Islamic Finance 4

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Islamic Finance 4

  1. 1.
  2. 2.
  3. 3. <ul><li>SHARIAH DEFINITION: </li></ul><ul><li>“ the exchange of a thing of value by another thing of value with mutual consent” </li></ul>
  4. 4. ESSENTIAL ELEMENTS OF A VALID CONTRACT <ul><li>Offer and acceptance </li></ul><ul><ul><li>Acceptance conform to the offer </li></ul></ul><ul><ul><li>Offer & acceptance executed in the same session </li></ul></ul><ul><ul><li>Assent must be genuine </li></ul></ul><ul><ul><li>Existence of offer till the issuance of acceptance </li></ul></ul><ul><li>Contract Subject Matter </li></ul><ul><ul><li>Lawfulness </li></ul></ul><ul><ul><li>Existence </li></ul></ul><ul><ul><li>Delivery </li></ul></ul><ul><ul><li>Determination </li></ul></ul><ul><li>Consideration </li></ul><ul><li>Capacity of The Parties to Contract </li></ul><ul><li>Legality </li></ul>
  5. 6. <ul><li>THE PARTIES CONSENT TO EACH OTHERS INTENTIONS </li></ul><ul><li>MAJORITY OF THE SCHOLARS: </li></ul><ul><ul><li>CONTRACTING PARTIES </li></ul></ul><ul><ul><li>SUBJECT MATTER </li></ul></ul><ul><ul><li>CONSENT </li></ul></ul>
  6. 7. <ul><li>Consent comprises of an offer and acceptance. The consent takes effect upon the contracting parties consensus. The Four famous Jurist differ on who is the offeror and the accepter. </li></ul>
  7. 8. <ul><li>The rights and duties flowing from a contract are segregated in four catogeries, namely:   </li></ul><ul><li>         Terminology of the contract </li></ul><ul><li>         The contracting Parties </li></ul><ul><li>         The place of the contract </li></ul><ul><li>         The subject matter of the contract </li></ul><ul><li>  </li></ul>
  8. 9. <ul><li>The terminology used by the contracting parties must imply the parties intention to conclude transaction whether the terminology is explicit or such terminology that is exercised in the market place. This can be done in writing, orally or by mere gesture. </li></ul><ul><li>The conditions of the terminology are three, which are: </li></ul><ul><li>1)        The consent to the contract must be very clear and free from vague language or ambiguity. </li></ul><ul><li>2)        The acceptance must confirm with the contents of the offer </li></ul><ul><li>3)        The acceptance must be within the same conversation </li></ul><ul><li>  </li></ul>
  9. 10. <ul><li>The contracting parties must have the capacity to contract. There are two types of capacity: </li></ul><ul><li>  </li></ul><ul><li>a)        Full Capacity </li></ul><ul><li>b)       Limited Capacity </li></ul>
  10. 11. <ul><li>Insanity </li></ul><ul><li>Demented mind </li></ul><ul><li>Unconscious </li></ul><ul><li>Sleep </li></ul><ul><li>Intoxicated </li></ul><ul><li>Incompetent (stupid) </li></ul><ul><li>Insolvent </li></ul><ul><li>Death illness </li></ul><ul><li>A person that is ceased from contracting can be represented by his official guardian. The official guardian shall act on his behalf in commercial matters and in his responsibilities. </li></ul>
  11. 12. <ul><li>There are four conditions attributed to the subject matter: </li></ul><ul><li>a)        The subject matter must be existing </li></ul><ul><li>b)       The subject matter must be acceptable in Shariah (Maal Mutaqawwam) </li></ul><ul><li>c)        The subject matter must be deliverable </li></ul><ul><li>d)       The subject matter must be stipulated and ascertained. </li></ul>
  12. 13. <ul><li>The outcome of the contract is the purpose for concluding the contract. The outcome of the contract is according to the rules stipulated in shariah regarding the form and type of contract concluded. </li></ul>
  13. 14. <ul><li>There are four types of contract: </li></ul><ul><li>1)        An concluded contract </li></ul><ul><li>2)        A valid contract </li></ul><ul><li>3)        An executable contract </li></ul><ul><li>4)        A binding contract </li></ul>
  14. 15. <ul><li>  </li></ul><ul><li>Bai’Mun’aqid means a sale that has been contracted </li></ul><ul><li>It may be of four kinds: </li></ul><ul><li>1. Sahih - valid </li></ul><ul><li>2. Naafidh effective </li></ul><ul><li>3. Mawqoof - suspensive </li></ul><ul><li>4. Makrooh - disliked </li></ul>
