840.31 Ghulam Mohammad 150,000 150.00 40,543.19 2.123 190,543.19 Ayesha 350,000 350.00 94,600.79 4.953 444,600.79

79
Seema Saboor Abdul Malik Abdul Wakeel Bank Islami Bank Muslim Bank Pakistan Scan Industries Total Subscription Sales Proceeds Gross Profit Withholding Tax Net Profit & ROI 120,000 130,000 150,000 110,000 160,000 170,000 180,000 250,000 1,910,000 2,500,000 590,000 73,750 516,250 120.00 130.00 150.00 110.00 160.00 170.00 180.00 250.00 1,503.60 32,434.55 35,137.43 40,543.19 29,731.68 43,246.07 45,948.95 48,651.83 67,571.99 516,250.00 Investment Profit Earn Total 1.698 1.840 2.123 1.557 2.264 2.406 2.547 3.538 27.029 152,434.55 165,137.43 190,543.19 139,731.68 203,246.07 215,948.95 228,651.83 317,571.99 2,426,250.00 1,910,000 516,250 2,426,250

12.50 27.029

1 2 3 4 5 6 7

FORMULAS Number of Sukuk = Investment Amount / Sukuk Price Gross Profit = Total Subscription - Total Proceeds Net Profit = Gross Profit - Cost Profit Earn = No of Sukuk Holding X Per Sukuk Declare Profit Per Sukuk Profit = Net Profit / Number of Sukuk PAR (Profit at Ratio) = Profit Earn / 100 / Total Subscription Total Amount = Investment + Profit Earn

Trim Sheet for Ijarah Financing

Vehicles price Rs.600,000 million Arboon 20% Period 36 month Gross Monthly Income Rs.75,000 Affordability at 30% Tax 2% & Insurance 3% per year 1. What is the cost price of the equipment? 2. What is the financing amount? 3. What is the rental amount? 4. What is the total rental? 5. What is the Expense and Saving percentage Total Installment 36 Market Price 600,000 Yearly Insurance (In %) 3 54,000

Rate X Principle /100 x No of Years = Total

80
insurance Cost Rate X Principle /100 = Total Tax Cost Market Price + Cost Market Price X Equity Rate /100 Cost of Equipment - Equity Cost of Equipment / Period Affordability Amount - Installment Amount Monthly Installment + Monthly Rentals Market Price+Cost+Rental Market Price-Arboon+Cost =FA Rent Amount x No Installment = TR Market Price X Equity Rate /100 FA+TR+Arboon=Total Amount Paid GMI x AR /100 MI x 100/ GMI MR x 100/ GMI Total Rental % / Total Period Monthly Profit % x 12 Monthly Profit % x Total Period

Income Tax. Cost of Vehicle Less Equity (Arboon) Ijara Financing Amount Installment for Ownership Rentals in % of Installment Repayment Monthly Total payment Financing Amount Total Rentals Paid Arboon Total Ijarah Adjustment Gross Monthly Income Recovery Level Saving Expenses Total Burden on Income Financier Monthly Profit Yearly Profit total Period Profit

1 20 36 50 36

30

1.4 16.7 50.0

6,000 660,000 120,000 540,000 15,000.0 7,500.0 22,500.0 810,000.0 540,000.0 270,000.0 120,000.0 930,000 75,000 22,500 20.00 10.00 30.00 7,500.0 90,000.0 270,000.0

Sukuk
Ahmed 12%, Mr. Muhammad 15%, Mr. Siddiqi 25%, Mr. Kashif 8%, Bank Islami 11% and Financial Institution Group 19% @ Rs.20,000 per Sukuk. The total subscription amount was invested with Sitara Chemical Company at 10% Management Fee and Profit Sharing 40:60. On the maturity the Sitara Chemical Declared 30% gross profit over the Capital. After deduction of 10% Management Fee and 40% Sitara Chemical Company profit the Net Profit was distributed among the investors according to their ratio of investment. Give the following details: (Format to be followed) 1. What is the total number of Sukuk issued? 2. What was the Sukuk price at the maturity?

81
3. What was the Gross Profit Amount and Share of Profit amount of Bank Islami? 4. What is the profit amount of each investor? 5. Explain step by step working of this transaction?

