This document provides an outline for a course on essentials of Islamic finance. It begins with an introduction to the economic system in Islam and key concepts like tawhid. It discusses Islamic principles around wealth, ownership and social justice. The outline then covers various Islamic financing instruments and terms. It aims to educate about Islamic finance based on 30 years of the author's experience and ongoing research.

1. RREADEAD IINN THETHE NAMENAME OFOF
AALMIGHTYLMIGHTY AALLAHLLAH
WWHOHO ISIS THETHE MOSTMOST BBENEFICIALENEFICIAL & M& MOSTOST
MMERCIFULERCIFUL
All praise is due to theAll praise is due to the Almighty AllahAlmighty Allah
Blessings & Peace be uponBlessings & Peace be upon
HolyHoly Messenger of AllahMessenger of Allah
The Leader of the MagnificentThe Leader of the Magnificent HonorableHonorable
EssentialsEssentials
ForFor
Islamic FinanceIslamic Finance
Yousuf Ibnul HasanYousuf Ibnul Hasan
PPROGRAMROGRAM CCONSULTANTONSULTANT
IISLAMICSLAMIC BBANKINGANKING & A& APPLIEDPPLIED FFINANCEINANCE
This document prepared through extensive research carried out since 1986. It isThis document prepared through extensive research carried out since 1986. It is
full of meaning and comprehensive information on the economic systemfull of meaning and comprehensive information on the economic system
guided by Almighty Allah for the mankind and for the better humanity.guided by Almighty Allah for the mankind and for the better humanity.
I dedicate this endeavor to myI dedicate this endeavor to my
IQRA UniversityIQRA University..
This is Islamic Economic & finance I am acquainted with in 30 years and stillThis is Islamic Economic & finance I am acquainted with in 30 years and still
searching its great extent and new dimensions.searching its great extent and new dimensions.
1

2. Essential of Islamic FinanceEssential of Islamic Finance
Course OutlineCourse Outline
1.1. Economic System in Islam, Concept & IntroductionEconomic System in Islam, Concept & Introduction
2.2. Islamic Finance Introduction & BackgroundIslamic Finance Introduction & Background
3.3. Concept of Riba & Other Prohibited ActivitiesConcept of Riba & Other Prohibited Activities
4.4. Saving ConductSaving Conduct
5.5. InvestmentInvestment
6.6. ParticipationParticipation
7.7. ModarabaModaraba
8.8. MorabahaMorabaha
9.9. MusharakaMusharaka
10.10. IjarahIjarah
11.11. Musaqa FinancingMusaqa Financing ((Irrigation Financing)Irrigation Financing)
12.12. Mussaja FinancingMussaja Financing (Agricultural Financing)(Agricultural Financing)
13.13. Havana FinancingHavana Financing (Animal Farming)(Animal Farming)
14.14. Sukuk A Financial InstrumentSukuk A Financial Instrument
15.15. Terms use in Islamic Financial SystemsTerms use in Islamic Financial Systems
16.16. Numerical:Numerical: Profit & Loss, Costing, Sharing, FinancingProfit & Loss, Costing, Sharing, Financing
TechniquesTechniques
17. Report
18. Quiz
19. Assignment
Marks DistributionMarks Distribution
•• Assignment/Quiz/ Class PerformanceAssignment/Quiz/ Class Performance 25%25%
• Report on topics of choice 10%
• Mid Term 25%
•• Final ExamFinal Exam 40%40%
TotalTotal 100%100%
2

3. Chapter 1
Economic System in Islam
What is Islamic Economics?
What are the principles upon which Islamic Economy, its monetary and
financial systems function?
Islamic Economics is a system that defines the available resources blessed by
Almighty Allah to the mankind. How these resources are utilized and distributed
by man keeping in it the social justice and seeking best of these in participation
and cooperation by applying the knowledge, experience, ability and efforts
through the power of the pen and book granted by Almighty Allah to men in
confirmation of “Unique among Creations” and “Custodian” to all the resources
that Almighty Allah owns it alone and absolute.
Islamic economics is as old as Islam itself”.
Islam is not a religion. It is a complete political, social, financial & an
economic system for Islamic & non Islamic communities.
Islam is “Deen”. It totally differs to the religions because of the definition,
depth and details and interpreted as a “Lifestyle”. Its principles are
comprehensively guided in the Holy Quran, explained in Hadiath and practice
by Holy Prophet Muhammad May Peace Be upon Him as Sharia’h”
Almighty Allah identified The Aims, Objectives, Purpose, Way and
Means of Islamic Economics
“READ (IQRA) in the name of your Lord, who has created you with the clot of
frozen blood and taught you with the power of the pen …………….
The word READ opens the chapter of an Islamic Economics; in
RATIONAL, EFFORTS, APPLICATION, DISCRIPTIVENESS.
20th Century Economists define Islamic Economics
Hasan-uz-Zaman
Islamic economics is the knowledge and application of injunctions and rules of
The Shari'ah that prevent injustice in the acquisition and disposal of material
Resources in order to provide satisfaction to human beings and enable them to
To perform their obligations to Allah and the society.
M. Akram Khan
Islamic economics aims at the study of human recovery achieved by organizing
the resources of the earth on the basis of cooperation and participation.
Dr. Nejatullah Siddiqi
Role of Shariah defines belief in justice and freedom, cooperation and sharing
3

4. which are the fundamentals of Islamic economic philosophy within the total
Islamic system. Key to the Islamic economic philosophy lies in man's
relationship with Allah, his universe and his people. The other human beings are
the nature and purpose of man's life on earth.
The concept of economics
It was established on the day Adam who was senseless to his needs and desires at
the time he was created, disobeyed Allah Almighty on the temptation of Iblees.
Adam’s act of disobedience created the principles of economics that revolveAdam’s act of disobedience created the principles of economics that revolve
aroundaround Theory of Need, Want and
Desire that lead to the Act, Acquire and Accept. Prophet Adam (Prophet Adam (MayMay
Peace Be upon Him)Peace Be upon Him) was sent to earth to develop mankind with a system of lifewas sent to earth to develop mankind with a system of life
that placed the Natural Economics as.that placed the Natural Economics as.
“Any activity that has a commercial, economic and financial purpose with the
priority of social benefit to mankind is classified as Islamic Economics and the
system that has basis for this classification leads to socio- economic
development and not just the economic development.”
The basis of Islamic economy
Resources are unlimited and efforts are limited.
Needs and wants does not effect on the supply or resources.
Availability of resources is dependent on efforts that develop the affordability in
satisfying the needs.
Nations were putting their efforts in achieving knowledge and seeking their rights
in the economic system are the leaders of economic growth.
Nation that merges the economics growth with social development
Develop Communities For the people, By the people, and Of the people
Social Economic Development converts Peoples into Nation.
Islamic Economic regards three factors of productions.
Man, Money and Commodity
These three basic factors bring other factors of productions keeping themselves
as guides to socioeconomic system. Economic activity travels in the triangle and
in a clockwise, the point of origin is the point of destination. Man is the source
behind all activities that leads towards Islamic Economic System and its abilities,
4
MAN
MONEYCOMMODITY

5. capabilities and control over is the key of efficiency and success that develop
healthy communities.
Role of Man & Money in Islamic Economics
1. The financial matters in the human life play a vital role
2. These identify principles of finance including earnings, income, and
distribution of wealth & utilization of the same.
3. Matters pertaining to money must be fair and transparent and useful for
developing socioeconomic life of the community.
4. The monopoly of a group or an individual who keeps a control on world
monetary policies and gets most out of these resources by blocking wealth,
crossing their jurisdictions to be eliminated.
5. It does not impose limits on the amount of wealth that an individual can
acquire.
6. It guides in maintaining of wealth in a proper form of distribution and
incentives for work and efforts.
7. It shows opposition & defends against misuse of exploitation in getting hold
of wealth through unfair means.
8. It clearly denies "free" market of Capitalism, which has led to the situation
of survival of a part of the society.
9. It emphasizes public revenue from natural resources is used to secure the
needs of the community and not to fill the pockets of casino owners.
10. It encourages states to provide public, essential resources to cover the needs
of every individual and family.
11. It outlaws hoarding of wealth and eliminate copyright or patent laws that
would open an avenue for potential monopoly to develop.
12. It protects the ownership of businesses and companies by restricting it only
to those who contributes both capitals or effort
13. It effectively puts a seal on such concepts as "corporate takeover" from ever
becoming a reality.
14. It classifies wealth in a systematic way to protect the rights of individuals to
access wealth.
15. It protects the society and secures the needs of the people.
16. It mandates vital and natural resources as public property while allowing for
unlimited access to luxury items.
17. It protects society by defining certain needs as a “prohibited needs”.
18. It disregards corrupt man-made systems and protects honor, the rights of
woman, minor and orphans.
19. It bans all forms of prostitution, pornography or any activities that exploit
charms and physical attractiveness of women.
20. It prohibits alcohol, gambling, spiral of corruption, social turmoil and moral
destruction
Relationship of Allah and Man
Tawhid (Oneness of Allah)
Total commitment to the will of Allah by submission & the mission to mold
5

