1. Islamic Modes for Agricultural
Financing
PRODUCTS – Murabahah and
Salam
Lahore 16 – 17 May, 2008
Al – Huda Training Programme
Muhammad Khaleequzzaman
Head Islamic banking Department
Int’l Islamic University Islamabad

2. Islamic Modes – Agricultural Financing
Agricultural production Cycle - Crops
STAGE ACTIVITY
Entering Contract of cultivation in
Acquisition of land/ case of rented land, decision about crop
Choice of crop in view of market demand
Clearing, Leveling, Plowing, Seed bed preparation,
Preparation of land
Installation of Irrigation/drainage system
Crop production Sowing/transplantation, Irrigation, Fertilization,
operations Weeding, Pesticide application
Cutting/ picking,
Harvesting threshing
Post harvest & Cleaning, Grading, Processing, Packing,
Marketing Storage, Transportation, Sale of produce

3. Islamic Modes – Agricultural Financing
Areas of Financing (including crop production)
– Working Capital (Short term):
• Crop production [Purchase of inputs i.e. seeds, fertilizers,
pesticides, etc.] {Murabahah}
• Poultry Farming [purchase of feed/raw material,
birds/chicks, vaccination/medication, utensils, etc.]
{Murabahah}
• Dairy Farming [purchase and production of feed/fodder,
milk container, vaccination/medication, utensils, etc.]
{Murabahah}
• Fish Farming [purchase of fuel, ration, processing
{Murabahah} equipment, purchase of handling and
storage boxes, etc.]
• Liquidity Requirement [repair & maintenance of machinery
& equipment, labor/water/utility charges, etc.) {Salam}

4. Islamic Modes – Agricultural Financing
Areas of Financing (including crop production)
– Term Financing (medium and long term:
• Farm Mechanization [Purchase of tractor and farm
machinery for tillage, sowing/planting, pesticide
application, harvesting/threshing, etc.] {Murabahah/
Ijarah}
• Transport [purchase of trailers, reefer vans, milk cooling/
chiller tanks/carriers, motorcycles/pickups, of feed/raw
material, birds/chicks, vaccination/medication, utensils,
etc.] {Ijarah/Diminishing Musharakah}
• Live stock [purchase/replacement of animals for milk &
meet production, refrigerated storage, animal sheds,
water supply system, generator, fencing slaughter house
etc.] {Murabahah/DM/Istisna}
• Irrigation System [t/wells, sprinkler/drip/solar pumps,
water course lining, etc.] {Ijarah/Murabahah/DM/ salam}
• Forest development and enhancement [nursery raising,
tree plantation, etc.] {DM}

5. Islamic Modes – Agricultural Financing
Areas of Financing (including crop production)
– Term Financing (medium and long term:
• Poultry Farming [construction of breeding & hatchery
farms, utensils, feed mills, transport & distribution
vehicles, slaughtering & processing, etc.] {Murabahah/
DM}
• Fish Farming/catching [construction of fish ponds &
hatcheries, purchase/replacement of fishing boats,
engines, and related facilities & equipments, construction
of cold storage, etc.] {Murabahah/DM}
• Dairy Farming [milk processing, plants, etc.]
{Murabahah/DM/Ijarah}
• Miscellaneous [green houses, godowns, dairy/livestock
farms, seed/milk/fruits/vegetables processing equipment]

6. Islamic Modes – Agricultural Financing
BLANK SLIDE

7. Training Workshop – Islamic Microfinance
ISLAMIC MODES/ INSTRUMENTS:
– Sale Contracts:
• Murabaha/Murabahah to the Purchase Orderer
• Salam/Parallel Salam
• Istisna’/Parallel istisna
– Participatory Modes:
• Mudarabah/Resource Mobilization
• Musharakah/Diminishing Musharakah
– Rent based Modes:
• Operating ijarah
• Ijarah wa iqtina’

8. Theory & Practice of Murabahah
Preliminary: Rules applicable for Islamic Sale
1. Subject (good to be sold) must exist at the time of sale
2. Subject must be in ownership of seller – Physical or constructive
possession [exception in Salam and Istisna’]
3. Subject must be property of value
4. Subject should be halal
5. Subject must be known and identified
6. Sale must be instant and absolute
7. Sale must be unconditional
8. Delivery of sold item must be certain
9. Price of subject must be certain
Risks and responsibilities attached with the subject
must transfer from seller to the purchaser as a result
of sale

9. Training Workshop – Islamic Microfinance
Preliminary:
• Murabahah; historical perspective
• Murabahah and Musawamah
• Spot and Deferred Murabahah
• Deferred Murabahah and Bai Muajjal
• Banking Murabahah

10. Theory & Practice of Murabahah
Murabahah – Concept and Historical perspective
Murabahah defined:
• Selling a commodity as per the purchasing price with a defined
and agreed profit (Ribh means profit).
• Profit may be a percentage of the selling price or a lump sum.
• The transaction may be concluded with or without any promise
in which case it shall be called as ordinary Murabahah or
banking Murabahah or Murabahah to the purchase orderer.
Shariah Legitimacy of Murabahah:
• Qura’an: Surah Ale Imran – “It is no crime for you to seek the
bounty of your Lord” [verse 198]
Surah Al-Baqarah – “Allah has permitted trade”
[Verse 275]
• Sunnah: The Prophet (PBUH) purchased a she camel from Abu
Bakr (RAA) for use as transportation from Medinah...