Sukuk
Sukuk Subscription Sukuk Holders 1 2 3 4 5 6 7 Mr. Hasan Mr. Ahmed Mr.Muhammad Mr. Siddiqui Mr.Kashif Bank Islami Financial Group Total Principal investment Less Sales & Services Gross Profit Less Management Fee Modarib Profit Net Profit Profit on each Sukuk No of Sukuk Sukuk Price at Maturity Gross Profit

Value of Sukuk 100,000 Invest Ratio 10 12 15 25 8 11 19 100

10 30

Total Amount of subscription 500,000,000 Subscription 500,000,000 50,000,000 60,000,000 75,000,000 125,000,000 40,000,000 55,000,000 95,000,000 500,000,000 500,000,000 32,500,000 (467,500,000) (46,750,000) (294,525,000) (58,905.00)

No of Sukuk 5,000 Sukuk Holdings 500 600 750 1,250 400 550 950 5,000

Price 5,000.00 Sukuk Profit (29,452,500) (35,343,000) (44,178,750) (73,631,250) (23,562,000) (32,397,750) (55,959,750) (294,525,000)

ROI (58.91) (58.91) (58.91) (58.91) (58.91) (58.91) (58.91)

(420,750,000) (126,225,000) -58.905

1 2 3

1250 21,250 7,500,000

519,750

Numerical Exercise Fall 20123

Modaraba Question No 1 Pakistan Group invested Rs.3 million with Ali Brokerage Inc on 40:60 profit sharing terms. Ali Brokerage enter into Modaraba Agreement: 1. Shan Corp for Rs.800,000 at Management Fee 10% and profit sharing 40:60. 2. Rainbow Est. Rs.900,000 at Management Fee 10% and profit sharing 35:65. 3. East & West Rs.1,000,000 at Management Fee 10% and profit sharing 45:55. 4. Services Associates Rs.300,000 Management Fee 10% and profit sharing 50:50.

82
At the close of the transaction Sales Proceeds realized Rs.1 Million, Rs.1.15 million, Rs.0.9 million and Rs.430,000 respectively. Pass the necessary entries using the format of Multiple Modaraba Question No 2 Pakistan Group invested Rs.5 million with Ali Brokerage Inc on 40:60 profit sharing terms. Ali Brokerage enter into Modaraba Agreement: 5. Shan Corp for Rs.1,800,000 at Management Fee 10% and profit sharing 45:55. 6. Rainbow Est. Rs.1,900,000 at Management Fee 10% and profit sharing 50:50. 7. East & West Rs.800,000 at Management Fee 10% and profit sharing 45:55. 8. Services Associates Rs.500,000 Management Fee 10% and profit sharing 50:50. At the close of the transaction Sales Proceeds realized Rs.1.4 Million, Rs.2.25 million, Rs.1.3 million and Rs.430,000 respectively. Pass the necessary entries using the format of Multiple Modaraba Question No 3 Pakistan Group invested Rs.5 million with Ali Brokerage Inc on 40:60 profit sharing terms. Ali Brokerage enters into Modaraba Agreement: 9. Shan Corp for Rs.2 Million Management Fee 10% and profit sharing 45:55. 10. Rainbow Est. Rs.3 Million at Management Fee 10% and profit sharing 50:50. 11. East & West Rs.4 Million at Management Fee 10% and profit sharing 45:55. 12. Services Associates Rs.5 million Management Fee 10% and profit sharing 50:50. At the close of the transaction Sales Proceeds realized Rs.3 Million, Rs.2.25 million, Rs.5.3 million and Rs.6.430,000 respectively. Pass the necessary entries using the format of Multiple Modaraba Question 4 Capital contributed by Mall Group Rs.6 million, Dow Group Rs.8 million, Scan Inc Rs.4 million, Zim Corp Rs.12 million, Life Corp Rs.5 million, Ahmed Group Rs.7 million and Rass Inc Rs.9 million. The total subscription invested by Muhammad Establishment in Sugar deal on 10% management fee on Gross profit and 30:70 profit sharing on Net Profit. The gross profit realizes at 35% over to the capital and the Net Profit is distributed at the Ratio of Investment. Workout the process using the prescribe format giving he details of Ratio of Investment, Capital, Gross Profit, Share of Profit in Volume and in Percentage on Net Profit and on IRR. Use proper format prescribe for Syndicate Modaraba