6. human life in accordance with Allah’s will”.
4 Great Ways of excepting4 Great Ways of excepting TawhidTawhid
1st Look back and thank Allah.
2nd Look forward and trust Allah
3rd Look Around and believe in Allah
4th Look within yourself and find Allah
Life on earth
It is a test and its purpose is to prove successfully by doing Allah’s willed.
For man entire universe with all the natural resources and powers is open to
exploitation, which Allah owns it alone.
Provisions are available to man being the nature of trust in men.
Islam & Faith
Almighty Allah is absolute and Prophet Mohammad Peace be upon Him, was an
executive judge and Holy Quran is the code of conduct.
Islam organizes
Man’s life in its aspect of political, social, commercial, financial, legal,
commercial, monetary or economy.
Islamic Economics is an Application of Deen (Principles of Lifestyle).
Through the Theory “The Holy Quran”, By the explanation of theory “Hadiath”
and Practice and Implementation “Sharia’h”
Islamic economics is an independent system,
1. It enjoys a separate identity.
2. It is a self-contained system with its own economic policy,
3. It covers interests at Private and Public as well as Material or Spiritual.
4. It has given a complete system of lifestyle, Earning, Expenditure, Businesses,
and Relationship with Legal Framework.
5. It emphasizes for all bases on Social Justice, Equality, Unity, love,
Cooperation, Sharing, Transparencies in all affairs and respect.
Islamic Economics System guards
1. Rights of minorities and non-Muslims in the Islamic state.
2. Rights of Women and Orphan’s
3. Rights of employees
4. Rights of Lenders and Borrowers
5. Rights of everyone without Race-Religion-Language-Color or Sect
The Islamic Economics system is based on four principles
1. All wealth belongs to Almighty Allah
6

7. 2. Man is the trustee of the wealth
3. Hoarding of wealth is prohibited
4. Wealth must be in circulation at all time
Three parameters for day-to-day affairs and problems.
IJMA (Gathering), QIYAS (Discussion) AMAL (Act)
Islamic Economic considers difference with other systems
1. Islamic Economics is specifically considering distributing as an economic
problem.
2. It differs application to capitalist & communist systems in production.
3. It differentiates between basic needs and luxuries.
4. It does not accept the concept of effective scarcity of resources.
5. It does not accept the concept of inflation
The Holy Quran identifies the resources are sufficient, unlimited and a number
of qualities to fulfill the basic needs like food, clothing and shelter for over fifty
billion human beings at all time and conventional economics misguides this
reality with starvation, poverty, & economic backwardness because of
misdistribution originated from man-made laws and systems.
Basic Principles of Islamic Economics
1. The principle of adaptable ownership
2. The principle of economic freedom within a “defined limit”
3. The principle of social justice.
Islamic law permits three types of ownership,
The individual ownership.
The state ownership.
The public ownership.
Economic Freedom within a Defined Limit
1. Islamic law prohibits all such social and economic activities that differ to the
teachings of Islam and principles and values approved by Islam. Such social
and economic activities fall under the category of Riba
2. It defines the principles on which ruler sworn in for supervision of general
activity intervenes in any anti-Islamic economic activities.
3. It guides State to protect and safeguard the public interest through the control
of individual freedom in the illegal and non-permitted actions they involve
due to which the economic activity of the community and society suffer.
4. Men have no right to possess unlimited wealth and the desire to obtain wealth
by any means and way he may choose.
5. Right is given to every member of the society by appointing each one as a
guardian of the public trust and the ownership is limited to the public welfare
and for the betterment of mankind.
Social Justice in Islamic Economics
7

8. 1. To give-and-take responsibility
2. To keep social balance
3. Prohibits growth in differences
Few live in extra luxury and rest were deprived of basic necessities of life and
forced to live a life of misery, hunger, without shelter, illness and as neglected
class of the society.
Tawhid (monotheism)
• Definite acceptance of Almighty Allah’s relationship with man and man’s
believes in the supremacy of Almighty Allah with a clear vision of the Day of
Judgment.
• The accomplishment of man depends on the belief and obeying the teachings
of Islam and bringing healthy and peaceful community by synchronizing
between morality and the material characteristic of life.
Ijtehad:
• Emphasize on independent legal judgment, effort and ability to figure out
rules from sources that carry out social justice in accordance with Islamic
Economics.
• Economic and social problems can be solved only through Ijtehad,
particularly issues in regard to which, no definite injunction is available in the
Quran, or Sunnah.
Ethics
1. It is the third element in the enforcement of social justice.
2. Islamic economics considers ethics in relation to human lifestyle or religion.
3. Islamic Sharia’s defines social justice in Islamic Economic as the pillar of the
concept that functions with a valid reason.
4. The concept of Zakat and prohibition of Riba practices in daily life of Islamic
society brings the stability, peace, harmony and social development.
5. It gives the real value of Money
6. It defines the state responsibilities for income distribution as the basic
principles of social justice
Muslim contributes for Economics
Ibn Khaldun,
Muslim Philosopher, Scholar & Economist and respected as the father of the
Economic System of all times, Adam Smith accepted him as the "father," of
economics. Authenticated name in Islam for defining different fields of
knowledge, specially science of civilization. He contributed theories and concept
in economics that placed him aboveboard in the history of economics thought as
a major predecessor.
• Planted seeds of classical economics in production, supply and cost
• Pioneered in consumption, demand, and utility, the bases of modern
economic theory
• Believes in free market economy.
• Introduced labor theory of value.
8

9. • Free economy & for freedom of choice.
• The analyzed relationship of economic study, which are demanding,
supply, prices and profits
• First to put a seed of modern demand theory which was further developed
by Thomas Robert Malthus, Alfred Marshall
• Logically role of cost of production on supply and prices
• Theory of profit as a reward for undertaking risk in a future of
uncertainties
• Concept for traders maximize profits, "Buy cheap and sell valued,"
• Concept of macroeconomics
• “Theory of Growth” based on capital accumulation through man's efforts
• Economic Development through Migration
• Tax Theory in history
• Theory for the best Rate of Taxation
• Explain advantages of trade among nations through foreign trade with
people's satisfaction, merchants' profits, and country’s wealth and how all
increased.
9

10. Chapter 2
Islamic Financial System
Introduction & Background
MAN, MONEY & COMMODITY
The three factors of production give birth to the exchange system and practice in
the fulfillment of needs. The two exchange system is classified as
1. Lending and Borrowing
2. Financing and Participation
Lending is based on the principle amount in a transaction by pricing it with
the time value without the concept of utilization of money and its impact on
economic activity.
Financing is made available on the basis of Man’s ability to use the money and
to multiply, divide, subtract and add the amount realize through the exercise of
money.
Definition of Finance and FinancingDefinition of Finance and Financing
1.1. Finance is the intermediary source having a value to act in production, tradingFinance is the intermediary source having a value to act in production, trading
and exchange of commodities, services and assets.and exchange of commodities, services and assets.
2.2. Financing is the source that makes the money service for specific purposesFinancing is the source that makes the money service for specific purposes
within a specific period, in between person to person, person to institution orwithin a specific period, in between person to person, person to institution or
institution to institution with an understanding to share the result in profitinstitution to institution with an understanding to share the result in profit
and loss.and loss.
3. Financing is the source that develops ownership, support entrepreneurship
and line-up procurement, production, distribution, utilization through
participation and cooperation between skill and capital on the basis of profit
and loss acceptability upon the maturity.
4. Financing is the use of money by one who owns it and the other who has the
ability to use it for a common purpose to make profit from participation and
cooperation.
5. Financing is the act of money without the concept of liability, collateral or the
guarantee. Its origin is an investment and its end is ownership.
6. Financing is an act of money which is classified as the opposite to lending.
10

11. Difference of Financing & Lending
1. Financing is Equity and not Liability
2. Lending is liability and not participation.
3. Financing is made and Loan is given
4. Loan is secure financing is supported.
5. Financing is an investment and loan is facility.
6. Loan cannot be financed until it is agreed on the Profit and loss sharing
7. Financing cannot be a loan till return is guaranteed.
8. Loan is given at a price of money with the application of the Rate
9. Financing ultimate outcome is profit that is shared in an agreed Ratio.
10. Loan has to be secure by external factors of collateral
11. Financing is collateralize within its own system
12. Financing cannot be made until the user is able to use it
13. Lending is given against the confirmation of guarantee.
14. Lending leads to inflation and liquidation
15. Financing ends at ownership
16. Financing increase the capital base and net worth
17. Lending increase the liability, cost and decrease the net worth.
18. LENDING of money is given normally for unstated purposes against the
security without going through pros & cones of activity (Example; Betting,
Gambling etc.) money is spent on. This gives fixed return either in cash or in
the term mortgaged movable or non-movable property/properties.
19. FINANCING is joining in the profitable operation like a commercial vehicle
purchase, acquiring business operation etc. for the acquired with proper
verification / validation of data submitted by the seeker. In short the financier
becomes the indirect partner in that venture with fixed guaranteed returns.
The world of Money
First is the Monitory Market where money is bought and sold. In this system
money is treated as the commodity and not the medium of exchange. This system
which is based on Interest and according to the Islamic financial system it is
commonly known as a one category of Riba.
Second is the Financial Market that emerged on factual and authentic
principles of Islam on the guidance of the Holy Quran, explained in Hadith. In
this market the money is being served on the basis of capital or by skill with a
clear understanding of participation in responsibilities, duties, obligations,
earnings, income, risk and profit sharing.
FINANCIAL MATTERS in a Post Islamic era were commonly practiced on the
basis of social priorities and Prophet (PBUH) too was involved in commercial
and financial activities considering social obligations in financial matters
11

