Diminishing MusharakahAccording to this concept, a financier and his client participate either in the jointownership of a property or an equipment, or in a joint commercial enterprise. The shareof the financier is further divided into a number of units and it is understood that theclient will purchase the units of the share of the financier one by one periodically, thusincreasing his own share until all the units of the financier are purchased by the client soas to make him the sole owner of the property, or the commercial enterprise, as the casemay be.Financing on the basis of Diminishing MusharakahThe proposed arrangement is composed of the following transactions: • Creation of joint ownership in the property (Shirkat-ul-Milk). • Giving the share of the financier to the client on rent. • Promise from the client to purchase the units of share of the financier. • Actual purchase of the units at different stages. • Adjustment of the rental according to the remaining share of the financier in the property.In the above mentioned arrangement, following conditions must be taken care of:The agreement of joint purchase, leasing and selling different units of the share of thefinancier should not be tied-up together in one single contract. However, the jointpurchase and the contract of lease may be joined in one document whereby the financieragrees to lease his share, after joint purchase, to the client. At the same time the clientmay sign one-sided promise to purchase different units of the share of the financierperiodically and the financier may undertake to reduce the rent on remaining unitsaccordingly.At the time of the purchase of each unit, sale must be affected by the exchange of offerand acceptance at that particular date. It will be preferable that the purchase of differentunits by the client is affected on the basis of the market value of the asset as prevalent onthe date of purchase of that unit, but it is also permissible that a particular price is agreedin the promise of purchase signed by the client.
Diminishing Musharakah is commonly used for: • House financing • Car Financing • Fixed Assets financing • Project FinancingIstisnaIstisna’a / Istisna: This is a kind of Sale where a commodity is transacted before it comesinto existance. It means: To order a manufacturer to manufacture a specific commodityfor the purchaser. If the manufacturer under takes to manufacture the goods for him withmaterial from the manufacturer, the transaction of Istisna’a comes into existence. But it isnecessary for the validity of istisna’that the price is fixed with the consent of the partiesand that necessary specification of the commodity (intended to be manufactured) is fullysettled between them. This kind of Sale also is used as a mode of financing which alsocalled “Parallel Istisna’a”.Istisna’ is a sale transaction where a commodity is transactedbefore it comes into existence. It is an order to a manufacturer to manufacture a specificcommodity for the purchaser. The manufacturer uses his own material to manufacture therequired goods.In Istisna’, price must be fixed with consent of all parties involved. All other necessaryspecifications of the commodity must also be fully settled. • Istisna’ as a mode of financingIstisna’ may be used to provide financing for construction of house. If the client owns aland and seeks financing for the construction of a house, the financier may undertake toconstruct the house on the basis of an Istisna’. If the client does not own the land andwants to purchase that too, the financier can provide him with a constructed house on aspecified piece of land. Istisna’ may also be used for similar projects like installation ofan air conditioner plant in the client’s factory, building a bridge or a highway.
The modern BOT (buy, operate and transfer) agreements may be formalized through anIstisna’ agreement as well. So, if the government wants to build a highway, it may enterinto an Istisna’ contract with the builder. The price of Istisna’ can be the right of thebuilder to operate the highway and collect tolls for a specific period.IjaraIjara/ijarahLit: letting on lease. Technically, sale of a definite usufruct in exchange for adefinite reward. Commonly used for wages, it also refers to a contract of land lease at afixed rent payable in cash. It is contrary to "Muzarah" when rent is fixed as a certainpercentage of the produce of land. It also refers to a mode of financing adopted byIslamic banks. It is an arrangement under which an Islamic bank leases equipment, abuilding or other facility to a client against an agreed rental. The rent is so fixed that thebank gets back its original investment plus a profit on it. Ijarah" is a term of Islamic fiqh.Lexically, it means to give something on rent.In the Islamic jurisprudence, the term Ijarah is used for two different situations. In thefirst place, it means to employ the services of a person on wages given to him as aconsideration for his hired services." The employer is called mustajir while the employeeis called ajir, while the wages paid to the ajir are called their ujrah. The second type ofIjarah relates to the usufructs of assets and properties, and not to the services of humanbeings. Ijarah in this sense means to transfer the usufruct of a particular property toanother person in exchange for a rent claimed from him. In this case, the term Ijarah isanalogous to the English term leasing. Here the lessor is called Mujir, the lessee is calledmustajir and the rent payable to the lessor is called ujrah.The rules of Ijarah are very much analogous to the rules of sale, because in both casessomething is transferred to another person for a valuable consideration. The onlydifference between Ijarah and sale is that in the latter case the corpus of the property istransferred to the purchaser, while in the case of Ijarah, the corpus of the propertyremains in the ownership of the transferor, but only its usufruct i.e. the right to use it, istransferred to the lessee.