  15. 16. <ul><li>  </li></ul><ul><li>Contract (Aqd) </li></ul><ul><li>Subject Matter (Mabe’e) </li></ul><ul><li>Price ( Thaman) </li></ul><ul><li>Possession of delivery (Qabza) </li></ul>
  16. 17. <ul><li>  </li></ul><ul><li>A void sale is a sale that is unlawful in itself. This sale is null and void. </li></ul><ul><li>  </li></ul><ul><li>In a void sale, the buyer does not have title to subject matter and seller does not have title to the price. Both subject matter and price cannot be used lawfully. The produce of both shall be unlawful. </li></ul>
  17. 18. <ul><li>An invalid sale is a sale that is according to the law in itself, but not in its manner. It is legally correct according to the Shari’ah from its onset, however, it has impermissible characteristics. </li></ul><ul><li>  </li></ul><ul><li>When a sale is invalid, it is Waajib (necessary) on either parties before possession being taken, to cancel the sale, in order that the invalidity of it may be removed. The same applies after possession, provided the invalidity exists in the contract itself. </li></ul><ul><li>  </li></ul>
  18. 19. <ul><li>A sale will be Makrooh when the transaction is complete and one gets possession of the goods but is disliked eg. Sale after Juma Azaan </li></ul>
  19. 20. <ul><li>Bai’Naafidh or effective sale falls into two categories: </li></ul><ul><li>1. Laazim - binding </li></ul><ul><li>2. Ghair Laazim- non binding </li></ul>
  20. 21. <ul><li>This is a sale in which there remains no option of return </li></ul>
  21. 22. <ul><li>This is a sale in which the buyer or the seller still have the option of returning or taking back the article. </li></ul><ul><li>Khiyaar-ush-Shart - Option on Approval   </li></ul><ul><li>Khityar-ur-Ru’yat – Option on Inspection </li></ul><ul><li>Khiyaar-ul-‘aib – Option on defect </li></ul>
  22. 23. <ul><li>If some make a transaction without permission of the actual buyer or seller, then the sale is suspended, and is subjected to the condition of the approval of the buyer and seller. </li></ul>
  23. 24. <ul><li>1 . Bai Musawamah : It refers to normal sale in which cost price is not known.  </li></ul><ul><li>2. Bai Murabaha: It refers to a sale in which cost and sale price is known to the buyer. </li></ul><ul><li>3. Bai Muqayada: It refers to barter sale excluding currency sale. </li></ul><ul><li>4. Bai Sarf: It refers to the sale of gold, silver and currency. </li></ul><ul><li>5. Bai Salam: It is a kind of sale in which payment is spot while the delivery of the good is deferred. </li></ul><ul><li>6. Bai Istisna: It refers to such in which commodity is transacted before it comes into existence. It is basically an order to manufacture. </li></ul><ul><li>7. Bai Muajjal: It refers to such sale in which payment is delivery is spot while payment is deferred but cost is not known. </li></ul>
  24. 25. <ul><li>1)The subject matter of sale must exist at the time of the transaction. </li></ul><ul><li>2)The Subject matter should be in the ownership of the seller at the time of the transaction. </li></ul><ul><li>3)The subject matter must be in the actual or constructive possession of the seller at the time of the transaction. Constructive possession is where the risk and reward is transferred to the seller. </li></ul><ul><li>4)The sale must be instant and absolute. </li></ul><ul><li>5)The subject matter should be a property having value. </li></ul><ul><li>6)The subject of sale should not be a thing used for an un-Islamic purpose. </li></ul><ul><li>7)The subject of sale must be specifically known and identified by the buyer. </li></ul><ul><li>8)   The delivery of the subject matter to the buyer must be certain. </li></ul><ul><li>9)The certainty of price is a necessary condition for the validity of the sale. </li></ul><ul><li>10)The sale must be unconditional </li></ul>
  25. 26. <ul><li>Death </li></ul><ul><li>Effluxion of time </li></ul><ul><li>Completion of contract </li></ul><ul><li>Cancellation </li></ul><ul><li>Loss of capacity </li></ul><ul><li>Revoked by the guardian </li></ul><ul><li>  </li></ul>
  26. 27.