12. It is authenticated by archives of the Islamic world that with the introduction of
financing and discarding lending the most powerful community development on
the basis of social development in the first Islamic state under the guidance of
Prophet Muhammad (Sall La Ho Wa Alay Wassalam) in the rule of four Caliphs.
Interest based system was dominating 98% monetary markets, controlling the
market with its powerful grip and titled as the
CConventional Monetary Systemonventional Monetary System
Now reduce to almost 75% and it is gaining the momentum on a daily basis.
Financial system derived from the Quran, Sunnah and Hadith has a well-defined
title that signifies motive and the concept of the system as
Socio-Financial System.
1. Islamic Finance was practice for the most part of the Muslim world
throughout the middle ages.
2. In Spain, the Mediterranean and Baltic states, Islamic merchants became vital
intermediaries for trading activities.
3. European financiers and businesspersons later adopted many concepts,
techniques, and instruments of Islamic finance.
4. Term "Islamic finance” is relatively new to the commercial money market in a
sense as it appears only in the early 1960’s through a movement that started
from Egypt when the fist Social Bank was established to bring the change in
the money activities and unite money with the ability with propose and
period.
5. Commercial or business activities conforming to Islamic principles are made
under the umbrella of either "interest-free" or "Islamic Banking which
Islamic financial system simply as "interest-free" does not provide a true
picture of the system as a whole. Prohibition of receiving and paying interest
may be the base of this system, not all.
6. It works on Islamic set guidelines consisting of Risk Sharing, Individual
Rights & Duties, Property Rights, Purity of Contracts, Commitments,
Transparencies, Fair Deals and Employment Growth.
7. Not limited to banking only but covers the capital formation, capital markets,
and all types of financial settlement.
8. The philosophical roots of an Islamic financial system originate from the
relations of factors of production and economic activities.
9. Conventional financial system deals primarily with the economic lending and
borrowing aspects of transactions.
10. Financial system equally emphasizes on the ethical, moral, social & religious
proportions for enhancing equality and fairness for an ideal society.
11. It fully appreciates the context of Islamic teachings on the work ethic, wealth
distribution, social and economic justice as well as the role of the state and
responsibilities and duties of the citizen. .
12. It is established on the absolute prohibition of payment or receipt of
predetermined and guaranteed return rate.
12

13. 13. Pre-agreed/ estimated share of profit or growth had been noticed in the
archives, way back to post Islamic era and was practiced by Muhammad (May
Peace Be Upon Him), the Caliphs and the Asahab (close associates of
Prophet May Peace Be Upon Him).
14. This ended the concept of interest and ruled out use of debt-based
instruments.
15. The system encourages risk sharing, promotes entrepreneurship, discourages
speculative behavior, and emphasizes the sanctity of contracts
16. The basic framework for Islamic financial system is enforcement of the rules
for handling of economic, social, political, and cultural characteristic of
Islamic societies
Basic principles of Islamic finance
Prohibition of Riba
Any unjustifiable increase of capital through the use of the capital whether in
financing, lending or sales are central belief of the system.
Any positive, fixed, predetermined rate tied to maturity and the amount of
principal etc. i.e. guaranteed regardless of the performance of the investment is
prohibited
Risk sharing
Interest is prohibited and owner of funds becomes investors instead of creditors.
The provider of capital and entrepreneur shares business risks and shares profits
and loss according to the ratio of investment and participation by way of their
Capital or Skill.
Money as "potential" capital
1. Money is treated as "potential" capital
2. It becomes actual capital only when it joins hands with other resources to
undertake a productive activity.
3. Islam recognizes the time value of money, only when it acts as capital, not
when it is "potentially" capital
4. Money cannot be treated as Capital if it is not in circulation.
Prohibition of speculative behavior
An Islamic financial system discourages exhibition of wealth and prohibits
transactions featuring extreme uncertainties, gambling, and risks
Transparency of contracts
Islam upholds contractual obligations and disclosure of information as a sacred
duty. This feature is intended to reduce risk of information and moral hazards.
Shariah Approved Activities
Only those business activities that do not violate the rules of Shariah qualify for
investment. For example, any investment in businesses dealing with alcohol,
gambling, and casinos would be prohibited
13

14. Concept of Finance defines “Interest” as the price of money where lender charges
borrower pays. Islam accepts that agreement between financier and user to be
pre agreed on the terms of the transaction and fulfills the obligations in the
rightful manner.
Transactions encounter a difference of opinion, when it starts entering into non
transparent acts. Thus it affects the relationship and harmony of two parties. In
this condition monetary and financial affairs are forbidden.
Salient features of this order
1. Islam clearly characterizes the difference between lawful and forbidden
economic activities and permits the Muslims to make all efforts for their right
in seeking their economic benefits.
2. Islam prohibits financial, economic, social and legal actions, which are
morally, financially and socially damaging to the community life.
3. The Islamic financial system employs the concept of participation in the
enterprise, utilizing funds at risk on a profit-and- loss-sharing basis.
4. It implies a Careful investment policy, diversification of risk and careful
management by Islamic financial institutions.
5. Potential profit in proportion to the risk assumed and to satisfy conflicting
demands of participants in the current environment and within the guidelines
of the Shariah.
How Finance has appraised
Financing appraisal is based on straight line method, applying 12-P Formula
12-P Formula is pre-financing activities
1. Person who is financing to whom?
2. Purpose for which financing works out?
3. Project for which financing is required?
4. Period for which finances to stay as financing?
5. Product that development through financing?
6. Process to be used for financing?
7. Price is the volume of finance require?
8. Place locations where finance shall be utilized?
9. Participation, relationship and responsibilities of financier and user?
10. Pact terms and condition of financing between parties of financing?
11. Professionalism, ability, experience, knowledge and expertise in
purpose?
12. Perfectness in Performances?
13. Profitability by the application of twelve “P” formulas which is the RISK
base perimeters
14

15. Chapter 3
Riba- Profit & Interest
Introduction & Difference
Almighty Allah clearly defines the principles and means of goods and services,
weight and measurement, time and period, increase and decrease, profit and loss,
buying and selling, giving and taking, efforts and lethargy, success and failure,
defeat and a winner, richness and poverty, knowledge and ignorance, civilized
and orthodox, traditions and customs, morals and ethics, transparencies and
malice, honesty and fraud, crime and punishment, reward and penalty.
The performance in the man’s daily life is defined only and only in the will of
Almighty Allah for which the holy books are given to mankind and the
messengers is sent to explain the evil and sins, the losses and distraction and the
health wealth and happiness of mankind.
For the betterment of humanity Allah have defined the limits of everything that
the men have in this daily life. Men have given unlimited power through
achieving knowledge and store in human mind and act according to an organize
system that is clearly explained in the Holy Quran, Hadith and Shariah
Almighty Allah prohibited any object or any act that is harmful to humankind
that creates instability, bring injustice, become injurious to human life and
considered as unconstructive to Socio Economic System.
RIBA.
Riba is an Arabic word drive from word RIBH which means Profit.
Riba means excess, increase or addition in accordance to the Islamic guidance
for commercial and business practices and correctly interpreted according to
Shariah terminology as Profit.
Riba is any earning, income, profit or benefits being earned, taken or received
through wrong means, bad intentions, shady practices or wicked participation.
Such earnings, income, profit or benefits are classified as RIBA earnings,
income, profit or benefits
Such earnings, income, profit or benefits are not only treated as immoral, unjust
and filthy but furthermore threat to the social economic life of society.
Such earnings, income, profit or benefits leads to crimes of various nature,
cruelty, exploitation & self-importance.
How Riba is seen in daily practice
15