11. Theory & Practice of Murabahah
Process Flow:
Promise Stage
– Negotiation/Approval of overall limit
– MOU/Master Murabahah Facility Agreement
– Requisition + Undertaking + Security Deposit (Hamish
jiddiyah)
2
Bank MOU/Master MFA Client
Approval of Limit 1
Requisition, Undertaking, Sec. Dep. 3

12. Theory & Practice of Murabahah
Agency Stage
– Third party appointed as agent [Optional] –
– Clint can be appointed agent [case of dire need]
– Payment to the Supplier – Direct
Draft of Payment 2A
Agent
3 (Client)
Receipt of Payment Agent
Bank
Bank Client
(3rd Party)
Receipt of
Payment
Agency Agreement 2
1
Supplier
Payment 3
2

13. Theory & Practice of Murabahah
Acquisition/Possession Stage
– Constructive Possession
• Payment to supplier
• Discount of supplier/benefit to client
• Title of goods
• Transfer of risk and responsibilites
Risks and Responsibilities Agent
(Client)
Agent
Bank Supplier
Title Goods (3rd party)

14. Theory & Practice of Murabahah
Execution of Murabahah / second Sale
– Receipt / Possession report
– Offer of client to purchase
– Acceptance of offer by the bank
– Return of security deposit
– Collateral obtained
– Delivery of goods / Transfer of Risk & responsibility
– Ownership changes
– Payment of earnest money (Urboun) [Optional]
Payment of Murabahah Price
– Client pays Murabaha price as per agreed schedule
– Collateral released
– Murabahah terminates

15. Theory & Practice of Murabahah
Execution of Murabahah Urboun/Securities 4
Offer to Purchase 2
Bank Client
Acceptance of Offer 3
Receipt , Possession Report 1
Sec. Deposit/Hamish jiddiyah 3
DP Note

Payment of Murabahah Price
Murabahah Price 1
Bank Client
Murabahah Terminates 2

16. Theory & Practice of Murabahah
Purchase of poultry feed stock
• Murabahah transaction: Rs. 100,000
• Murabahah Facility: 90 Days
• Payment: Lump sum
• Rate of Profit: Six months
KIBOR+2%
• Freight: 5% of cost of goods
• Securities: Pledge of feed stock,
post dated cheques

17. Theory & Practice of Murabahah
Pricing of Murabahah [Example]:
Particulars Amount (Rs.)
Cost of goods Rs. 100,000
Rate of Profit Kibor + 2%
Six monthly KIBOR 10% p.a.
Freight/Insurance 5% of cost
Total cost 100000 x 5% 100000 + 5000
=105000
Profit 10%+2% = 12% p.a. 105000 x 12% x
90/365 = 3107
Murabahah Price 105000+3107= 108107

18. Theory & Practice of Murabahah
Issues in Murabahah:
• Oral promise/unilateral – bilateral promise with option
• Supplier’s price in the name of customer/without any
name/bank’s discretion (offer to negotiate)
• Prior contractual relationship (customer and supplier)
• Vendor being third party [buy back (inah)]
• Commitment or credit facility fee
• Documentation charges
• Syndication charges
• Feasibility study fee
• Performance guarantee from customer in case the
vendor is of its choice

19. Theory & Practice of Murabahah
Issues in Murabahah:
• Hamish Jiddiyah/trust/return/investment
• Arboun/ treatment/timing
• Sequence of transactions
• Timing of promissory note
• Rollover in murabahah
• Timing of executing murabahah
• Default by the client
• LIBOR/KIBOR being reference price
• Rebate on early payment

20. Islamic Modes – Agricultural Financing
BLANK SLIDE

21. Islamic Modes/Instruments - Sale Contracts:
Salam: Defined
A salam transaction is the purchase of a
commodity for deferred delivery in
exchange for immediate payment. It is a
type of sale in which the price, known as
the salam capital, is paid at the time of
contracting while the delivery of the item
to be sold known as subject matter of
salam (al Muslam fihi) is deferred. Salam is
also known as Salaf (lit: borrowing)

