ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 1ISLAMIC FINANCESubmitted To:Prof. Umar Zaqa SahibSubmitted By:Shahid Mukhtiar 11549Faizan Javed 11550Asim Munir5thsamester
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 2INTRODUCTIONBurj Bank Limited, formerly known as Dawood Islamic Bank Limited (DIBL), is Pakistans sixthfull-fledged Islamic commercial bank. The bank received its license from the State Bank ofPakistan in May 2006, and officially commenced its operations on Friday, April 27, 2007. TheBank was the result of an initiative of the First Dawood Group, with the Islamic Corporation forthe Development of the Private Sector (ICD) in Jeddah, Unicorn Investment Bank in Bahrain, AlSafat Investment Company in Kuwait, Gargash Enterprises (LLC) in Dubai, the Singapore-basedentrepreneur Azam Essof Kolia and Shaikh Abdullah Mohammad Al-Romaizan, an entrepreneurfrom the Kingdom of Saudi Arabia. In July 2011, the bank was renamed Burj Bank Ltd.Prof. Mufti Munib-Ur-Rehman is heading Shariah Departmentof the Bank as the bank’s Shariahadvisor. It currently has 75 online branches.Burj Bank has a diversified range of Shariah Compliant funded and non-funded products andservices aimed at both individual and corporate customers. The bank also offers investmentand corporate advisory services.
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 3MusharakahMusharakah plays a vital role in financing business operations based on Islamic principles,which prohibit making a profit on interest from loans. For example, suppose that an individual(A) wants to begin a business but has limited funds. Individual (B) has excess funds and wishesto be the financier in musharakah with A. The two people would come to an agreement to theterms and begin a business in which both share a portion of the profits and losses. This negatesthe need for A to receive a loan from B.Roles of musharakahThe basic rules and features of Musharakah used by the Burj bank are given below• Musharakah means relationship established under a contract by the mutual consent ofthe parties for sharing of profits and losses,arising from a joint enterprise or venture.• Investments come from all partners/shareholders hereinafter referred to as partners.• Profits shall be distributed in the proportion mutually agreed in the contract.• It is not allowed to fix a lump sum amount for any of the partners,or any rate of profittied up with his capital. A management fee however, can be paid to the partnermanaging the Musharakah provided the agreement for the payment of such fee isindependent of the Musharakah agreement.• Losses are shared by all partners in proportion to their capital.• All assets of Musharakah are jointly owned in proportion to the capital of each partner.• All partners must contribute their capital in terms of money or species at an agreedvaluation.
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 4• Share capital in a Musharakah can be contributed either in cash or in the form ofcommodities. In the latter case, the market value of the commodities shall determinethe share of the partner in the capital.• The presence of the commodity: This means the price and commodity itself.• The rate of profit sharing should be determined: The share of each partner in the profitearned should be identified at the time of the contract. If however, the ratio is notdetermined before hand the contract becomes void (Fasid).• Therefore identifying the profit share is necessaryPower and rights of partners in Musharakah:After entering in to Musharakah contract, partners have the following rights,1- The rights to sell the mutually owned property since all partners are representing each otherin shirkah and all have right to buy and sell for business purposes.2- The right to buy raw material or other stock on cash or credit using funds belonging to shirkahto put into business.3- The right to hire people to carry out business if needed.4- The right to use shirkah,s fund or goods in Mudarabah.5- The right of giving shirkah,s funds as hiba (gift) or loan.If one partner for purpose of investing in the business has taken a Qard-e- Hasan, then paying itbecomes liable on both.SECURITY IN MUSHARAKAH:In case of Musharakah agreement taking place between bank and client, the bank may ask theclient to furnish a security to ensure that the capital is invested as per agreed term andconditions. note that security cannot be used to set off against any losses.