16. 1. Riba is as a combination of evil and sins.
2. Riba is bad practice to earn & gain.
3. Riba bring instability in the community life.
4. Riba is the source of the increase of inflation.
5. Riba create classes in the society.
6. Riba create injustice in seeking the rights.
7. Riba is non transparent economic activity.
8. Riba is the most hated practice of Islam
9.9. Riba is the social crimeRiba is the social crime
Riba is immoral, unethical, unjustified commercial, economic,Riba is immoral, unethical, unjustified commercial, economic,
political, social, cultural and traditional practices and activities topolitical, social, cultural and traditional practices and activities to
gain benefit at individual, collective or institutional levelgain benefit at individual, collective or institutional level
Holy Quran Al-Baqarah 2:275-6
People who indulge in Riba shall be raised like those who have been
Driven to madness by the touch of the Devil. That is because they say that Riba-
based transaction is just like trading, while Allah has permitted trade and
prohibited Riba. Hence those who have received the warning from Allah and
have stopped accordingly, may have what has already passed, their case being
entrust to Allah but those who revert to Riba-based dealings, shall be the
inhabitants of the hellfire and abide therein forever.
(You must know that) Allah deprives Riba from all blessings and blesses
charity; He loves not any ungrateful sinners.
Hadith reinforces the concept of Quranic RibaHadith reinforces the concept of Quranic Riba
The Prophet Muhammad (Sall La Ho Walay Wassalam) Said:
"There is no Riba except in loaning." (Nasaeea 4504)
"Verily Riba is in loaning." (Muslim 2991)
"There is no Riba in hand to hand (spot) transactions." (Muslim)
At the last Pilgrimage,
"All of the Riba of Jahilliya is null and void. In this respect, the first Riba I (Sall La
Ho Walay Wassalam) withdraw is the Riba that the borrowers owe to my uncle
Abbas; it is cancelled completely. (Muslim) 3 See Shafi (1996).
The Prophet (Sall La Ho Walay Wassalam) cursed all those who take Riba, who give
Riba, who write a Riba contract and the two witnesses to a Riba contract. He (Sall
La Ho Walay Wassalam) further said:
"They are all alike (in fault)." (Muslim 2995)
RIBA IN FINANCIAL AFFAIRS
16