Question No 5 Capital contributed by Mall Group Rs.16 million, Dow Group Rs.18 million, Scan Inc Rs.14 million, Zim Corp Rs.22 million, Life Corp Rs.15 million, Ahmed Group Rs.17 million and Rass Inc Rs.19 million. The total subscription invested by Muhammad Establishment in Sugar deal on 10% management fee on Gross profit and 45:55 profit sharing on Net Profit. The gross profit realizes at 35% over to the capital and the Net Profit is distributed at the Ratio of Investment. Workout the process using the prescribe format giving he details of Ratio of Investment, Capital, Gross Profit, Share of Profit in Volume and in Percentage on Net Profit and on IRR. Use proper format prescribe for Syndicate Modaraba Question No 6 Capital contributed by Mall Group Rs.1.6 million, Dow Group Rs.1.8 million, Scan Inc Rs.1.4 million, Zim Corp Rs.1.2 million, Life Corp Rs.4.5 million, Ahmed Group Rs.1.7 million and Rass

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Inc Rs.0.9 million. The total subscription invested by Muhammad Establishment in Sugar deal on 10% management fee on Gross profit and 35:65 profit sharing on Net Profit. The gross profit realizes at 35% over to the capital and the Net Profit is distributed at the Ratio of Investment. Workout the process using the prescribe format giving he details of Ratio of Investment, Capital, Gross Profit, Share of Profit in Volume and in Percentage on Net Profit and on IRR. Use proper format prescribe for Syndicate Modaraba Question No 7 Mall Group issued Sukuk for the value of Rs.1000 each with the Capital contributed by Mall Group Rs.1.6 million, Dow Group Rs.1.8 million, Scan Inc Rs.1.4 million, Zim Corp Rs.1.2 million, Life Corp Rs.4.5 million, Ahmed Group Rs.1.7 million and Rass Inc Rs.0.9 million. The total subscription invested in Sugar deal at cost 5% on Gross profit and Net Profit divided into total subscribe Sukuk giving per Sukuk share of profit. The gross profit realizes at 35% over to the capital. Workout the process using the prescribe format giving he details of Ratio of Investment, Capital, Gross Profit, Share of Profit in Volume and in Percentage on Net Profit and on IRR, ach Sukuk Profit and. Use proper format prescribe for Sukuk Subscription. Question No 8 Mall Group issued Sukuk for the value of Rs.1000 each with the Capital contributed by Mall Group Rs.1 million, Dow Group Rs.1 million, Scan Inc Rs.2 million, Zim Corp Rs.2 million, Life Corp Rs.4 million, Ahmed Group Rs.7 million and Rass Inc Rs.9 million. The total subscription invested in Sugar deal at cost 6% on Gross profit and Net Profit divided into total subscribe Sukuk giving per Sukuk share of profit. The gross profit realizes at 45% over to the capital. Workout the process using the prescribe format giving he details of Ratio of Investment, Capital, Gross Profit, Share of Profit in Volume and in Percentage on Net Profit and on IRR, ach Sukuk Profit and. Use proper format prescribe for Sukuk Subscription. Question No 7 Mall Group issued Sukuk for the value of Rs.1000 each with the Capital contributed by Mall Group Rs.1.6 million, Dow Group Rs.1.8 million, Scan Inc Rs.1.4 million, Zim Corp Rs.1.2 million, Life Corp Rs.4.5 million, Ahmed Group Rs.1.7 million and Rass Inc Rs.0.9 million. The total subscription invested in Ijarah Financing on the basis of Mall Group GMI is Rs.1 million. The facility is for 48 month, the Affordability level is 30% of GMI. Work out the Net Profit on each Sukuk and Volume of Profit of each Sukuk holder in amount and in percentage. Give the Capital Amount, Affordability Amount, Installment, Rental and Saving and Expense level.

Question No 7 Mall Group issued Sukuk for the value of Rs.10,000 each with the Capital contributed by Mall Group Rs.2 million, Dow Group Rs. 3 million, Scan Inc Rs. 4 million, Zim Corp Rs. 5 million, Life Corp Rs. 6 million, Ahmed Group Rs. 7 million and Rass Inc Rs.8 million. The total subscription invested in Ijarah Financing on the basis of Mall Group GMI is Rs.5 million. The facility is for 24 month, the Affordability level is 30% of GMI. Work out the Net Profit on each Sukuk and Volume of Profit of each Sukuk holder in amount and in percentage. Give the Capital Amount, Affordability Amount, Installment, Rental and saving and expense level. Question No 8 Equipment Price Rs.1,500,000 Insurance 6% For total tenure, Tax 2% Arboon 25%