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 5MUSHARAKAH TERMINATION IN CASE OF A DISPUTEIf there is a dispute between the partners in this matter i.e. one partner seeksliquidation while the other wants partition or distribution of the non-liquid assetsthemselves,the latter shall be preferred, because after the termination of musharakah,all the assets are in the joint ownership of the partners, and a co-owner has a right toseek partition or separation, and no one can compel him on liquidation. However, if theassets are such that they cannot be separated or partitioned, such as machinery, thenthey shall be sold and the sale-proceeds shall be distributed• (2)If any one of the partners dies during the musharakah, the contract of musharakahwith him stands terminated. His heirs in this case, will have the option either to drawthe share of the deceased from the business, or to continue with the contract ofmusharakah.• (3)If any one of the partners becomes insane or otherwise becomes incapable ofeffecting commercial transactions, the musharakah stands terminated.• Termination of Musharakah without closing the business• If one of the partners wants termination of the musharakah, while the other partner orpartners like to continue with the business, this purpose can be achieved by mutualagreement. The partners who want to run the business may purchase the share of thepartner who wants to terminate his partnership, because the termination ofmusharakah with one partner does not imply its termination between the otherpartners.• However, in this case, the price of the share of the leaving partner must be determinedby mutual consent, and if there is a dispute about the valuation of the share and thepartners do not arrive at an agreed price, the leaving partner may compel otherpartners on the liquidation or on the distribution of the assets themselves.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 thecase may be.
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 6USES OF MUSHARAKAH IN BURJ BANKThe BURJ BANK used Musharakah in the following areas as a mode of financing which are givenbelow;1) Project financing2) Working capital financing3) Import financing4) Export financing5) Running finance6) Saving accounts7) Certificate of investment8) Term finance certificate9) Treasury bills10) Interbank lending and borrowing
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 7Mudarabah"Mudarabah" is a special kind of partnership where one partner gives money to another forinvesting it in a commercial enterprise. The investment comes from the first partner who iscalled "rabb-ul-mal", while the management and work is an exclusive responsibility of theother, who is called "mudarib".BASIC RULES OF MUDARABAH USED BY BURJ BANK1. The rabb-ul-mal has authority to oversee the mudarib activities or work with mudarib ifhe consents, otherwise he is not allowed to participate.2. Mudarib does not have the authority to keep another mudarib or a partner and mix hisown investment in that particular Mudarabah without consent of rabb-ul-mal.3. Different capacities of mudarib;Ameen (Trustee)Wakeel (Agent)Shareek (Partner)Zamin (Liable)Ajeer (Employee)CHARACTERISTICS IN MUDARABAH:At the beginning of each MUDARABAH, a contract period should be specifiedIf all asset of the MUDARABAH are in the cash form at the time of terminationIf all the of MUDARABAH are not in cash form They will sold and liquidated so thatactual profit may be determined.All payable and receivable will be paid on termination.The agreed profit paid to mudarib and rabb-ul-mal will aalso be taken into ccount andwhen the total capital is withdrawn. The principal amount invested by rabb-ul-mal will
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 8be given to him first remaining balance will be called profit which will be distributedbetween mudarib and rabb-ul-mal.If the principal amount invested by the rabb-ul-mal is not recovered fully then theinterim profit paid to mudarib and rabb-ul-mal during the term of Mudarabah will betaken into account in the payment of the principal amount to rabb-ul-mal.Types of MudarabahThere are 2 types of Mudarabah namely:1. Al Mudarabah Al Muqayyadah: Rab-ul-Maal may specify a particular business or aparticular place for the mudarib, in which case he shall invest the money in thatparticular business or place. This is called Al Mudarabah Al Muqayyadah (restrictedMudarabah).2. Al Mudarabah Al Mutlaqah: However if Rab-ul-maal gives full freedom to Mudarib toundertake whatever business he deems fit, this is called Al Mudarabah Al Mutlaqah(unrestricted Mudarabah). However Mudarib cannot, without the consent of Rab-ul-Maal, lend money to anyone. Mudarib is authorized to do anything, which is normallydone in the course of business. However if they want to have an extraordinary work,which is beyond the normal routine of the traders, he cannot do so without expresspermission from Rab-ul-Maal. He is also not authorized to:a) keep another Mudarib or a partnerb) mix his own investment in that particular Modarabah without the consent of Rab-ulMaal.Conditions of Offer & Acceptance are applicable to both. A Rab-ul-Maal can contractMudarabah with more than one person through a single transaction. It means that he can offerhis money to A and B both so that each one of them can act for him as Mudarib and thecapital of the Mudarabah shall be utilized by both of them jointly, and the share of theMudarib.