Lease as a mode of financing:Lease is not originally a mode of financing. It is simply a transaction meant to transferthe usufruct of a property from one person to another for an agreed period against anagreed consideration. However, certain financial institutions have adopted leasing as amode of financing instead of long term lending on the basis of interest.This transaction of lease may be used for Islamic financing, subject to certain conditions.It is not sufficient for this purpose to substitute the name of interest by the name of rentand replace the name of mortgage by the name of leased asset. There must be asubstantial difference between leasing and an interest-bearing loan. That will be possibleonly by following all the Islamic rules of leasing.Basic Rules of IjarahLeasing is a contract whereby the owner of something transfers its usufruct to anotherperson for an agreed period, at an agreed consideration.The subject of lease must have a valuable use (which is recognized as Mal-e-Mutaqawwam in Shariah. Therefore, things having no usufruct at all or whose usufruct isnot permissible according to Shariah cannot be leased.It is necessary for a valid contract of lease that the corpus of the leased property remainsin the ownership of the seller, and only its usufruct is transferred to the lessee. Thus,anything which cannot be used without consuming cannot be leased out. Therefore, thelease cannot be effected in respect of money, eatables, fuel and ammunition etc.As the corpus of the leased property remains in the ownership of the lessor, all theliabilities emerging from the ownership shall be borne by the lessor, but the liabilitiesreferable to the use of the property shall be borne by the lessee.The period of lease must be determined in clear terms.The lessee cannot use the leased asset for any purpose other than the purpose specified inthe lease agreement. If no such purpose is specified in the agreement, the lessee can use itfor whatever purpose it is used in the normal course.The lessee is liable to compensate the lessor for any damage to the leased asset caused byany misuse or negligence on the part of the lessee.
The leased asset shall remain in the risk of the lessor throughout the lease period in thesense that any harm or loss caused by the factors beyond the control of the lessee shall beborne by the lessor.A property jointly owned by two or more persons can be leased out, and the rental shallbe distributed between all the joint owners according to the proportion of their respectiveshares in the property.A joint owner of a property can lease his proportionate share to his co-sharer only, andnot to any other person.It is necessary for a valid lease that the leased asset is fully identified by the parties.The rental must be determined at the time of contract for the whole period of lease.In the long term lease agreements, it is mostly not in the benefit of the lessor to fix oneamount of rent for the whole period of lease because the market conditions change fromtime to time. For this purpose it is allowed to use benchmark rate to determine the rentalamounts. However, rent for the month will be fixed at the start of the month, any changein benchmark rate during the month will not cause rent for that month to change. It is alsonecessary to define a floor and ceiling.The lessor cannot increase the rent unilaterally, and any agreement to this effect is void.The rent or any part thereof may be payable in advance before the delivery of the asset tothe lessee, but the amount so collected by the lessor shall remain with him as on accountpayment and shall be adjusted towards the rent after its being due.The lease period shall commence from the date on which the leased asset has beendelivered to the lessee, no matter whether the lessee has started using it or not.If the leased asset has totally lost the function for which it was leased, and no repair ispossible, the lease shall terminate on the day on which such loss has been caused.However, if the loss is caused by the misuse or by the negligence of the lessee, he will beliable to compensate the lessor for such negligence.Ijarah is commonly used for: • For long and medium term fixed asset financing • Project Financing • Retail products such as Car Financing, House Financing etc.