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GMI Rs.200,000 Affordability Level 30% Period of Facility: 36 Installments Workout (1) Monthly Installment & Monthly Rental Amount, (2) Total Saving & Expenses (3) Total Cost of the Equipment at maturity, (4) Net profit earned in percentage. Question No 9 Equipment Price Rs.4,000,000 Insurance 10% For total tenure, Tax 3% Arboon 30% GMI Rs.350,000 Affordability Level 30% Period of Facility: 48 Installments Workout (1) Monthly Installment & Monthly Rental Amount, (2) Total Saving & Expenses (3) Total Cost of the Equipment at maturity, (4) Net profit earned in percentage. Question No 10 Allied Group need Ijarah financing and agree to participate with Arboon 25% for the equipment having value Rs.10,00,000. Bank Muslim allowed the financing for period of 36 month at 30% of Gross Monthly Income declared by Allied Group of Rs.1,000,000 per month (The Insurance and Tax in the Net Purchase Price as part of financing amount) and Bank Muslim capitalize the financing by way of Sukuk subscription at Rs.5000 per Sukuk which are bought by Client 1: 10%, Client 2:20%, Client 3:30% and Client 4: 40% of the total Sukuk. Work out the Sukuk application and after realizing the financing amount apply the Ijarah financing. Question No 5 5 Marks Ali enterprise Net Worth is Rs.20 million which was divided into shares of Rs.100 each. Question 11 Ali Enterprise sold its 50,000 shares to Bank Muslim for Working Capital and declare the following results in five years: 1st Year Loss (Rs.110,000) 4th Year loss (Rs.200,000) 2nd Year Profit Rs.150,000 5th Year Profit Rs.380,000 3rd Year Profit Rs.220,000 After declaration of profit Ali Enterprise buy out the total shares at prevailing price What is the Financing amount and in % of total net worth What is the Share Price of each term What is the total profit earn by Bank Muslim Question No 12 Allied Group need Ijarah financing and agree to participate with Arboon 25% for the equipment having value Rs.150000. Bank Muslim allowed the financing for period of 36 month at 30% of Gross Monthly Income declared by Allied Group of Rs.1 50,000 per month (The Insurance and Tax in the Net Purchase Price as part of financing amount) and Bank Muslim capitalize the financing by way of Sukuk subscription at Rs.10 per Sukuk .Amount invested by Client 1: 10,000, Client 20,000, Client 30,000 and Client 40,000. Work out the Sukuk application and after realizing the financing amount apply the Ijarah financing. Question No 13 Deluxe Group declare its Net worth consist of 2 Million shares of Rs.100 each. The Group applied for the Venture Financing from Bank Islam Rs.5 million against its shares and declare the following results in five years:

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1st Year Loss (Rs.210,000) 2nd Year Profit Rs.250,000 rd 3 Year Profit Rs.220,000 4th Year loss (Rs.300,000) th 5 Year Profit Rs.480,000 After declaration of profit Ali Enterprise buy out the total shares at prevailing price What is the Financing amount and in % of total net worth What is the Share Price of each term What is the total profit earn by Bank Muslim

Sample of Examination Papers

Final Exam
1. 2. 3. 4. 5. Write day and time of your class on the answer copy No Cutting, Rubbing and Scratching in Numerical working Application of numerical without attach answers of attach question is not accepted. Break between the applications of numerical is not accepted. Rough work to be workout in the answer copy.

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Question No 1
Scan Pakistan issued LPO of Rs.30,000,000 for the purchase of 15,000 tons of sugar at a purchase price of Rs.20,000 per tons and offered 15% Arboon. Bank Islami allowed at Cost Plus with Transportation Rs.130 per tons, Insurance Rs.90 per ton, Storage Rs 55 per ton, Macadam Rs.50 per tons, and Selling Expenses Rs.30 per tons. Sale reported as 1,000 tons sugar sold at 20% and 500 tons sold at 17% over to the cost price. Net Realizing Profit was agreed at a Ratio of 45:55. 1. Work out the application of above transaction and explain how Morabaha financing operates? Answer should be in synopsis form.

Question No 2
Capital contributed by Mall Group Rs.6 million, Dow Group Rs.8 million, Scan Inc Rs.4 million, Zim Corp Rs.12 million, Life Corp Rs.5 million, Ahmed Group Rs.7 million and Rass Inc Rs.9 million. Capital invested with M/s Muhammad Establishment in a Sugar transaction at 10% Management Fee on Gross Profit and Net Profit at a Ratio 30:70 The gross profit realizes at 35% over to the Capital Net Profit share of Rab-al-Maal is distributed at the Ratio of Investment. ANSWER the following: 1. What is the total capital amount? 2. What is the Management Fee amount? 3. What is the Net Profit amount? 4. What is the profit sharing amount and percentage of each partner? 5. What is the definition of Modaraba?