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 9InvestmentIn Mudarabah, Rab-ul-maal provides the investment and Mudarib the management thereforethe Rab-ul-maal should hand over the agreed investment to Mudarib and leaves everything toMudarib with no interference from his side but he has the authority to:a) Oversee the Mudaribs activities andb) Work with Mudarib if the Mudarib consents.Distribution of Profit & LossIt is necessary for the validity of Mudarabah that the parties agree, right at the beginning, on adefinite proportion of the actual profit to which each one of them is entitled. The Shariah hasprescribed no particular proportion; rather it has been left to their mutual consent. They canshare the profit in equal proportions and they can also allocate different proportions for Rab-ul-Maal and Mudarib. However in extreme case where the parties have not predetermined theratio of profit, the profit will be calculated at 50:50.The Mudarib & Rab-ul-Maal cannot allocate a lump sum amount of profit for any party nor canthey determine the share of any party at a specific rate tied up with the capital. For example, ifthe capital is Rs.100,000/-, they cannot agree on a condition that Rs.10,000 out of the profitshall be the share of the Mudarib nor can they say that 20% of the capital shall be given to Rab-ul-Maal. However they can agree that 40% of the actual profit shall go to the Mudarib and 60%to the Rab-ul-Maal or vice versa.It is also allowed that different proportions are agreed in different situations. For example, theRab-ul-Maal can say to Mudarib "If you trade in wheat, you will get 50% of the profit and if youtrade in flour, you will have 33% of the profit". Similarly, he can say "If you do the business inyour town, you will be entitled to 30% of the profit and if you do it in another town, your sharewill be 50% of the profit".Apart from the agreed proportion of the profit, as determined in the above manner, theMudarib cannot claim any periodical salary or a fee or remuneration for the work done by himfor the Mudarabah.All schools of Islamic Fiqh are unanimous on this point. However, Imam Ahmad has allowed forthe Mudarib to draw his daily expenses of food only from the Mudarabah Account. The Hanafijurists restrict this right of the Mudarib only to a situation when he is on a business trip outsidehis own city. In this case he can claim his personal expenses, accommodation, food, etc. but heis not entitled to get anything as daily allowances when he is in his own city.
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 10If the business has incurred loss in some transactions and has gained profit in some others, theprofit shall be used to offset the loss at the first instance, then the remainder, if any, shall bedistributed between the parties according to the agreed ratio.The Mudarabah becomes void (Fasid) if the profit is fixed in any way. In this case, the entireamount (Profit + Capital) will be the Rab-ul-Maals. The Mudarib will just be an employeeearning Ujrat-e-Misl.The remaining amount will be called (Profit).This profit will be shared in the agreed (pre-agreed) ratioUSES OF MUDARABAH IN BURJ BANK:The Mudarabah can be used in the followings ways;1. Short/medium/long term financing2. Project financing3. Small and medium enterprises set-up financing4. Large enterprise financing5. Import financing6. Import bills drawn under inland letters of credit7. Bridge financing8. LC without margin9. Inland bill drawn under inland letter of credit10. Export financing11. Working capital financing12. Running accounts financing13. Current/savings/investment accounts14. Interbank lending and borrowing15. Term finance certificate and certificate of investment16. T-bills and federal investment bonds
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 11Roles of the Mudarib:Ameen (Trustee): To look after the investment responsibly, except in case of naturalcalamities.Wakeel (Agent) : To purchase from the funds provided by Rab-ul-MaalShareek (Partner): Sharing in any profitZamin (Liable): To provide for the loss suffered by the Mudarabah due to any act on hispart.Ajeer (Employee): When the Mudarabah gets Fasid due to any reason, the Mudarib isentitled to only the salary, Ujrat-e-Misl.In case there is a loss, the Mudarib will not even get the Ujrat-e-Misl.Termination of MudarabahThe Mudarabah will stand terminated when the period specified in the contract expires. It canalso be terminated any time by either of the two parties by giving notice. In case Rab-ul-Maalhas terminated services of Mudarib, he will continue to act as Mudarib until he is informed ofthe same and all his acts will form part of Mudarabah.If all assets of the Mudarabah are in cash form at the time of termination, and some profit hasbeen earned on the principal amount, it shall be distributed between the parties according tothe agreed ratio. However, if the assets of Mudarabah are not in cash form, it will be sold andliquidated so that the actual profit may be determined. All loans and payables of Mudarabahwill be recovered. The provisional profit earned by Mudarib and Rab-ul-Maal will also be takeninto account and when total capital is drawn, the principal amount invested by Rab-ul-Maal willbe given to him, balance will be called profit which will be distributed between Mudarib andRab-ul-Maal at the agreed ratio. If no balance is left, Mudarib will not get anything. If theprincipal amount is not recovered fully, then the profit shared by Mudarib and Rab-ul-Maalduring the term of Mudarabah will be withdrawn to pay the principal amount to Rab-ul-Maal.The balance will be profit, which will be distributed between Mudarib and Rab-ul-Maal. In thiscase too if no balance is left, Mudarib will not get anything.