MurabahaMurabaha: Lit: sale on profit; Cost plus profit, sale at stated cost price and mark-up, saleat a specified profit margin. The term is, however, now used to refer to a sale agreementwhereby the seller purchases the goods desired by the buyer and sells them at an agreedmarked-up price, the payment being settled within an agreed time frame, either ininstallments or lump sum. The seller undertakes all the management needed for thepurchase and also bears the risk for the goods until they have been delivered to the buyer.See also bay al-muajjal. This has been adopted as a mode of financing by a number ofIslamic banks. As a financing technique, it involves a request by the client to the bank topurchase a certain item for him. The bank does that for a definite profit over the costwhich is settled in advance. Some people have questioned the legality of this financingtechnique because of its similarity to Riba or interest.Murabaha is one of the most commonly used modes of financing by Islamic Banks andfinancial institutionsDefinition:Murabaha is a particular kind of sale where the seller expressly mentions the cost of thecommodity purchased, and sells it to another person by adding some profit thereon. Thus,Murabaha is not a loan given on interest; it is a sale of a commodity for cash/deferredprice.The Bai’ Murabaha involves purchase of a commodity by a bank on behalf of a client andits resale to the latter on cost-plus-profit basis. Under this arrangement, the bank disclosesits cost and profit margin to the client. In other words rather than advancing money to aborrower, the bank will buy the goods from a third party and sell those goods to thecustomer at an agreed price.Difference between Murabaha and SaleA simple sale in Arabic is called Musawamah -a sale without disclosing or referring tothe cost of goods sold.
However when the cost price is disclosed to the client, it is called Murabaha. A simpleMurabaha is one where there is cash payment and MurabahaMuajjal is one on deferredpayment basis.Basic rules for Murabahah:Following are the rules governing a Murabahah transaction:The subject of sale must exist at the time of the sale. Thus anything that does not exist atthe time of sale cannot be sold as this makes the contract void. The subject matter shouldbe in the ownership of the seller at the time of sale. If the seller sells something that hehimself has not acquired, then the sale becomes void.The subject of sale must be in physical or constructive possession of the seller when it issold to another person. Constructive possession means a situation where the owner hasnot taken physical delivery of the commodity yet it has come into his control and allrights and liabilities of the commodity are passed on to him including the risk of itsdestruction.The sale must be instant and absolute. Thus a sale attributed to a future date or a salecontingent on a future event is void. The subject matter should be a property havingvalue in the eyes of Shari’a.The subject of sale must be specifically known and identified to the buyer. For Example,‘A’ owner of an apartment building says to ‘B’ that he will sell an apartment to ‘B’. Nowthe sale is void because the apartment to be sold is not specifically mentioned or pointedto the buyer. The delivery of the sold commodity to the buyer must be certain and shouldnot depend on a contingency or chance. The certainty of price is a necessary condition forthe validity of the sale. If the price is uncertain, the sale is void.The sale must be unconditional. A conditional sale is invalid unless the condition isrecognized as a part of the transaction according to the usage of the trade.
SalamBai al-salam:This term refers to advance payment for goods which are to be deliveredlater. Normally, no sale can be effected unless the goods are in existence at the time ofthe bargain. But this type of sale forms an exception to the general rule provided thegoods are defined and the date of delivery is fixed. The objects of this type of sale aremainly tangible things but exclude gold or silver as these are regarded as monetaryvalues. Barring these, bai salam covers almost all things which are capable of beingdefinitely described as to quantity, quality and workmanship. One of the conditions ofthis type of contract is advance payment; the parties cannot reserve their option ofrescinding it but the option of revoking it on account of a defect in the subject matter isallowed. It is also applied to a mode of financing adopted by Islamic banks. It is usuallyapplied in the agricultural sector where the bank advances money for various inputs toreceive a share in the crop, which the bank sells in the market. This kind of sale (Salam)also used nowadays as a mode of fianancing that is also called ‘Parallel Salam’.In Salam, the seller undertakes to supply specific goods to the buyer at a future date inexchange of an advanced price fully paid at spot. The price is in cash but the supply ofpurchased goods is deferred.This mode of financing can be used by the modern banks and financial institutionsespecially to finance the agricultural sector.Purpose of use:To meet the need of small farmers who need money to grow their crops and to feed theirfamily up to the time of harvest. When Allah declared Riba haram, the farmers could nottake usurious loans. Therefore Holy Prophet allowed them to sell their agriculturalproducts in advance. To meet the need of traders for import and export business. UnderSalam, it is allowed for traders to sell the goods in advance so that after receiving theircash price, they can easily undertake the aforesaid business. Salam is beneficial to theseller because the price is received in advance and it is also beneficial to the buyerbecause the price in Salam is lower than the price in spot sales.