Question No 3
Sukuk issued at a value of Rs.10,000 each and purchase by Mall Group for Rs.2 mil, Dow Group Rs. 3 mil, Scan Inc Rs. 4 mil, Zim Corp Rs. 5 mil, Life Corp Rs. 6 mil, Ahmed Group Rs. 7 mil and Rass Inc Rs.8 mil. The capital realize by sale of Sukuk invested in a financing for an Industrial Equipment for a period spread over 24 month keeping the affordability level 30% of GMI Rs 1.4 million. Work out Sukuk into Ijarah process giving the details of Net Profit on each Sukuk and Volume of Profit of each Sukuk holder in amount and in percentage. ANSWER the following form the application of this solution. (1) Capital Amount, (2) Affordability Amount, (3) Installment & Rental (4) Saving & expense level (5) Total payment made by Sarif. (6) What are the conditions for the issuance of Sukuk?

Question No 4
Pakistan Group invested Rs.3 million with Ali Brokerage Inc at profit sharing 40:60 terms. Ali Brokerage enters into Modaraba Agreement with: 13. Shan Corp for Rs.1,000,000 at Management Fee 10% and profit sharing 40:60. 14. Rainbow Est. Rs.900,000 at Management Fee 10% and profit sharing 35:65. 15. East & West Rs.1,100,000 at Management Fee 10% and profit sharing 45:55.

87 At the close of the transaction Sales Proceeds realized Rs.1 Million, Rs.1.35 million, Rs.1.2 million and Rs.1,000,000 respectively. Pass the necessary entries using the format of Multiple Modaraba 1. What is the profit amount of Pakistan Group? 2. What is the Net profit of Ali Brokerage after adjustment of loss? 3. What is the Net Profit percentage of Pakistan Group against Capital? 4. What is the earning amount of each Modarib?

Question No 5
Ali enterprise Net Worth is Rs.20 million which was divided into shares of Rs.100 each. Ali Enterprise sold its 50,000 shares to Bank Muslim for Working Capital and declares the following results in five years: 1st Year Loss (Rs.110,000) 2nd Year Profit Rs.150,000 3rd Year Profit Rs.220,000 th 4 Year loss (Rs.200,000) 5th Year Profit Rs.380,000 After declaration of profit Ali Enterprise buy out the total shares at prevailing price 1. What is the Financing amount and in % of total net worth 2. What is the Share Price of each term 3. What is the total profit earn by Bank Muslim

Question No 6
Give the Purpose of the following term in one word only: 1. Ruka 13. Shirakat-al-Inan 2. Arboon 14. Shirakat-al-Mufawadah 3. Suftaja 15. Modaraba 4. Morahib 16. Morabaha 5. Modarib 17. Ijarah 6. Sarif 18. Musharka 7. Rehen 19. Mozart 8. Musaqa 20. Farman 9. Havania 10. Jibria 11. Shirakat-al-Wujhoo 12. Shirakat-al-Abdan

Sample 2
6. 7. 8. 9. Write day and time of your class on the answer copy No Cutting, Rubbing and Scratching in Numerical working Application of numerical without attach answers of attach question is not accepted. Break between the applications of numerical is not accepted.

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10. Rough work to be workout in the answer copy. Question No 1 5 marks Mall Group issued Sukuk for the value of Rs.1000 each. These Sukuk purchase by Mall Group Rs.1 million, Dow Group Rs.1 million, Scan Inc Rs.2 million, Zim Corp Rs.2 million, Life Corp Rs.4 million, Ahmed Group Rs.7 million and Rass Inc Rs.9 million. The total subscription invested in Sugar deal and Net Profit divided into total subscribes Sukuk giving per Sukuk share of profit. The Net profit realizes at 45% over to the capital. Workout the process using the prescribe format giving he details of 1. Ratio of Investment, 2. Capital, 3. Share of Profit in volume and in percentage on Net Profit using proper format prescribe for Sukuk Subscription. 4. Give minimum 5 advantages for Sukuk Financing. Question No 2 10 Marks Allied Group need Ijarah financing and agree to participate with Arboon 25% for the equipment having value Rs.5,000,000. Bank Muslim allowed the financing for period of 36 month at 30% of Gross Monthly Income declared by Allied Group of Rs.500,000 per month. The cost price of the equipment was declared by Bank Muslim at Insurance 1% per year, Income Tax 1%, Transport 2%. Make a Ijarah worksheet and give details of the following: 1. Repayment Amount 2. Total Rental Amount 3. Saving & Expense percentage on Gross Monthly Income 4. Total cost of equipment including Arboon paid by Sarif 5. Give Cross Road of Ijarah Financing by giving minimum 10 step to form Ijarah financing and its benefits. Question No 3 5 Marks Super Group Net worth 3 Million shares of Rs.10 each and the Group enter into Working Capital Financing under Buy Back Agreement with Bank Islam Rs.5 million against sale of its shares. Following results were reported in five years: 1st Year Loss (Rs.300,000) 2nd Year Profit Rs.450,000 3rd Year Profit Rs.320,000 4th Year loss (Rs.300,000) th 5 Year Profit Rs.480,000. After declaration of profit Ali Enterprise buy out the total shares at prevailing price. 1. Workout the Profit & Loss declaration sheet giving the each year share price and profit and loss sharing amount. 2. What is the difference between Musharka and Modaraba and Modarib and Musharik? Give your answer in synopsis form