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 12SALAMSalam is a sale whereby the seller undertakes to supply some specific goods to the buyer at afuture date in exchange of an advanced price fully paid at spot.Here the price is cash, but the supply of the purchased goods is deferred. The buyer is called"rabb-us-salam", the seller is "muslam ilaih", the cash price is "ra’s-ul-mal" and the purchasedcommodity is termed as "muslam fih", but for the purpose of simplicity, I shall use the Englishsynonyms of these terms.The rules adopted by BURJ BANK are:Payment of price is fullHomogeneity of the productGeneral availability at the time of deliveryExactness of date and place of deliverySecuritySettlement as per contract onlyCancellation of contractThe salam price must be paid in the full at the time of effecting sale. Another importantcondition for validity of Salam sale is that salam is not allowed in every halalcommodity. The commodities salam is meant for must be homogeneous and fungible innature. We mean by fungible that every unit of the item is identical same assubstitutable by other. For instance, wheat is the commodity where each unit of it i.eevery grain is identical to other in the sense that the difference between is negligible.The commodity must be generally available in the market at the time of delivery. If thecommodity is not easily available at the time of delivery, salam would not be allowed.In salam one cannot put a condition of buying a particular commodity or product ofparticular field or farm. The exact date and place of delivery by the seller must bespecified in the contract. The seller may ask the buyer to furnish the security in order to
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 13secure the transaction of salam. The seller at the time of delivery must hand over thecommodity. Sometimes it happens that the buyer does not want to take the delivery,instead, he wishes a monetary settlement. Salam contract once established cannot becanceled unilaterally.
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 14ISTISNAIstisna is a sale transaction where a commodity is transacted before it comes into existence. Itis an order to a manufacturer to manufacture a specific commodity for the purchaser. Themanufacturer uses his own material to manufacture the required 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 IN BURJ BANKCancellation of contract:After giving prior notice, either party can cancel the contract before the manufacturing partyhas begun its work. Once the work starts, the contract cannot be cancelled unilaterally.The subject on which transaction of Istisna is based, is always a thing which needs to bemanufactured. The subject can be anything that need manufacturing or not.The price in Istisna does not necessarily need to be paid in full in advance. It is not evennecessary to pay the full price at delivery. It can be deferred to any time according to theagreement of the parties. The payment may also be made in installments. The price has to bepaid in full in advance.The time of delivery does not have to be fixed in Istisna. The time of delivery is an essentialpart of the sale.The contract can be cancelled before the manufacturer starts the work. The contract cannot becancelled unilaterally.Time of deliveryAs pointed out earlier, it is not necessary in Istisna that the time of delivery is fixed. However,the purchaser may fix a maximum time for delivery which means that if the manufacturerdelays the delivery after the appointed time, he will not be bound to accept the goods and topay the price.
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 15USES OF ISTISNA IN BURJ BANKIstisna may be used to provide financing for house financing. If the client owns a land and seeksfinancing for the construction of a house, the financier may undertake to construct the houseon the basis of an Istisna. If the client does not own the land and wants to purchase that too,the financier can provide him with a constructed house on a specified piece of land. Thefinancier does not have to construct the house himself. He can either enter into a parallelIstisna with a third party or hire the services of a contractor (other than the client). He mustcalculate his cost and fix the price of Istisna with his client that allows him to make areasonable profit over his cost. The payment of installments by the client may start right fromthe day when the contract of Istisna is signed by the parties. In order to secure the payment ofinstallments, the title deeds of the house or land, or any other property of the client may bekept by the financier as a security until the last installment is paid by the client. The financierwill be responsible to strictly conform to the specifications in the agreement for theconstruction of the house. The cost of correcting any discrepancy would have to be borne byhim.Istisna may also be used for similar projects like installation of an air conditioner plant in theclients factory, building a bridge or a highway.The modern BOT (buy, operate and transfer) agreements may be formalized through an Istisnaagreement as well. So, if the government wants to build a highway, it may enter into an Istisnacontract with the builder. The price of Istisna maybe the right of the builder to operate thehighway and collect tolls for a specific period.OTHER Uses of IstisnaHouse financingFinancing of plant / factory / building.Booking of apartmentsBOT arrangementsConstruction of buildings and plants.SCOPE OF ISTISNA:Burj bank use Istisna in many situations these are given below;Real estate financeGovernment projectsFinancing of plantHostels, Hospitals etc.