  27. 28. <ul><li>1950 – Islamic Banking in Theory </li></ul><ul><li>1970 – Islamic Banking in Practice </li></ul><ul><li>180 – Islamic Financial Institutions </li></ul><ul><li>$300 Billion </li></ul>
  28. 29. <ul><li>Exodus </li></ul><ul><li>Leviticus </li></ul><ul><li>Deutronomy </li></ul><ul><li>Psalms </li></ul><ul><li>Proverb </li></ul><ul><li>Nehemiah </li></ul><ul><li>Ezakhiel </li></ul><ul><li>7 Verses of the Quraan </li></ul><ul><li>More than 40 sayings of </li></ul><ul><li>the Prophet Muhammad </li></ul><ul><li>(Peace Be Upon Him) </li></ul>Interest is Forbidden :
  29. 30. <ul><li>Procedures </li></ul><ul><li>Interest </li></ul><ul><li>Uncertainty </li></ul><ul><li>Speculation </li></ul><ul><li>Unlawful Products </li></ul><ul><li>Unlawful Services </li></ul>
  30. 31. <ul><li>Deposits </li></ul><ul><li>Financing </li></ul><ul><li>Services </li></ul>
  31. 32. Wadi`a ( Trust )
  32. 33. Qardh hassan ( Beneficial Loan )
  33. 34. (Mudarib) Investor of Capital CLIENT Payment of Mudarabah Capital INVESTMENT / TRADING ACTIVITIES Earning of Profits (Mudarib) Distributor of Profits Earned CLIENT Periodic proportionate Profits / Return of Capital Mudaraba (Passive Partnership)
  34. 35. * Murabaha * Ijara * Musharaka * Mudarabah * Salam * Istisna` * Sukuk
  35. 36. ISLAMIC BANK CUSTOMER VENDOR Transfer of title to bank Transfer of title to customer Payment of purchase price (P) Payment of marked up price (P + X) The structure of a Murabaha Contract
  36. 37. <ul><li>The Bank Buys the asset from the Vendor </li></ul><ul><li>The customer then buys the asset from the bank at a mark-up price (P+X) , which is payable on a deferred payment basis. </li></ul><ul><li>The period covering the deferred payment is effectively the period of financing. </li></ul><ul><li>The title to the asset is transferred to the customer at the time of purchase but usually the customer provides the same or other assets as collateral to the bank for the period of financing. </li></ul>
  37. 38. ISLAMIC BANK CUSTOMER (Lessee) VENDOR Transfer of title to bank Assets leased to customer – title does (not) pass at end of lease term Payment of purchase price Ijarah Installment The structure of an Ijarah Wa Iqtina Contract
  38. 39. <ul><li>The bank buys the asset from the vendor </li></ul><ul><li>The bank then leases the asset to the customer </li></ul><ul><li>Periodic rentals are collected by the bank </li></ul><ul><li>The title of the asset remains with the bank under as operating ijaarah </li></ul><ul><li>Title passes to the customer under a Lease ending with transfer of ownership, either gradually over the period of the contract, at the end. </li></ul>Narrative description of Ijaarah
  39. 40. The structure of a Musharaka Contract ISLAMIC BANK PARTNER (Customer) MUSHARAKA 60% Ownership 40% Ownership
  40. 41. <ul><li>Both the Bank and the customer contributes towards the capital of the enterprise </li></ul><ul><li>Under a “diminishing” musharakah, the customer buys out the bank`s share over a period of time. </li></ul><ul><li>The customer and the bank share in the profits according to the agreed proportions, which may be different from the proportions of capital contributed. Any losses of the enterprise will be borne by the customer and the bank according to their capital contributions. </li></ul>Narrative description of Musharakah