17. 1. Riba must be eliminated from the financial transactions.
2. Nothing is more horrific as compared to Riba that Islam has prohibited.
3. Nothing is more dreadful than Riba, is remains in widespread threatening
social economic activities in both theory and practice.
4. Riba convert financing system into lending system that make the money as a
commodity and owner of the wealth, a seller and user of the same as the
buyer.
5. Riba does not justify money to be a medium of exchange and brings the love
of money instead of respect for the money.
6. Riba create love of money instead of respect.
7. Riba move in one direction that create classes in the society that ultimately
develop privilege and neglected class of the society.
8. Riba develop inflation, black marketing, blackmailing and mismanagement in
the business, commercial and social life of the community.
Timothy 6:10Timothy 6:10 ""The love of money is the root of all evil."The love of money is the root of all evil."
Islam for Money Matter
Riba does not justify money to be a medium of exchange and develop the love of
money in several ways that disrupt the entire system of mankind.
Islam stresses a respect of money by disregard lending and borrowing and guide
to financing with participation by uniting money and skill as equal in effort and
utilization and value.
Islam guides the point of origin and limit of destination of monetary transaction.
Islam defines duties and responsibilities between money owner and money user.
The combination and participation of money and effort brings the result which is
share according to the pre-agreed terms of understanding is the creation of the
prophet
Interest
When money becomes a commodity and bought and sold with guaranteed results
of profitability or increase in volume of money being used for the transaction,
such increase is the price of the money and this price of the money is classified as
Interest which is the part of Riba
1. Any amount, earning or income that is taken over and above the principal
amount, without any risk, efforts, activity, without loss sharing and the return
is guaranteed within a specific time is called interest.
2. The compulsory return, income, earning on a fixed term & fixed percentage,
upon principal amount, is an Interest.
3. Interest is the price of money whereas money is just an intermediary between
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18. exchanges of the transaction.
4. Interest is an increase in the principle by way of
5. Exploitation
6. Non-transparency
7. Future success of the transaction in presence by involving guarantee or
promise ignoring the uncertainty in the transaction.
8. Humiliation or cruelty in case of non-performance by borrower.
9. There are many categories of Riba, interest is one of the categories of Riba.
10. Interest is Riba where is Riba is the manager of Interest
There is confusion in understanding for the terms Interest & Riba (Usury).
The question arises “Interest is Riba or Riba is Interest”?
To make a distinction of terms with rational reasoning, Islam through definitions
and interpretations, provides in the Holy Quran and Hadith, Riba is clearly
explained where Interest is defined by the scholars.
Abul Ala Maududi,
Interest is an earning through the lending of money by a lender from the
borrower on condition that the lender shall charge a fixed amount of money in
addition to the principal. Interest is prohibited in Islam and people are not
allowed to make money by lending their capital on interest. Capital is to be
invested in a productive manner that increases the profits.
“Aristotle”
Greek researcher & philosopher define Interest in his book “Money &
Politics”.
“Interest is an artificial profit, which does not enter into legal trading. Using
money as a commodity is selling, just a forged artificial transaction. Money has
to be used as a means of sale and purchase and a measurement of a commodity
to be sold or purchased. Money is just a means to ascertain the value of
commodity and it cannot be sold or purchased within similar quantities”.
FACTS AND GUIDANCE AGAINST RIBA
Prophet Moses (May Peace be upon him) Torah 22nd versus of the “Exodus”Torah 22nd versus of the “Exodus”
If you lend money to any of my people with you who are poor, you shall not be
to him as an exact Riba from him.”
Deuteronomy verse 23rd
“You shall not lend upon Riba to your brother, Riba on money, Riba on virtual,
Riba on anything that is lent for Riba.”
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19. Leviticus 25:35
"'If one of your countrymen becomes poor and is unable to support himself
among you, help him as you would an alien or a temporary resident, so he can
continue to live among you.
Judaism
Inn several Biblical passages in which the taking of interest is either forbidden,
discouraged or disliked.
Roman Catholic Church
In the fourth century AD prohibited taking of interest by Church Scholars.
In the eighth century under Charlemagne it was declared usury to be a general
criminal offense.
Ancient Hindu Religion
Vasishtha, a well-known Hindu lawmaker made a special law which forbade
higher castes of Brahmans (priests) and Kshatriyas (warriors) from being
usurers or lending at interest. Vedic texts of Ancient India (2000-1400BC)
In the Jatakas, (600-400 BC).
Usury is referred to in a humiliating manner:
“Two-faced Elites accused of practicing Usury”.
Anti-usury movements gained momentum during the early middle ages and
reached its peak in 1311 when Pope Clement V forbade on usury absolutely and
declared all secular legislation in its favor, null and void
Profit DescribeProfit Describe
Income on financing is determined not on financing amount, but takes a
principal amount, cost of transaction and applicable fee & charges as a part.
Profit is the aim of financing and loss is “acceptable”.
Appraisal, Precaution, Trust, Confidence, Experience, Knowledge, Purpose, Will
and Sprit is business ethics that result in realizing profit on the transaction.
Profit is an amount appreciates over and above to the principle amount of
investment on the basis of profit and lost sharing between the two participants of
the transaction upon the maturity as gross return.
This gross return over to the principal amount of the investment then be
deducted with applicable and agreed fee, expenses and charges which is classified
as the cost of the transaction brings out Net Income on the transaction.
The Net Income which is to be shared on an agreed ratio instead of confirming
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20. and guaranteed rate is the Profit.
The profit is shared in ratio and not divided into rates applied in
principle.
Now the question? If Interest is eliminated from the monetary system,
would it be possible that system & transactions would become transparent
and clear?
The answer is simple and straight: “Filth remains in its hard and powerful grip
irrespective of other factors”.
Interest alone cannot be eliminated without eliminating categories that fall under
the term called Riba.
Categories of Riba
Some of the categories are mentioned and clearly defined in Islamic Economics.
Islam strictly prohibits these as well as society disregards them due to their
dreadful effect on social, moral, cultural, economical, financial and legal life
styles of the society.
The main classes of
RIBA are as follows:-
1. Exploitation by taking advantage of status and position,
2. Irregular weight & measures for profitability,
3. Wrong declaration for higher return,
4. Misconduct (misbehavior),
5. Crime & Law breaking,
6. Mistrust,
7. Commit a breach
8. False commitment,
9. Manipulation of affairs for benefits at a cost and efforts of another,
10. Gambling in all forms,
11. Promising to secure the benefit of covering honorable, nearest, dearest
12. Falsehood and Lies
13. Betting and gambling
14. Speculation, Conjecture, unfounded information,
15. Trading in commodities prohibited by Islam and the law of the land,
16. Income from the practices or activities that are prohibited by Islam,
17. Breaking and abuse of state law for self benefit or for any purpose that is
declared as punishable act.
18. Disobedience to the state law by declaration and submission of wrong
information for self-benefits.
19. Disturbing the peace of the community by using force.
20. Committing and involving in the illegal acts.
21. Interest that is the price of money taken in cruelty, exploitation, wrong
means, false declaration, and advantage based on weak or wrong
calculation,
22. Taking and giving a return on loans or fixing the amount without appraising
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21. the use of funds that are given to the user.
23. Keeping deposit with the person or institution having involved in Riba
practices,
24. Using deposits as investments and declaring non-transparent results that
lead to discrimination of sharing in accordance with investment percentage,
25. Holding and storing of currency that affects economic activities negatively.
26. Holding commodities that lead towards scarcity in the supplies against
market demand.
27. Monopoly and monopolization of activity, transaction and business to
taking sole benefit, stopping the growth of employment and earnings
28. Grabbing the wealth,
29. Illegal encroachment on the property that is not owned by encroaching. For
example, construction of Mosque on the property that was not purchased,
gifted or legally transferred to title made,
30. Using public money for luxuries and self-usage,
31. Misusage of rights belonging to minors, orphans, widows and women,
32. Misappropriations among share division of inherited wealth,
33. Miscalculation of share for inherited wealth under law of inheritance,
34. Income by power and cruelty,
35. Misuse of power and status,
36. Theft,
37. Burglary,
38. Smuggling,
39. Adultery,
40. Human trading,
41. Pressurizing and influencing of earning situation and taking benefits,
42. Misuse of public representation and obtaining benefit through status as
Public Representative,
43. Misuse of ownership right on the commodity by charging over and above the
prevailing price, furthermore, avoiding payment of state, that is its right
toward revenue, by hiding the earning to such transaction. (Premium on
commodity for extra benefit),
44. Abuse of labor, specially child and women.
Above classes differentiate between status of Interest vi's-à-vis Riba
Fundamental Facts on Riba
Basis of Islamic thoughts conflict directly with the Riba based system. As “No
Islam exists in a place where there is Riba based system”.
1. Riba based system is a misery not only on humanity, faith, morals or
imagination of life, but also in every core of economic and practical life.
2. It is the most hateful system, which eradicates human satisfaction and
frustrates its civilized and neutral developments.
3. Islam has a complete ethical system supported by the realistic system as
interlink.
4. Ethics & reality cannot be separated in Islam & cannot be practiced alone.
5. Islam has clearly stated benefits of following of ethics and reality that
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22. followers follow in daily life.
6. Successful Islamic economics does not rise without Ethics which cannot be
separated to reality of life and its rational approach.
7. Practical life of people cannot prosper without proper ethics.
8. Riba practices corrupt the individual’s ethics, behavior, and feelings towards
the community and the society.
9. It also corrupts the human life, culture and the relationship by spreading the
spirit of greed, selfishness, sneakiness and gambling in general.
10. Today investing capital on the minimum risk basis over guaranteed return is
commonly practiced including funds as a deposit, invested on no risk with
guaranteed return.
11. Interest is paid at lower to the depositor’s investment and higher to
investment managers and shareholders.
12. Money lent to somebody on higher return or interest does not grow useful
projects but seeks the most lucrative opportunity even if profit comes from
the lower nature and the meanest tendency.
13. Islam is a connected system; it prohibits the dealing with Riba.
14. It also defines all its systems based on providing the need for it.
15. It organizes the aspects of social life of giving out means of dealing without
touching growth of humanity, social & economic development.
16. A true Muslim should have a firm belief that whatever Almighty Allah has
prohibited, can develop human life in a better and fairer way.
17. It must be kept as a firm belief to restrain from false and evil acts for the
betterment of life with its development and growth in harmony.
18. Almighty Allah is the Creator of this life and makes man, custodian to all the
blessings for humanity.
19. Mans determination towards the Almighty Allah overcomes all and guides
the man to the right path.
20. It is also impossible for the Muslims to raise the community in prosperity or
the perception that wickedness can show the way to advancement, going
against the prohibitions of Almighty Allah.
Riba Al Nassieah
• Riba al Nassieah practiced before Islam as man paying his money to
another for a pre agreed period.
• In return, he took from him a certain amount every month without
taking the principal amount.
• When date of payment came, he asked him for his capital and if he
was unable to repay would increase in his fund and the term of repayment.
Riba Al Fadi
1. A man sells an article in exchange of another article having the same
quality and nature with an increase or decrease like gold sold for gold,
rupee for a rupee, corn for corn and barley for barley.
2. This kind is considered as Riba, as commodities are similar to each with
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23. different values not ascertain.
3. Such transaction has the involvement of exploitation and injustice on any
one’s part of the two.
4. Riba system emerges initially on a rule that there is no relationship
between the determination of Allah and the life of man.
5. Riba creates the false feeling in the mind of men that wealth ownership
would bring the power to become the master of this earth. It instructs the
men to not to get bound by a pledge himself from Allah and to ignore the
importance of following the commandments of Allah.
6. Riba establishes a feeling of liberty among humans for ways and means of
obtaining wealth, encouraging to adopt more unfair means to multiply it.
7. Riba provides an individual a feeling that he is free to enjoy his wealth
without abiding the contract of faith and trust in Almighty Allah or
obeying any condition as holder of wealth, for which he is not bound to
keep the interest of others.
Gharar is uncertainty, hazard, chance or risk and technically it is sale of a
thing which is not present at hand or the sale of a thing whose consequence or
outcome is not known or a sale involving risk or hazard in which one does not
know whether it will come to be or not. Such as fish in water or a bird in the air
which are dishonesty through ignorance by one or more parties to a contract.
There are several types of Gharar, all of which are Haram. The following are
some examples:
1. Selling goods that the seller is unable to deliver
2. Selling known or unknown goods against an unknown price
3. Selling goods without proper description
4. Selling goods without specifying the price
5. Making a contract conditional on an unknown event
6. Selling goods on the basis of false description
7. Selling goods without allowing buyers to properly examine the goods
8. Gambling is a form of Gharar because the gambler is ignorant of the
result of his gamble
Chapter 4
SAVING AND SAVING CONDUCT
Saving leads to investment through participation and goals in the Islamic
financial System in spreading the saving awareness and developing it Saving,
investment and participation is an individual decision which change into profit
and loss sharing in economic activity that leads toward socioeconomic
development.
1. Saving deposit is a decision that is taken by an individual.
2. Saving is a part of income that is kept aside for spending in a later time.
3. Islamic Finance gives particular importance and care of saving deposits. .
4. Reasons that encourage taking decision for avoiding un-necessary
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24. spending of income and use saving for better purpose.
5. Saving distinguishes a commitment that defines individual of realizing his
own interest and the betterment of economic activities.
6. Islamic Financial System defines a way to save funds.
7. Saving is employed according to the requirements and means of incentives
that give individual to practice saving application.
8. It does not neglect individual and guided to lead his saving motives as a
caution to ensure safety for him for the future.
9. It rises to the individual standard of living.
10. They caution towards wastage and guide to make a profit.
The cross road
Saving is one of the qualities of the member of healthy and welfare community.
Saver do not spend wastefully in regards to what he receives funds in his hand.
Saving Conduct is the saving for the future of community for common goals.
To apply the directives Islam called for in Holy Quran IX, 34 Chapter the Regret
means:
And as for those who store up gold and silver and do not spend those in
Allah’s cause announce to them a painful destiny
1. Islamic Financial System does not neglect saving motives of saving.
2. It does not stick on to Islam and the nature of human beings and their
character.
3. It makes clear to an individual step by step as when he makes his saving
interest.
4. It exercises a practical devotion of worshipping.
Savings operations in Islamic Finance
1. Do not differ with conventional that system that focus all efforts on class of
savings.
2. It does not care about the size of savings that is a conventional system practice
of discouraging savings which are below a minimum limit.
3. It stresses on the continuous and timely investment savings that are collected
in any size of the amount.
4. Islamic System emphasis on benefit for the community and does not remain
to make profit in all ways through funds collected.
5. It cares saving conduct and not the individual interest by guiding the ways
and benefits of saving.
6. Saving and Spending are the social conduct and un-necessary saving is
discouraged and moderate spending is encouraged.
7. Saving is a part of the broad Islamic Financial System and provide individual
to take part in shaping its individual character to adapt himself to welfare of
the community as a whole.
8. More saving activity becomes a habit; it expands large number of community
balance to community requirements and increases community in becoming
strong and number of needy persons decreases.
Conventional system better than Islamic System for Savings?
24

