4. MURABAHAH
Murabahah is a cost-plus profit sale contract whereby disclosure of
cost to the buyer is necessary.
Two Parties: Customer and Bank.
Bank Buys and Owns Asset and Sells to Customer on Cost-Plus Mark-
Up over a Deferred Payment Plan.
Bank charges a certain profit usually linked to the Inter Bank Offered
Rate.
5. MURABAHAH
Amount of installment or price of the asset cannot be increased or
decreased in case of default or early payment.
The amount of penalty for defaults cannot be included in the income
of the IFI and must be donated to charity.
6. STEPS IN MURABAHAH
Step One: Customer requests to an IFI to purchase an asset. The IFI
gets the written promise from the customer to purchase the asset
once it is acquired by the IFI.
Step Two: IFI purchases asset as per the specifications of the
customer. In certain cases, the IFI can appoint another person as a
purchasing agent including the customer him or herself. However, at
this stage, the customer is only the agent of the IFI and the
underlying asset belongs to the IFI. All risks of ownership are borne
by the IFI. Invoice by supplier must be in the name of the bank and
the price must be paid to the supplier by the IFI.
7. STEPS IN MURABAHAH
Step Three: After completion of sale and purchase agreement of the
asset plus transfer of the asset to the Customer, Customer bears all
risk and returns of ownership.
8. MURABAHAH
Currency, gold, and silver cannot be the subject-matter of the
murabahah.
It is permissible to demand a security deposit (Hamish Jiddiya) from
the customer in the case of a binding promise, which can be forfeited
equal to the amount of actual loss suffered by the bank (excluding
time value of money) if customer breaches his promise.
Urbun or down-payment is allowed after the execution of the
murabahah contract, however, it is preferable to forfeit the amount
equal to actual loss suffered.
9. SALAM
Mode of finance used in agriculture.
IFI pays upfront cash on spot for future delivery.
IFI usually locks in a lower price while the farmer gets a cash advance
to finance the crop production.
A method for farmers to finance crop production without taking a
loan with interest.
Crop must be available in the market as in case the crop fails, the
farmer has to purchase the crop in the marketplace and deliver to the
IFI.
10. SALAM
As a matter of practice, the IFI enters into a parallel salam contract
with another party after entering the first salam contract, selling the
proceeds of the first salam contract to the third party buyer.
Execution of the second contract is not conditional upon the
fulfilment of the first contract, therefore, the IFI bears the risk of
supplying the contracted good to the third party even if the first
salam contract fails or is delayed.
11. SALAM
Step One: Customer makes a request to an IFI for salam financing,
requesting payment upfront for deferred delivery.
Step Two: The IFI enters into a contract of parallel salam with a third
party, receives the payment from the third party, and promises to
deliver the goods at a future date.
Step Three: IFI receives delivery from first salam contract.
Step Four: IFI delivers product from first salam contract to third party
buyer in the second salam contract.
12. SALAM
The contract should clearly stipulate the specifications and quantity
of goods to be delivered.
In salam contracts, the commodities are fungible goods and
standardized products of companies.
It is not permitted to stipulate the products of a specific piece of
land or i.e. an unborn calf.
The subject-matter of the salam contract must be different from the
mode of payment of the price. (i.e. if the capital provided is currency
or gold, then the commodity in the salam contract must not be
currency or gold).
13. SALAM
The commodity should be clearly known at the time of contract
without ambiguity and uncertainty as to the object, quality, and
quantity of the commodity.
Date and Place of Delivery should be clearly defined in the salam
contract.
Security in the salam contract can be obtained through guarantee,
pledge, etc.
Replacement of commodities with other commodities, except with
cash, is permissible.
14. SALAM
It is permitted to settle the salam contract at discount if the seller
provides inferior goods.
It is permissible to settle the salam contract earlier than the due date
if the commodities can be supplied by the supplier at an earlier date.
