Introduction to Islamic Banking and its contracts

2. Maryam Khan
13029046-002
MBF
Islamic Banking

3. INTRODUCTION
• BANK
• BANKING
• ISLAMIC BANKING
• Origin of Islamic Banking in Pakistan
• Major Modes of Financing

4. TIMELINE OF ISLAMIC BANKING

5. COMPONENT-PART IN ISLAMIC CONTRACT
2013

8. PRODUCTS OF BANK-ISLAMI PAK. LTD.
Corporate Banking
Mudarabah
Financing
Musharakah
Financing
Consumer Banking
MUSKUN
Financing
Islami Auto
Ijarah-New
Vehicle
Investment
Banking
Sukuk
Arrangement
Retail Banking
Islami Bachat
a/c
Islami Dollar
Bachat a/c

9. MUDARABAH FINANCING
• Glossary (Mudarib, Ras-ul-Maal, Rab-ul-Maal, Wakeel, Ameen, Kafeel)
• Types of Mudarabah Contract
1. Al-Mudarabah Al-Muqayyadah
2. Al-MudharabaAl-Mutlaqah
• Investment
• Expense
• Distribution of Profit and Loss
• Termination of Mudarabah
• Uses

10. Termination of Contract
The mudarabah will stand terminated when the period specified in the contract expires.
It can also be terminated any time by either two parties giving the notice.
Terms of MUDARABA
• Nature of investment and it to be at the disposal of the
Mudarib (Manager).
• Conduct of business within a framework.
• Sharing of profit in agreed proportion.
• Financial loss on capital only.
• Liability of investor limited to his investment

11. • Mudarabah is a kind of partnership which involves two partners i.e.
(Rabb-ul-Maal, Mudarib).
• The profits generated are shared according to a mutually agreed pre-
determined ratio.
• Loss is borne by Rabb-ul-Maal unless the loss is due to negligence of
Mudarib.
• Mudarabah transactions are based on pure profit & loss sharing
arrangement.
• The risks associated with such transactions are greater. Due to this
reason, Mudarabah transactions are executed subject to satisfactory
review of feasibility of the proposed project.
How Mudarbah is used in bank Islami?

12. Literature Review
MUSHARAKAH FINANCING
• Finance should not exceed with the original price of asset. The loan
made should be short term based.(Razak & Meera, 2009 A.D)
• Sharing of profit is required as per the proportion of each member’s
capital.(Wilson, 1974)
• The paper demonstrates principles governing the implementation of
Musharakah Mutanaqisah in Islamic home financing to keep it free
from interest .(Osmani & Abdullah, 2010)
• Musharakah business do not compromise the long-term sustainability
of the business & safeguard the interests of stakeholders. (Noraziah &
Ismail, 2010)

13. • Shareholders (Shuraka’)
• Capital (Ra’sul Mal)
• Project/Business Venture (Mashru’)
• Pre-determined profit allocation (Ribh)
• Offer (Ijab)
• Acceptance (Qabul). (Fariha & Hanani, 2013)
Legal Elements
• Distribution of Profit
• Distribution of Loss
• Nature of Capital
• Management of Musharakah
• Termination of Contract
PILLARS OF MUSHARAKH

15. DIMINISHING MUSHARAKAH
www.sbp.org.pk

16. • The proposed arrangement is composed of the following
transactions:
• To create joint ownership in the property (Shirkat-al-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.
HOUSE FINANCING
DIMINISHING MUSHARAKAH

17. • Sukkuk & Conventional Bond
• Islamic Sukkuk Types
• Islamic Sukkuk
1. International Overview
2. Local Overview
SUKKUK ARRANGEMENTS
“Every loan that draws any premium is Riba”

18. Sukuk al-
Ijarah
• Ownership certificates
• Trustee as form of sukuk
• Asset leased to firm
• Proceeds as dividend for sukuk holder
• Fixed/Floating returns
• Pre-determined rental Payment
• Holder suffer loss
• Real ownership not only right to receive rent
• Asset shown on books as an clients instead of SPV
Sukuk al-
Salam
• Seller makes an advance payment
• Alternate to short-term Govt. T-bills
• Acknowledgement Receipt
• Difference between Sale & Purchase Price is profit for investor.
• ZTBL sell commodity to buyer on Salam basis.
• Many bank participate in Sukuk but one Bank act as trustee.
• Trustee nominated to represent other Banks.
• Cannot be treated in secondary market.