25. 1. In their ability to attract savings by offering interest on savings rather an
Islamic system does not offer any interest
2. Risk free investment
3. It is easy to invest in any form of currency and in any product or services.
4. Verity of saving products that gives a choice to saver to save.
5. Inter-lending support in investment of savings
6. Multi currency conversion of saving funds.
7. Saving on the basis of earning on compound interest return increases the
volume of saving returns and it is the attraction and temptation.
8. Saving in conventional system does not need obligation on declaration of
details of saving results by saving managers
BUT …… in Islamic Financial System
1. Restrict saving to be invested in illegal form.
2. Compounding of saving return is prohibited.
3. Savings are invested on Profit & Loss Basis.
4. Restricted saving products are available to the saver.
5. Limited numbers of financial institutions operating on Riba free.
6. Saving cannot be invested in prohibited products and practices.
7. Savings results are transparent, short tenure and with a clear understanding
of Profit & Loss.
8. Human ego avoids pain whenever it finds the way to that.
9. Conventionally it is found that savers have a higher participation in
investment and lesser in receiving in return.
10. Savers are less important in saving operation whereas the savings are the real
players that generate the interest.
11. The conventional system restricts higher ratio of saver on the saving return
and allow higher return to the saving fund operators.
12. Besides social and educational effects of spreading saving conduct, are there
are economic reasons in which Islamic Financial play great notice to spread
the saving conduct.
13. Voluntarily an individual savings are a part of an individual’s income for
which he temporarily postpones his spending.
14. The saving he made, help in financing the economic activities for socio
economic development.
Chapter 5
INVESTMENT
There are common apprehension & economic principles which can be taken as
guiding rules of the Islamic Financial System for investment.
Saving leads to Investment
1. Rule of Profit & Loss sharing is Participation.
2. Loan leads to seeking price of money that increase in capital.
3. Financing is made on the principle of safety of capital and obtaining profit.
4. Expenditure is deducted from profit and not from the capital.
5. The profit which can be distributed is net profit and not gross profit.
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26. 6. Islamic Financial System allows participation in Joint Stock Companies or
Limited Liability Companies from its accounts or can participate in a
part of the capital of existing companies
7. It implies financing the working capital in the projects for short term
financing on the basis of participation which is not the lending on
interest, but made on profit and loss sharing on Net Earning on
investment.
8. Legitimate participation is a way of seeking profit through money from the
money owner and work close of participator at a common purpose
among each participant for earning profit.
9. Riba Free Financial House can may be the money owner and saver the
participator or vice versa.
10. The Riba Free Financial Houses are permitted to be a participator from
employer to re-participate with the previous participated funds on a
Profit & Loss basis.
11. The Riba Free Financial Houses can be the second participator if it
receives a participation from the first participator.
12. The Riba Free Bank may be the second participator if it receives a
participation from the first participator.
13. The Riba Free Finance House as money owner bears loss alone as long as
the participator does not exceed his role.
14. If the Riba Free Finance House works as a participator it does not bear
loss as is sufficient that the Riba Free Finance House’s effort and work
are of no return.
15. It is allowed that the profit between money owner and participator is pre
agreed. But if it is determined sum of the principal amount of money
with the condition of no less then participation becomes null and void.
16. Riba Free Finance House can trade its funding precious stone and in
foreign currencies on its conditions written down in the exchange
contract.
17. Investment in financial securities is only valid in shares and not in
debentures.
In Conventional System traditions do not approve the Finance
Houses or the lenders to perform investments by it whereas Riba
Free Finance House breaks the tradition in three stages.
Firstly
A rule known to us that every person is taken by his words. Allah’s word revealed
in written form and by the traditions of the Prophet (May Peace be upon him) as
considering Riba Free Finance Houses and their systems are the blessings and in
purity which cannot be broken, provided these are followed in according to its
pure soul.
Secondly
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27. With no doubt Finance Houses with their present forms and existing functions
rose up in response to different environments and non Islamic philosophies in
their present form and they serve these environments which are not necessarily
convenient for serving Islamic communities in achieving the Rules approved by
Almighty Allah
Thirdly
1. Riba Free Financial System guide to perform direct investments or financing
by participation and stop all practices of other nature that deviate to its
system.
2. In case if continues its operations in the style of usurious banks and follow the
lending of saving funds by covering its administrative expenses from these
funds, this damage the investment and create a difference between the two
systems.
3. Financing by participation means sharing Investor (bank’s) capital of
productive project becomes a partner in the ownership project, partner in
management, running and supervision and partner in all what it yields from
profit or loss according to proportions agreed upon.
4. The Investor (bank) can sell its share to a limit restore only the price agreed
upon in the selling contract either it is less or more than its capital.
5. Justice must be secured and there should not be exploited as in the case of
loan at interest where the lender obtains all its capital completely with an
increase in its capital equal to the mount of interest either the project which
borrowed makes a loss or profit.
6. Participation should exist on joint liability between the financier and the
financing in case of loss and in case of profit.
7. Financier or Islamic Bank is a partner in the financing on the condition to
accept loss or profit as the condition of participation.
8. From here come the glorious reference and great wisdom, thus this
participation in the two cases (loss and profit) obliges the two partners (every
of them) to make the project prosper, and to make every effort to supervise it
to participate in its success and therefore the efforts of the two partners
should be faithfully directed to its developer
Chapter 6
PARTICIPATION
Participation operations lead at the end to an ownership that is applied in
projects or transactions. Islamic Financial System through its Banking System
contributes in solving the problems.
• Diminishing participation or participation leading at the end to ownership.
• In participation were the financier or bank gives the partner the right to
replace it by ownership.
• It is either at once or in parts according to pre-agreed conditions on a basis
of organized arrangement by keeping a part of income as an installment to
repay the financing.
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28. Method of diminishing participation
1. Entrepreneur presents the project to Financier.
2. Financier sees its viability of the project.
3. Financier finances as the partner of the project.
4. Entrepreneur pay through the earning of profit in parts.
5. If the entrepreneur owner keeps its own to him, the profit is distributed
between financier and entrepreneur according to the proportions agreed
upon.
6. In case entrepreneur pay the financing either at once or in installments
financier has no right to obtain any privilege because of the increase in
prices.
7. The financier or bank invests in projects with the capital and therefore it is
treated as a partner in the transaction either equally or in part and any
change in value of the transaction the working partner has always choice
either to sell and earn profit or buy himself according to market price.
8. In hire selling method the finance has to participate in construction on the
land then rents the housing units.
9. The landowner pays the ownership and rent and finally become an
ownership to its hirer after a period of time.
10. Rent installment includes a calculated part of the costing.
Rules for the participation which financier follows with
partner in the project or in transactions.
1. Each participation transaction is under a contract and conditions that
specify investment and profit in proportion of each partner and instruct
two matters:
2. First: The participator should keep accounts for the business operation.
3. Second: The accounts of the participation transaction should be checked
by the expert accountant to approve their results.
4. Islamic Finance has a social target.
5. Participation in the course of financing for the purpose is to enlarge
economic base and to open doors for all who wish to work in production,
distribution and services.
6. For small worker who needs a small financing forcing him to keep
accounting books is asking him impossible act which could make him
reject financing.
7. Keeping accounting books and auditing exceed the value of the financing.
8. The expense of this check is treated as the cost of the transaction.
How financier determines profits on investment
First stage: Every participation understanding determines the share according
to the rules of participation contract.
Second Stage: By preparing Profit & Loss account of investment operations
and determining the portion resulting from participation transactions and from
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29. the results of the investment projects which the financier operates alone.
Third Stage: The distribution of net profit and loss of investments among the
group of investors and the financier or bank and everyone according to his share
in investment, as the shares with a sum of its funds in transactions. After that it is
distributed among every one of the investors.
A profit portion of every investor from the profit
determined
1. Every investor obtains his portion of the profit according to pre-agreed
terms as regards to investing operations.
2. By mixing of total fund participated or deposited by the investor in the
bank at the time of investment:
3. The profit is only shared for the period in which the funds are being
invested.
4. Mixing of fund that forms the capital of the transaction leads to a fair
distribution as regards the share of investors from profit distributor.
Is it possible that the result of investment is a loss
There are chances that the fund managers (Islamic Bank) for the sake of
eliminating the possibility of loss from investment operations. Keeping such
possibility there are ways to keep investors secure and in banking provisions are
made for the purpose of safeguarding such possibilities by way of.
1. Technical pre- study of the investment projects before their execution.
2. The qualitative and geographical distribution of investments is kept as
important to the pre-study.
3. The refusal of conditional investment in a certain project that has whole
operations of is a distribution of risk.
4. Formation of appropriate provisions and reserves
Forming appropriated provisions & reserves.
1. Provision or reserve is a part of the profit that is put aside to encounter
probable loss or to strengthen the financial standing.
2. The reserve is on the right of the profit owner from which the reserve is
deducted.
3. Reserve or provision made to encounter losses and is deducted from
investment profits before distribution.
4. Reserves are the right of investors and the bank (participators) together.
5. The investor is not a permanent and may finish his participation is a
natural matter.
6. Casual problem is seen on withdrawal but it could be overcome with in-
build a system of diminishing ownership.
7. In order of investment operations without disputes, the bank makes a
reserve or an investment provision from the preparation the bank charges
in return for its efforts and for managing investments.
8. Therefore this reserve is employed to encounter any emergency and the
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30. balance is still being owned by the bank.
Chapter 7
Riba Free Mode of Financing
MODARABA
Modaraba –Commenda- Qarad the three distinct concepts appropriate for
Riba Free Economic Activities.
Three names with an ancient background of transactions used for economic
activities classified as business activities under a contract of “Money and Ability”
The owner of money, the financier is called Rab-Al-Maal and the worker is
called Modarib
Commenda It is a pre-Islamic word from Italy
Qarad It is a Hegari word generally found in Imam Malik’s and Imam Shafei’s
schools of thought.
Modaraba It is of Iraqi origin and found mostly in Imam Abu Hanifa’s and
30