22. Islamic Modes/Instruments - Sale Contracts:
Salam: Shariah Legitimacy
 Allh says “O ye who believe when you deal with
each other, in transactions involving future
obligations in a fixed period time, reduce them to
writing” [Al Baqara Verse 282]
 Ibn Abbas reported, the Prophet (PBUH) came to
Medina on Hijrat and found that people were
selling dates for deferred delivery (salam) over a
period of one or two years. The Prophet (PBUH)
said: “whoever pays for dates on a deferred
delivery basis (salam) should do so on the basis
of specified scale and weight” [Bukhari and
Muslim]

23. Islamic Modes/Instruments - Sale Contracts:
Wisdom of allowing Salam
 Farmers, orchard owners, merchants can
fulfill their working capital and
consumption needs before the commodity
is ready to be sold

24. Islamic Modes/Instruments - Sale Contracts:
Salam:
 It is an exception to the possession (a rule
of sale)
 A purchase contract with deferred delivery
of goods in exchange of advance price
fully paid on spot (opposite to Murabahah
financing)
 Benefits both the seller and purchaser –
 Seller (client) receives the price in advance
 Purchaser (Bank) contracts the price which
is lower than the market price at the time of
delivery

25. Islamic Modes/Instruments - Sale Contracts:
Conditions of Salam:
• Salam is a binding contract
• Full price at spot, otherwise selling debt for debt
(exception – upto 3 days)
• Salam capital (price) in principle be in cash,
however, it can also be fungible commodities
(wheat etc.), or usufruct [Imam Malik]
• Debt not recognized as salam capital
• Sale in case of commodities satisfying condition
of fungibility (Dhawatul Amthal), quantity be
specified exactly
• Standardized production of companies can also be
treated as salam commodity
• Product of a particular field or farm cannot be sold
under Salam

26. Islamic Modes/Instruments - Sale Contracts:
Conditions of Salam:
• Certain date and place of delivery
• The commodity should remain in the market
throughout the period of contract [Different
opinions]
• Time period for delivery should be sufficient to
allow use of salam capital conveniently and effect
prices, preferably be at least 15-30 days [Different
opinions]
• Subject matter of salam can be exchanged with
other goods only after the date of delivery as long
as this replacement is not the part of contract. But
market value of exchanged goods should not be
more than the market value of salam goods

27. Islamic Modes/Instruments - Sale Contracts:
Conditions of Salam:
• If the buyer refuses to take delivery of goods
(when these meet the specification criteria) he
should be compelled to take delivery
• If seller fails to deliver due to insolvency he should
be granted an extension in time of delivery
• Salam contract can be cancelled with the consent
of both parties, and only the original price paid is
returned
• A security/guarantee or personal surety can be
obtained as safeguard against risk of default

28. Payment of Salam Price 1-1-2007
Salam
Bank Client
Transaction
Agent
Delivery of Goods 30-6-2007
Third Party

29. Islamic Modes/Instruments - Sale Contracts:
Salam: Procedural Alternatives:
•The banks face limitations in receiving
commodities and selling them in the market
•Banks can overcome the limitation by
establishing a subsidiary to undertake this task
•Banks can adopt Parallel Salam or Third party
sales to avoid this situation
•Banks can appoint the client its agent to sell the
commodity. The agency agreement should be
separate from the salam agreement
•If agent has been able to sell the commodity at a
price more than the one stipulated in agency
agreement, he is entitled to get the difference

30. 1 Salam Sale Contract 1 June 06
2 Salam Price Payment 1 June 06
Delivery of
Client 5 Purch
Commodity
Ban
MFI
20 Dec 06
Parallel
Salam 3
2 Salam Contract
2nd Salam Contract
Delivery of Third
Commodity 2nd S
20 Dec 2006 6 15 Ju

31. 1 Salam Sale Contract 1 June 06
2 Salam Price Payment 1 June 06
Delivery of
Client 4 Purchaser
Commodity
Bank
20 Dec 06
Promise to Purchase
Pays 20 Dec 06
15 June 06
Third Party 6 3
Promise 5
Delivery of Third Party
Commodity Promise and
20 Dec 2006 Payment

32. Islamic Modes/Instruments - Sale Contracts:
Rules of Parallel Salam and Third party promise
•Both the contracts viz. salam and parallel salam
must be independent of each other, otherwise it
becomes two sales in one contract
•Parallel salam is allowed only with third parties.
Therefore the original seller cannot be entered into
the parallel salam
•If one party breaches its obligation, the bank has
no right to refuse delivery of goods in parallel
contract
•The third party giving unilateral promise should
not pay the price as this is not allowed in Shariah

33. Islamic Modes/Instruments - Sale Contracts:
Difference Between Salam and Murabaha
Salam Murabahah
Delivery of good is deferred, Good is delivered at spot,
price is paid at spot payment of price is deferred
Price has to be paid in full Price can be paid on spot or
differed, lump sum or in
installments
Salam is not executed in the Murabaha can be executed in
commodity of particular particular commodity.
specifications or the
commodity from particular
origin

34. Islamic Modes – Agricultural Financing
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