It is permissible to settle the salam contract with superior
commodities.
However, it is not permissible to stipulate a penalty clause for delay
in delivery.
15. ISTISNA’A
Istisna’a is manufacture to order and is used in project financing.
Bank enters into first istisna’a contract with contractor to build a
project.
Bank then enters into parallel istisna’a contract as contractor to
supply project to third party buyer.
Thus, bank provides finance to contractor in first istisn’a contract to
build the contract and then contracts with third party buyer to supply
the project to the third party.
Can pay on the spot or in deferred payment option.
16. STEPS IN ISTISNA’A
Step One: Customer requests istisna’a financing from the bank and
agrees to sell the project with deferred delivery and either spot or
deferred payment usually at a lower price at the time of contract then
would be the price at the end of the construction period.
Step Two: The bank then enters into a parallel istisna’a with a third
party buyer, receives payment either on spot or in deferred payment
option, and contracts to deliver the project at a future date.
Step Three: The contractor in the first istisna’a contract delivers the
project to the bank.
Step Four: The bank then delivers the project to the third party buyer
in the second istisna’a contract.
17. ISTISNA’A
The contract of istisna’a is binding upon the parties to the contract
provided certain conditions fulfilled including specifications of
underlying subject-matter (project), price, and delivery date.
The contract of istisna’a cannot be executed with a customer who is
the purchaser of the project from the IFI and at the same time acts as
the contractor of the project.
Istisna’a is allowed only where the project originates from raw
materials that are transformed from their original shape to the final
form through a construction/manufacturing process.
18. ISTISNA’A
Istisna’a contract cannot be executed for a project, which is already
manufactured or constructed.
Contractor can outsource the work to sub-contractors.
The price in istisna’a can be paid at spot, deferred payment, subject
to completion, at stages of completion, and in cash or in kind as the
parties agree. However, determination of price on murabahah basis or
cost plus mark-up is not allowed in istisna’a.
Urbun or down-payment can be demanded and forfeited if the
contract is rescinded. However, it is preferred to forfeit the amount
equal to the actual damages suffered. Guarantee allowed/security
allowed.
19. ISTISNA’A
It is permitted to change the price of the contract due to events of
force majeure.
It is permitted to appoint the purchaser in the istisna’a contract as
the agent for the IFI.
It is permitted to charge a penalty for delay in completion of project,
however, penalty for default in payment is not allowed.
The contractor can also be appointed as agent of the IFI to dispose of
the project.
20. ISTISN’A
It is not permissible to sell the subject-matter of an istisna’a contract
before taking possession of it.
The IFI can enter into a parallel istisna’a contract, however, the
parallel istisna’a contract cannot be conditional upon completion of
the first istisna’a contract.
21. IJARAH
Ijarah is Islamic Leasing.
It is a rental contract whereby the IFI leases an asset for a specific
rent over a specific period of time.
Ownership risks of the asset are borne by the IFI except in the case of
negligence of the lessee.
The ljarah contract begins when lessee takes possession of asset
rather than when the contract is signed (conventional lease).
Ending Ijarah in sale of the asset to the lessee is allowed through a
separate contract (Ijarah Muntahia Bittamleek).
22. IJARAH
Consumables cannot be leased out.
Rentals of joint property are shared according to equity.
Inter Bank Rate can be used as a benchmark amount for the rental
price.
At the completion of the Ijarah contract, the rented asset is either
returned to the lessor or purchased by the lessee through a separate
contract.
23. STEPS IN IJARAH
Step One: Customer approaches IFI for Ijarah financing for asset.
Step Two: IFI either purchases the asset itself or appoints the
customer as agent to purchase the asset on behalf of the IFI. Once
the asset is purchased, the IFI makes payment to the vendor.
Step Three: After the IFI obtains possession and ownership of the
asset, the IFI and customer sign the Ijarah contract.