Question No 4 1.

10 Marks Name the financial modes Monitory contribution to structure the capital base of transaction

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2. Venture Financing under equity participation in mode known as 3. Commodity cannot be the capital only paper currency can be the capita 4. It is not capital base contract and funds use for purchase of commodity, 5. Person who have the ability to manage the trade transaction is called as 6. To finance under Imported Merchandise 7. Financial instrument use for structure capital of transaction 8. Transaction under differed sale 9. Transaction under advance against supply 10. In case of loss it is shared exactly in the proportion of capital in contract 11. Non debt financial instrument use as proof of investment 12. Financing amount is determine according to gross income 13. Financial Instrument tradable and non tradable in secondary market 14. Selling expenses are taken as the cost of the goods 15. Jabriyyah contract 16. Al Wujuh contract in 17. Al Abdan contract by 18. All Inan contract with 19. It was decided to avail go into expansion through venture financing 20. Mr. Khan bought shareholding in a company under by back term Question No 5 10 Marks Muslim Bank enter into Modaraba transaction with Ithad Enterprise with Rs.35,000,000 on the basis of 10% Management fee and Profit Sharing 30:70. Ithad Enterprise and Malik Brother enter into Morabaha deal to buy out 2,000 Tons sugar at purchasing price of Rs.17,500 Per Ton. Malik Brother added Arboon participation in terms of added cost of Transport Rs.17.50, Storage Rs.20.00, Selling Expenses Rs.10.00, Tax Rs.12.00 Per Ton respectively. 1600 Tons of Sugar was sold at Rs.22,100 Per ton and 400 tons Sugar sold at 21,750. The net realize profit was shared between the two partners at a Ratio of 45:55. Use proper format of the two mode of financing. Answer the following 1. What is the Arboon Amount and % contributed by Malik Brothers? 2. What is the total Cost Price of the Per Ton Sugar? 3. What is the Sale Amount of 1600 tons Sugar and 400 Tons of Sugar? 4. What is the Average Sale Price of Per Ton Sugar 5. What is the difference between Modaraba Financing and Musharka Financing and what is the purpose of the two financing modes in commercial activities?

Sample Paper Mid Term

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Question No 1 Explain relationship between Saving, Investment and Participation? Why it is important in socio Economic Development? Question No 2 What are the criteria for financing the project or transaction? Give minimum five factors that differentiate between financing and lending? Question No 3 Is Riba is Interest or Interest is Riba? Explain the two concepts with reasonings? Question No 4 1. Islamic economics is an independent system and enjoys separate____. 2. Islamic economic system is a self contained system with its own_____. 3. Islamic economic system covers interest at and_____ . 4. Islamic Economic demands three main principles to be followed in his day-to-day affairs and problems are , , and . 5. Islam does not share application of & system for production. 6. Matters pertaining to money must be fare and transparent and useful for developing __________life of the community. 7. Riba is a combination of & , whereas Interest categorized as one of elements of . 8. Islamic Economic eliminate monopoly that keep a control on _______. 9. Riba is bad practice to while Interest is price of _______. 10. Islam does not impose any limits on amount of that an individual can acquire. Identity, economic policy, IJMA, private or public, capitalists, material and spiritual, QYAS, Holy Quran, AMAL, world monetary polices, evil, Riba, Man, sins, earn, gain, wealth, give and take responsibility, social balance, three, four, five, prohibited need, Allah, custodian, trustee.