31. Imam Ibn Hambal’s schools of thought.
According to Fuqaha Modaraba It is a partnership contract between two parties,
persons or organizations in which one brings the capital, the other shares his
time and skill for a specified project or transaction. Upon the maturity, profit is
divided according to the agreement, which will either be equal or one third, in
proportion. In case of loss the Rab-Al-Maal (financier) looses the capital
investment and Modarib (skill) lose its time, efforts and reputation
The history of Modaraba reveals that the business under the concept of
Modaraba was in practice before the rise of Islam, emerging from Italian city of
Rome, which was the center for trade and culture in the Christian world. When
Christian traders entered the Arab world, they chose Baghdad as the place for
business. As a capital of Iraq, Baghdad was the center of trade, education and
culture. Business communities of Iraq acknowledged the Commenda mode of
business and started practicing it. Iraq developed the system and named it
Quard, which spread in the Arab and Persian world, and eventually penetrated to
all places where the religion of Islam reached, either through traders or by the
Muslim conquerors. Credit goes to Islam in the developing a proper shape for the
concept of Modaraba by prohibiting Riba in financial dealings.
The Holy Quran says,
“Whereas Allah permitted trading forbid Riba ”.
The Prophet Mohammad (Peace Be Upon Him) left on a trading trip to Syria and
used Modaraba method by making a contract with Hazrat Khadija Al Kubra, who
financed the transactions before the Prophet Mohammad (Peace Be Upon Him)
married her. Therefore, Modaraba is treated as Sunnah Al Ijma.
In Islamic jurisprudence
Modaraba is a contract between persons, between persons and institutions,
and between institutions, through which finances are given for trading or
manufacturing purpose. Profit sharing is agreed upon beforehand at a
predetermined ratio and not the rate.
In case of loss, the financier loses the money used to finance and the worker loses
his time, efforts and talent.
Islamic jurisprudence show the legal demonstration in accordance with the
Quran, Hadith, Seerat of the Prophet (May Peace Be Upon Him) and the practice
of Ashab (companions of Prophet May Peace Be upon Him).
The Great Fuqaha (Religious Scholars)
Modaraba on the basis of Qiyas (fixed return or wages) is not allowed. The
reason for this is the unknown salary for an unknown activity.
Al KASSANI says Modaraba becomes invalid if it is on the basis of Qiyas as it
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32. involves an unknown salary for an unknown amount of work. Qiyas is only
allowed in accordance with the teachings of the Holy Quran, Sunnah and Ijma.
IBNE TAYMIYA Modaraba is valid on the basis of Qiyas. Fuqaha had
invalidated Modaraba on the basis of Qiyas (wages).
IBNE GHAZI says Modaraba is permissible as an exception to Gharar (fraud)
and unknown remuneration
Modaraba falls in the partnership type of contract, which has a vague similarity to
Mufawadah. It differs because money is the main objective in Modaraba and
work in the second. Rab-Al-Maal (the financier) does not have to take an active
part in the daily operations as in the case of employment.
There will be no return for Modarib if a profit does not result in the transaction.
In case of loss Rab-Al-Maal has the right to investigate the cause of loss, whereas,
in case of any negligence or misappropriation or a purposeful mistake by the
Modarib, financier can claim the financing.
Al-Baghi’s definition
“Money that can be fructifying through work should not be lent for higher
return, but can be traded for generating a profit”.
Modaraba Formation
1. Only money in shape of Dirham, Dinars, Rupees, Dollars or any other
currency is used as a medium of exchange in the Modaraba mode.
2. Commodity in exchange of another commodity (i.e. barter trade) is not
permissible. On the other hand, Modaraba contract cannot be established
with just anybody.
3. Experience, knowledge and skill of related business processes are an
essential condition of the contract.
4. Return on financing with a condition of profit & loss sharing is the
legitimate and allowed by Shariah.
5. There is no harm in investigating the cause of loss in Modaraba.
6. Modarib is bound to provide the justification to the satisfaction of Rab-Al-
Maal on loss.
7. In case of any dispute over the causes of a loss, the jurists permit the
arbitration clause in the agreement.
8. Capital is the soul of Modaraba and it should be in the form of currency
instead of a commodity.
As the Modaraba mode penetrated in the economic activities and Shariah
accepted the mode, scholars laid down Modaraba conditions & rules.
Though rules and conditions of Modaraba are in accordance with the
teachings of the Holy Quran and Sunnah, different scholars have interpreted
them differently.
The Four School of Thoughts
32

33. IMAM ABU HANIFA
He was flexible on the conditions of Modaraba. He was a trader and made
several transoceanic voyages in connection with trading & preaching. He faced
countless problems of hardship of traveling; Imam Abu Hanifa’s justified the
flexibility in certain conditions. His teaching on the legal framework of
Modaraba is treated as the most rational approach
IMAM MALIK and IMAM SHAFEI
The two were more rigid in terms of the limitations of economic activities. They
had adhered to the Shariah rules theoretically. The Four Imams agreed on
certain conditions and differed on some.
Currency of Modaraba
Currency is the origin of price and value of goods. The Market value of currency
does not change that is why almost all Fuqaha had invalidated Modaraba with
commodities.
This condition is explained an example:
Superior quality dates presented to Prophet (Peace Be Upon Him). These dates
obtained in exchange with inferior quality dates. Prophet (Peace Be upon Him)
refused to accept the gift and asked to return the superior dates to its original
owner. Prophet (Peace Be upon Him) stressed on sale of inferior dates, first.
Then, with the amount received from the sale of the inferior dates, superior dates
were to be purchased. When transaction was completed, quantity was lesser then
it was before.
• Accordance to Prophet’s (Peace Be upon Him) a commodity cannot be the
capital of a Modaraba contract.
• As far as coins are concerned, their restrictions are due to involvement of
metal, which is also a commodity.
• Any commodity should be exchanged with another of the same quality and
the same quantity, or it has to be bought through a currency that acts as a
medium of exchange in the economic affairs of Islam.
• Islamic economics does not treat money as a commodity. All the Four
Imams have forbidden Modaraba between coins and commodities
• Metal Coins too cannot be the capital of Modaraba as coins are restricted
due to involvement of metal, which is also a commodity.
• Commodity must be exchanged by another of same quality & quantity.
• It has to be bought through a currency that acts as a medium of exchange in
the economic affairs of Islam.
All Four Imams forbidden Modaraba between coins and commodities and with
this clarification, it is set that the capital of the Modaraba must be in currency
and not in coin form and the most preferred form of currency should be paper
because it establishes value that is easily traded and the market value is
infrequently changed
33