  41. 43. <ul><li>Shirk or Shirkah in Arabic means partnership </li></ul><ul><li>  In classical Islamic law, partnerships are referred to as Shirkah . In the parlance of contemporary jurists, the term Musharakah (sharing) is more commonly used </li></ul><ul><li>In its broader sense Musharakah means a joint enterprise formed for conducting some business in which all partners share the profit according to a specific ratio while the loss is shared </li></ul><ul><li>according to the ratio of the contribution. </li></ul>
  42. 44. <ul><li>Shirkat-al-Milk : Partnerships by ownership </li></ul><ul><li>-- Ikhtiyari (optional) and Ghair-Ikhtiyari </li></ul><ul><li>Shirkat-al-Aqud : - these are further divided into three major types: </li></ul><ul><li>-- Shirkat-al-Amwal : </li></ul><ul><li>- Shirkat-al-Aamaal </li></ul><ul><li>-- Shirkat-al-Wujuh :   </li></ul><ul><li>All of the above three are then further divided into two types: </li></ul><ul><li>-- Mufawadhah : </li></ul><ul><li>-- Inan : </li></ul>
  43. 45. <ul><li>  </li></ul><ul><li>The partners’ capital invested must be equal at all times. </li></ul><ul><li>Each partner equally shares the profit or loss of the business </li></ul><ul><li>Each partner is a Wakeel or agent of the other partner/s and has therefore the right to buy or sell goods on the other partner/s behalf. Thus every partner represents the other partner/s when negotiating any business deal. </li></ul><ul><li>Each partner is also a Kafil or a guarantor and thus responsible for the debts incurred by the other partner/s </li></ul>
  44. 46. <ul><li>1. Partners’ Capital </li></ul><ul><li>The partners’ capital invested can be in any proportion. </li></ul><ul><li>  </li></ul><ul><li>The Nature of Capital </li></ul><ul><li>  The share capital can be contributed either in cash or in form of commodities such as equipment, furniture, motor vehicles etc. In the latter case, the market value of the commodities shall determine the share of the partner in the capital. </li></ul>
  45. 47. <ul><li>1. Existence of Mutaaqideen (Partners) </li></ul><ul><li>2. Legal capacity of partners ( ahliyah ) : Partners must be sane & mature; </li></ul><ul><li>3. The rate of profit sharing should be determined: </li></ul><ul><li>4. Profit & Loss Sharing: All partners will share in profit as well as loss. By placingthe burden of loss solely on one or a few partners makes the partnership invalid </li></ul><ul><li>5. Distribution of loss: </li></ul><ul><li>6. Management of Musharakah : </li></ul><ul><li>7. Rights of partners in Musharakah : </li></ul>
  46. 48. <ul><li>The right to sell the mutually owned property </li></ul><ul><li>b) The right to buy on cash or credit </li></ul><ul><li>c) The right to hire people to carry out business if needed. </li></ul><ul><li>d) The right to deposit money & goods of the business </li></ul><ul><li>e) The right to use Shirkah funds or goods in Mudarabah (entrepreneur-based partnership) </li></ul><ul><li>f) The right of giving Shirkah funds as loan. If one partner for purpose of investing in the business has taken a loan ( Qard ), then paying it becomes liable on both. </li></ul>
  47. 49. <ul><li>Musharakah will terminate if the purpose of formingthe Shirkah has been achieved; if any of the partners applies for termination; if any ofthe partners die or becomes insane or incapable of effecting commercial transaction </li></ul>
  48. 50. <ul><li>MARKET VALUE </li></ul><ul><li>ACTUAL LIQUIDATION </li></ul><ul><li>CONSTRUCTIVE LIQUIDATION </li></ul>
  49. 51. CLIENT (Mudarib) Investor of Capital ISLAMIC BANK Payment of Mudarabah Capital INVESTMENT / TRADING ACTIVITIES Earning of Profits CLIENT (Mudarib) Distributor of Profits Earned ISLAMIC BANK Periodic proportionate Profits / Return of Capital Mudarabah (Passive Partnership)