19. Sukuk al-
Murabahah
• Sukuk issued against Murabahah
• Investors provide funding to purchase asset for issuer.
• Asset purchased from supplier.
• That asset immediately sold to issuer against deferred price.
• Profit would be distributed among the investors proportionately.
• Murabahah sukkuk represents investors shares in receivable from
purchaser.
• Its dayn, cannot traded in secondary market.
Sukuk al-
Musharakah
• Company financed itself through Musharakh.
• Every sukuk represent holder’s proportionate ownership in asset.
• After converting majority of cash into fixed assets, these sukuk
can be treated as negotiable instruments in secondary market.
• Profit be shared among issuer & investors to an agreed ratio.
• Loss is shared on pro rata basis.
• Profit & Loss is shared between investors as per investment ratio.
• Assets of Musharakah should mot be in liquid form to ensure
tradability.
• At least 20% of the value of portfolio should be invested in non-
liquid assets.

20. Sukuk-Other
types
• Sukuk Al Intefah is transfer of usufruct instead of ownership of
asset.
• Other types include Sukuk Al Muzara’a (sharecropping), Sukuk
Al Musaqa (irrigation), Sukuk Al Mugharasa (agriculture) etc.
• Also issued under hybrid structures where number of Islamic
modes of finance are used to issue a Single Sukuk.
• Each Islamic mode is applied at different intervals to cater
different requirements of issuer.
Sukuk al-
Musharakah
• AAOIFI also issue Shariah Standards for Sukuks & these
standards would help reducing differences in fatwas for Sukuks.
• And whosoever fears Allah and keeps his duty to Him, He will
make his matter easy for him...
• (Surah Al TalaqAyat 04)

21. CLIENTS

22. • What makes IslamiBachat Account Shariah Compliant?
• What is the relationship between an IslamiBachat Account holder and
BankIslami?
• Key Features
1. Monthly Profit/Loss statement.
2. Differential and specific pool allocation for large deposit holders.
3. Profit announcement at the end of every month.
4. Minimum balance of Rs. 100/- .
5. Joint a/c facility upto four joint a/c holders.
6. Unlimited over the counter deposits & withdrawal, free of charge.
7. No restriction on intercity transactions.
8. Free 1 card, Bankislami ATM & Deposit card.
9. Access to all ATMS linked to MNET.
10. Instant payment at Orix terminals for grocery,fuel & other etc.
ISLAMI BACHAT ACCOUNT

23. Individual/
Joint a/c
• Filled Account Opening Form
• Computerized National Identity Card (CNIC)
• Passport (for Non-residents only)
• Employment proof (Pay slip, Employment letter etc)
Sole-
Proprietor
• Filled Account Opening Form
• Computerized National Identity Card (CNIC)
• Passport (for Non-residents only)
• NTN Certificate
Partnership/
Club/Society
• Certified Copy of Partnership/ Trust Deed
• Certificate of Registration
• Signatures of all Partners on letter of Partnership
• Certified copy of rules
• Certified copy of resolution
• Copy of by-laws
• Copy of NTN Certificate
• CNICs of all Partners
• Passports (for Non-residents only)

24. Limited Company
• Certificate of Incorporation
• Certificate for Commencement of Business
(PLC only)
• Memorandum of Association
• Articles of Association
• Current list of Directors
• Copy of Board Resolution
• CNICs of all Directors
• Copy of NTN Certificate and Form 29

25. • What makes Islami Dollar Bachat Account Shariah Compliant?
• What is the relationship between an Islami Dollar Bachat Account and
BankIslami?
• Products
• Key Features
1. Free Internet Banking
2. Safe Deposit Lockers
3. 100% interest free
4. Monthly Profit/Loss payment on daily product basis.
5. Minimum balance of USD 100$.
6. No Zakat/withholding tax applicable.
7. Joint a/c facility to four joint account holders.
8. Access to entire online branch.
9. No restriction on intercity transactions.
10. Free a/c statement etc.
ISLAMI DOLLAR BACHAT ACCOUNT