Step Four: Customer takes the benefit of the usufruct and makes the
periodic rent payments as according to the Ijarah contract. At the
end of the contract, either asset is returned to the Bank or the Bank
sells the asset to the Lessee through a separate contract.
24. IJARAH
Under ijarah, the contract terminates if the asset becomes unusable
for any reason.
Lessor can charge a penalty for late payment, however, this amount
must be given to charity.
25. IJARAH
Urbun or down-payment is permitted.
If the Ijarah contract is not executed by the lessee, the lessor can take
the urbun or down-payment.
The subject-matter of the lease must be capable of being used.
The benefits from the Ijarah contract must be Shari’ah compliant and
use of the asset must be for halal purposes.
Lease rentals may be in cash or kind (goods) or benefits (services)
and must be specified as lump sum or installments.
26. IJARAH
Lease rentals begin from date the lessee begins to use the asset.
If rentals are variable, the price should be fixed for the first period
and then tied to a bench mark. The bench mark must be based on a
clear formula subject to a floor and ceiling.
Future rental prices can be changed with mutual agreement, however,
it is not permissible to change past rental prices.
Securities/Guarantees are allowed.
Lessor can charge a penalty for late payment, however, this must be
forwarded to charity.
27. MUSHARAKAH
Shirkah means partnership.
Musharakah occurs when two partners come together to form a joint-
venture.
Partners share in profit in a pre-agreed ratio and share loss according
to capital contribution.
There must be a written agreement specifying the terms and
conditions of the musharakah including management, capital
contributions, and profit and loss sharing.
28. MUSHARAKAH
Capital can be contributed in cash or in kind.
Sleeping partner cannot share in profit more than his/her
proportionate share in equity.
The partners cannot guarantee the capital or profit share to the other
partners.
Profit must be a percentage of actual profits and not a lump sum
determined at time of contract.
Each partner is entitled to participate in management, however, if
management is vested in one or a few partners by agreement, then
the other partners are bound not to interfere in management.
29. MUSHARAKAH
The managing partner is entitled to higher share in profit, however, in
pre-agreed ratio/percentage and not lump sum.
Any third party can provide guarantee of capital subject to: - (a)
financial liability of guarantor is independent of partnership contract;
(b) guarantee is provided for zero consideration.
Final distribution of profits is subject to valuation of assets (actual or
constructive).
Accounts receivables should be valued at cash value less allowances
for doubtful accounts.
30. MUSHARAKAH
It is not permitted to account for present value of accounts
receivables.
It is allowed to allocate some profit to partners provisionally subject
to final settlement after calculation of actual profit.
It is permitted to create a reserve and charity out of profit subject to
agreement.
It is permitted for a partner to sacrifice his or her share of profit in
total or in part at the time of profit distribution to another partner.
It is also allowed for partners to bear total loss at the time of loss.
31. MUSHARAKAH
Musharakah can be dissolved by one partner after serving a notice to
the other partner(s) subject to:
(a) If a partnership is formed for a specific period, then it must be
terminated mutually;
(b) if a partnership is formed to complete a project, then it cannot be
terminated unilaterally prior to completion of the project.
A partner can enter into a binding promise with others to buy the
assets of a partnership as per agreed price and date of buying,
however, entering into a promise to buy at face value is not allowed.
33. DIMINISHING MUSHARAKAH
Diminishing musharakah is a form of declining partnership between
the IFI and the client generally used to finance the purchase of real
estate by the client.
A customer requests a diminishing musharakah from the Bank.
The Bank then contributes a certain percentage of finance and a
certain percentage must be contributed by the customer.
The Bank’s share of the asset is divided into units of smaller
amounts, which are purchased by the client in installments until the
client owns the entire share of the Bank’s equity in the real estate.
Title is transferred to the client.
34. DIMINISHING MUSHARAKAH
The Diminishing Musharakah must be in the form of a written
agreement.
The capital of the partnership can be in cash or in kind. If in kind,
the monetary values of the assets must be expressed in currency to
determine the share contributed by each partner.