  50. 52. <ul><li>The bank provides to the customer (mudarib) all the capital to fund a specified enterprise </li></ul><ul><li>The customer contributes only entrepreneurship. </li></ul><ul><li>The customer is responsible for the day to day management of the enterprise and is entitled to deduct its management fee(mudarib fee) from the enterprise`s profits. </li></ul><ul><li>The mudarib fee could be a fixed fee (to cover management expenses) and a percentage of the profits or a combination of the two. A classical mudarib fee is based on a percentage of the profits only. </li></ul><ul><li>The balance of the profit of the enterprise is payable to the bank </li></ul><ul><li>If the enterprise makes a loss, the bank (as the fund provider or Rabbul Mal) has to bear all the losses unless the loss has resulted from negligence on the part of the mudarib. </li></ul>
  51. 53. ISLAMIC BANK CUSTOMER COMMODITY OWNER Delivery of asset at future date Delivery of asset At future date Advance payment of purchase price (P) Advance payment of purchase price The structure of a Salam Contract
  52. 54. <ul><li>A Salam (sometimes referred to as Salaf) is a short term agreement in which a financial institution makes full pre-payments for future delivery of a specified quantity of goods on a specified date. </li></ul><ul><li>A salam is primarily a deferred delivery sale contract usually used for commodity finance. It is similar to a forward contract where delivery is in the future in exchange for spot payment. To mitigate the asset risk a financier can enter into parallel Salam </li></ul>
  53. 55. ISLAMIC BANK MANUFACTURER CUSTOMER Delivery of asset at future date Delivery of asset At future date Payment of purchase price on delivery Progress payment of purchase price The structure of a Istisna` Contract
  54. 56. <ul><li>Istisna` is primarily a deffered delivery sale contract similar to salam. It is similar to conventional work in progress financing for a capital project. In practice it is usually used for construction and trade finance such as pre shipment export finance. </li></ul>
  55. 58. <ul><li>A contract on a commodity on liability with the provison of work. </li></ul><ul><li>Terms in an Istisna contract. </li></ul><ul><li>- Purchaser:- Mustania` </li></ul><ul><li>- Seller:- Sania` </li></ul><ul><li>- Commodity:- Masnooa` </li></ul>
  56. 59. * SALAM * IJARAH
  57. 60. <ul><li>Full description of specification, type, and dimension </li></ul><ul><li>Only products that can be manufactured </li></ul><ul><li>In Zawatul Amsaal and Zawwatul Qiyam </li></ul><ul><li>Materials to be supplied by the Manufacturer </li></ul><ul><li>Parties are binded to the contract unless the product description is not as per the contract </li></ul><ul><li>Payment can be cash or deferred </li></ul><ul><li>Time and Place of delivery to be specified </li></ul>
  58. 61. Investments
  59. 62. <ul><li>Four fundamental Principles </li></ul>1) Primary business activity must be Shariah 2) Majority of assets are illiquid 3) Involunatary non permissable income must be less than 10 % and purified 4) At the AGM interest based transactions must be apposed
  60. 63. ISLAMIC BANK INVESTORS CUSTOMER TRANSFER OF ASSETS ISSUE OF SUKUKS CASH CASH The structure of a Sukuk Contract
  61. 64. <ul><li>Sukuks represent proportionate beneficial ownership. For a defined period the risk and returns associated with the cash flows generated from the assets belong to the sukuk holder. The characteristics of a sukuk are similar to a conventional bond with the difference being that they are asset backed. </li></ul>
  62. 65. Thank you

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