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 16IJARAH"Ijarah" is a term of Islamic fiqh. Lexically, it means to give something on rent. In the Islamicjurisprudence, the term Ijarah is used for two different situations. In the first place, it means toemploy the services of a person on wages given to him as a consideration for his hired services.The employer is called mustajir while the employee is called ajir.BASIC RULES OF IJARAHLeasing is an agreement in which the owner the asset transfer the right to use.Leased asset must have a valuable use permissible in Shariah.Ijarah is transfer of right to use, therefore anything which is consumed cannot be leased.The ownership is not transferred, all the liabilities animating from the ownership.Leased asset shall remain in the risk of the lessor throughout the lease period.Leased asset cannot be used other than the purpose specified in the agreement.Period of lease must be determined in clear terms.Rental must be determined at the time of contract for the whole period of lease.Lessor cannot increase the rent unilaterally.The lease period shall commence from the date on which the leased asset has beendelivered to lessee.Lessee will bear the maintenance and operating cost of the asset during the lease period.The leased asset has lost the function for which it was leased no repair is possible, leaseshall terminate on the day on which such loss occurred.Lessor will bear the cost of insurance of the asset and its annual renewals.All ownership related expenses belongs to lessor.Rent will start after delivery of the goods.After the lease period expire the ownership of the asset revert back to lessor.If the lessee breaches any condition of the lease agreement the lessor may unilaterallyterminate the agreement.
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 17CAR OFFER BY BURJ BANKCar Ijarah is Pakistan’s first Interest Free car financing based on the Islamic financing mode ofIjarah (Islamic leasing). This product is ideal for individuals looking for car financing whileavoiding an interest-based transaction.BURJ Bank’ Car Ijarah is a car rental agreement, under which the Bank purchases the car andrents it out to the customer for a period of 3 to 5 years, agreed at the time of the contract.Upon completion of the lease period the customer gets ownership of the car against his initialsecurity deposit.TYPES OF LEASE:1. OPERATING LEASE; lease is basically meant for giving the right by a person to otherto use an asset against a compensation with the ownership not transfer.2. FINANCE LEASE; this is also called capital lease. In the simple words, the essence oftransaction in the financial lease id funding not use of asset. in such transactions, theobligations of the lessee are almost that of the borrower not an asset user.3. SALE AND LEASE BACK; is form of Ijarah. Under this format the bank purchases anasset from the customer and lease the same back to the same customer.USES OF IJARAH:The banks use Ijarah in following ways;House financingCar financing etc.
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 18MURABAHAHThe word “Murabaha” has been derived from the Arabic word “Ribah”, which has literarymeaning of profit.Murabaha is a particular kind of sale where Seller expressly mentions the cost it has incurredon purchase of the Asset(s) to be sold and sells it to another person by adding some profit,which is known to Buyer.FEATURES OF MURABAHA Murabaha finance is not a loan given on interest, it is a sale of Asset(s) for cash/deferredprice. It is the obligation of the Seller to disclose the Cost and Profit to the Buyer. Murabaha Finance can only be used for the purchase of fresh Asset(s) only.Buy-Back arrangement is prohibited. This means that Murabaha transaction cannot beexecuted for the Asset(s) already purchased by the Customer Murabaha Transaction can either be a cash sale (Spot Payment Murabaha) or a creditsale (Deferred Payment Murabaha) or a combination of both. Payment of Murabaha Price can be made in lump sum or in installments or combinationof both. It is a fixed price sale and normally is done for short term. The Murabaha Finance can be used to meet the working capital requirements.However, it cannot be used to meet the liquidity requirements.
ISLAMIC FINANCE 2013SUPERIOR UNIVERSITY Page 19WHAT WE OFFERBurj Bank offers financing based on trade i.e. sales and purchases. Money is not lendbased on an agreed return for money which is prohibited as Islam encourages Trade andprohibits lending. Burj Bank purchases goods required by the customer and sells thesame at an agreed profit, on the cost price under Murabahah transaction. The valuebased on price is settled within an agreed time period, either in installments or lumsum.