Net assets of a company entering into partnership are allowed to be
used as capital in the partnership.
It is not allowed that debts (Receivables) alone be used as
contribution in capita of partnership.
35. DIMINISHING MUSHARAKAH
Third party can provide guarantee of capital subject to:-
(a) financial liability of guarantor is independent of the partnership
contract;
(b) guarantee is provided for zero consideration.
One partner cannot guarantee the capital of the other partner(s).
36. DIMINISHING MUSHARAKAH
Same rules for profit and loss sharing and termination of partnership
as in musharakah.
In diminishing musharakah, the contract of buying and selling equity
shares must be separate from the partnership contract. It is not
permitted that one contract be entered into as a condition for
concluding the other.
The contract of diminishing musharakah must not include a clause
whereby any of the partners is allowed to withdraw his share in
capital.
37. DIMINISHING MUSHARAKAH
Maintenance and insurance is the liability of all of the owners.
The profit/income/benefit sharing ratio must be clearly determined.
It is permitted to agree on a ratio of profit sharing, which is
disproportionate to equity stake.
It is also permitted to agree on a fixed profit sharing ratio or variable
(according to changing equity stake), however, loss must be shared
according to equity stake.
It is not permitted to stipulate that a partner will receive a lump sum
of profit or a percentage of capital.
38. DIMINISHING MUSHARAKAH
It is permissible to issue a binding promise of sale and purchase of
equity, gradually, at an agreed price at the time of transaction,
however, it is not permissible to sell or purchase equity shares at
their original or face value as this constitutes guarantee of capital to
the selling partner.
Renting or leasing the equity shares of the other partner is allowed
for a specified time and for whatever duration of time.
39. MUDHARABAH
Mudharabah is a partnership where one partner (rabb-ul-mal)
provides the capital and one partner acts as the manager (mudarib).
The partners share profit in a pre-agreed profit ratio, however, all
loss is borne by the rabb-ul-mal.
40. MUDHARABAH
The written mudarabah contract must stipulate the terms and
conditions relating to profit sharing and guarantees.
Under the restricted mudarabah contract, the mudarib is obliged to
act within the scope of the agreement, while under the unrestricted
mudarabah agreement, the mudarib is free to invest according to
his/her expertise and the market conditions in order to fulfill the
objective of the mudarabah partnership (profit generation).
41. MUDHARABAH
The rab-ul-mal can obtain a guarantee/security from the mudarib,
which is enforceable in the case of negligence, misconduct, or breach
of contract.
The capital of the mudharabah can be contributed in the form of cash
or in kind, however, if in kind, the fair value of the asset should be
determined.
The amount of capital in the mudharabah must be known to both
parties to the contract.
42. MUDHARABAH
Debt receivables from the mudarib or a third party cannot be treated
as a contribution to the capital of the mudharabah.
Profit-share must be in a pre-agreed ratio of profit share and not a
lump sum or percentage of capital.
It is permitted to stipulate a lump sum for a partner if profit exceeds
a certain limit.
The final profit distribution must be made on the basis of valuation of
the business (actual or constructive), however, it is not allowed to
allocate the profit on account to be settled later on.
43. MUDHARABAH
Cost of living and travelling expenses for the mudarab is allowed as
per agreement or custom.
A gift, loan, or charity out of the mudharabah fund and waiver of
receivables by the mudarib are allowed subject to the approval of the
rabb-ul-mal.
44. MUDHARABAH
Both parties can agree to liquidate the mudharabah.
The mudharabah can be liquidated upon maturity of the mudharabah
agreement.
If the remaining funds in the mudharabah are insufficient to run the
business after suffering losses, the mudharabah can be liquidated.
If the mudarib dies or there is a liquidation of the institution acting as
mudarib, the mudharabah can be liquidated.
If the mudharabah business has completed, the mudharabah can be
liquidated.