34. SAMARKANDI has given his views that capital should consist of consummate
value. Here is the reason:
“Modaraba transaction with paper currency is permissible. Even gold, silver
and precious metals are not permitted for the capital of Modaraba”
RESTRICTIONS AND PERMISSIONS
1. Liabilities cannot be the capital.
2. Return on capital is not guaranteed.
3. The capital of Modaraba should be deposited in cash with the Modarib in
full trust and confidence
4. Modaraba becomes invalid if the return of finance is guaranteed.
5. It should be of known in quality and quantity.
6. Ignorance leads to differences and disputes.
7. Profit Sharing should be at maturity of transaction.
8. It should not be paid in parts before the maturity of the transaction
because payment might exceed the share and any one of the two partners
might devour all the profit.
9. Modaraba is only achieved through participation because of profit & loss
sharing contract, based on justice and trust among the partners.
10. It is not justice that all profit goes to one and other suffers.
Imam Malik
1. Refund of liabilities that could be delayed purposely for making more
money is prohibited.
2. Modarib has to return the capital and Rab-Al-Maal has a choice to invest
money that is returned on maturity of Modaraba.
3. Capital cannot be Roll-over under same agreement.
4. Modarib in a monetary constraint and wish to keep money for longer has
to first end the agreement and enter into fresh agreement either with same
terms or additional mutually agreed upon.
AL BASHI says that it might be Modarib intention for benefit in order to
prolong payment of his liabilities which cannot be permitted. Almost all scholars
have forbidden the usage of debts as Modaraba capital.
IBN KADAMA There is no wrongdoing if the Liabilities taken as Modaraba
Capital with the permission of Rab-Al-Maal who has settled the price with a
clear conscience”.
• In another way, it is like a commodity given to Modarib which can be used
as a capital of the transaction.
• All Fuqaha agreed that only capital be in the form of cash as it is the
Participation of Rab-Al-Maal.
• The debts remain in the possession of debtor.
• Participation with Cash is different from debts, as it remains the property
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35. of Rab-Al-Maal even when it is with Modarib.
• Cash Participation is the capital of Modaraba and remains with Modarib
in trust.
Essential conditions of Modaraba financing
1. For differentiating Modaraba mode of financing and interest mode of
loans, principals should be kept in mind before establishing financial
transaction that in normal banking and lending practice, money is made
available to borrower against guaranteed return of principle with profit.
2. In such practice collateral is the cover against the lending that ultimately
liquidated in case of loss by lender.
3. In Modaraba, profit and loss is the end of the contract and profit and loss
sharing is the key
4. In case of a loss, the Rab-Al-Maal suffers the financial loss and Modarib
faces loss in time, effort and his name.
5. Capital has to be surrendered to Modarib who is free to utilize it in
business mutually agreed between Modarib and Rab-Al-Maal.
6. According to Imam Ibn Hambal, this condition satisfies Modarib for his
free actions to Capital utilization and can take better way to earn best.
7. Rab-Al-Maal interference in the working disrupts the connection between
Capital and Modarib. But the cooperation of Rab-Al-Maal is accepted.
8. Relationship as an employee and an employer between the two parties
which are Rab-Al-Maal and Modarib invalidate Modaraba transaction.
9. Share of profit has to be pre-agreed at the pre-agreed ration and not the
rate applied on the principle amount but on Net Profit.
10. Modarib is entitling for Modaraba management fee out of Gross profit and
not from the capital of Modaraba.
11. Modarib fee must be pre- agreed and terms have to in the agreement.
12. Rab-Al-Maal cannot impose the amount of percentage.
13. The ignorance and discriminative distribution share of profit invalidates
the Modaraba. Profit is the essence of contract and its ignorance invalidate
the terms of the contract.
14. Profit has to be divided by half or by third after deduction of pre-agreed
Cost and Expenses including Modarib fee.
15. Rab-Al-Maal gets share of his Capital investment and Modarib gets the
share for his efforts.
16. In loss, Modarib has no share nor can’t Rab-Al-Maal claim his capital.
17. Assets shall be the right of Rab-Al-Maal.
Classification of Modaraba
1. Modaraba can be classified as, General purpose and Specific Modaraba.
2. In General purpose Modaraba, the operation is not restricted to activity,
partner and place.
3. General purpose Modaraba is mostly used between Modarib and Rab-Al-
Maal in which Rab-Al-Maal empowers, Modarib to act, invest or activate
capital for earning profit.
4. Specific Modaraba is limited by one or several aforementioned
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36. restrictions. Modaraba can be restricted to certain conditions and has to
commit for the non-compliance.
Multiple Modaraba
1. One Rab-Al-Maal finances several Modarib at one time with different
terms and conditions of contract.
2. Several Rab-Al-Maal finance to one Modarib as an individual worker or as
in group by pool of capital under single agreement between Modarib and
Rab-al-Mall either in group or by proxy to single person in representation.
3. One Rab-al-Maal finance to several Modarib and each Modarib using the
financing amount investing in several transaction for specified period
under single agreement.
HAKIM IBN HAZAM Close Companion of Prophet (May Peace be upon him)
Says and it has to be taken as the authentic condition in the present practices
“ I lay down conditions in Modaraba that if my money is left in a humid place
or taken across the sea or washed between fast-moving water, Modarib will be
responsible for the non-compliance of the conditions.”
Fuqaha Belief
1. All activities pertain to Modaraba should be agreed in witting including
functions and operation in proper record, supported with documentary proof.
2. Modarib can invest the Capital by self or by making similar contract with
other person, institute or organization without the permission of Rab-al-Maal
but keeping him in confidence.
3. Modarib status could be change to Rab-al-Maal and Rab-al-Maal could be
Modarib too with the condition of contract and agreement in transaction.
Banking & Financial Institutes
1. Banks can finance their funds or from their deposits for financing someone
to carry out Modaraba.
2. Banks can be Modarib for their Depositors and Rab-al-Maal for Modarib
seeking financing.
3. The contract shall be two separate.
4. The first contract with the Depositor as Modarib and second contract with
Modarib whom financed.
5. The contracts can have different terms and different profit sharing.
6. Both the contract should be matured on the pre agreed date and bank cannot
pay-off without realizing the profit of its financing or from own source.
7. Banks can specify the purpose of Modaraba to safeguard depositor’s capital.
8. Bank can enter into a General Purpose Modaraba. But in case of being a Rab-
al-Maal it only enters into Specific Modaraba Contract.
9. Banks are not permitted to ask for guarantee against the loss of capital, but
participate in the transaction as partner by holding the assets of transaction
excluding Capital.
10. Modaraba can be in consolidation with other mode of financing permitted
like Musharaka, Morabaha, Ijarah, Havana, Musaqa or Mussaja.
36

37. Al Mighty Allah instruct
Oh you misuse your wealth in self-importance among them. This wealth
should be used for trade on mutual consent”. Those who believe in Allah
should observe their duty to Allah and give up what remains from Riba, if
they are true believers. If they do not, then they are warned for a war with
Allah and his Prophet (Peace be upon him) and if you ask forgiveness, then
you have your principal without interest. Wrong not and you shall not be
wronged.”
Summary
• A profit-sharing agreement between two parties, in which one provides the
finance, and the other provides entrepreneurial and management skills.
• Profits are divided on a pre-determined ratio.
• Losses are borne by the provider of capital and Modarib loose its reputation,
time and efforts.
• Financing is made in the absolute trust on the skills, experience, reputation,
capability and feasibility of Modaraba transaction or project.
• Modaraba agreement is made only to the transaction purely based free from
all the classifications and categories of the Riba.
Chapter 8
Morabaha Financing
“Trade Financing”
The word Morabaha is taken from the Arabic word Ribh which means Profit.
Originally, Morabaha is a contract of sale in which a commodity is sold on profit.
The seller tells the buyer his cost price as well as his profit he is adding to the cost.
Modern form of Morabaha has become the single most popular technique of
financing all over the world.
• Morabaha is a financing mode for trading activities on basis of sale on profit.
• Technically, it is a contract of sale in which seller declares his cost and profit.
• It is an ancient practice which was seen in archives prior to horizon of Islam.
• Morabaha practice developed in Islamic financial system with guidance of
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38. Islamic Shariah.
• Morabaha is a financing technique that involves a request by the Morahib
(Worker) to the financier (Rab-al-Maal) for the purchase of a certain goods or
equipment for him.
• The financier after the appraisal of the price and cost estimates its profit over
the cost which is settled as purchase price in advance.
• The financier pay on behalf of the Morahib and deliver the goods after taking
acceptance of receiving the goods as per request
• There is a question on the legality on Morabaha financing technique due to its
similarity with Interest of Riba.
• In reality it is wise to settle all the terms in pre-agreed as saying of Prophet
Muhammad, May Peace Be Upon Him.
“You must settle your terms in writing and in agreeing prior to your
trading and in trust and for better profitability.”
Confirmation
Conference on Islamic Banking held at Dubai in 1979 endorsed the terms &
condition of contract between two parties of Morabaha as:
“This conference concluded that the Morabaha transaction comprises a
promise to purchase on behalf of the Morahib according to condition agreed
upon and promise by the financier to conclude the sales after purchasing the
commodity based on the decided condition”.
Morabaha Key Notes
• Financier is Rab-al-Maal & financing is made for the procurement of
goods and commodities.
• Morahib is the party of contract to sell the goods that Rab-al-Maal
financed under the contract.
• It is not capital base contract and funds are use as financing for purchases
of goods.
• Morahib has to prove and satisfy the Rab-al-Maal of capabilities know-
how of goods requested and marketing and selling plans of the goods that
are financed.
How Morabaha mode of finance operates?
• Morahib needs goods and approaches financier to get the required goods
or commodities through financing
• In interest-based system, money is landed on interest to the borrower who
would go and buy the required commodity from the market.
• This option is not available in Morabaha.
• Money cannot be lent directly to Morahib.
• Financing against the procurement of goods or commodity requested,
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39. directly paid to supplier in accordance to request of Morahib.
• Morahib approach Rab-al-Maal with his request to acquire goods for
trading purpose.
• The request must be in writing with clear specification of goods required
along with the supplier identification and prices declare by the supplier.
• Rab-al-Maal by self or through agent enters into purchase deal with the
supplier of Morahib and negotiates the price to a minimum possible level.
• Supplier final price and Morahib declare price if differ this difference is
part of earning for Rab-al-Maal as efforts involve to be compensated
• Morahib cannot claim a part of this earning, however Rab-al-Maal as good
gesture can reduce the profit on the commodity that he add on procured
price declare by Morahib.
• Morahib upon receiving the goods from supplier issue an acceptance
confirming the quality and quantity of goods received from the supplier as
well as issue detail of stock kept at place.
• Rab-al-Maal can also appoint its Moqqadum (agent) who is allowed to
receive the delivery of goods and commodities on behalf of Rab-al-Maal.
• Moqqadum (agent) may keep the goods and commodities under his
control and release upon the delivery order issued by Rab-al-Maal to the
Morahib either upon the payment or under differ payment terms.
• It is compulsory that goods transfer from Rab-al-Maal to Morahib should
be on the pre-agreed price which was incorporated in the Morabaha
Financing Contract supported by Local or Foreign Purchase Order duly
signed by Morahib..
Morabaha transaction completed in two stages!
• Firstly, the Morahib requests the Rab-al-Maal to undertake a Morabaha
transaction and promises to buy the commodity specified by him.
• The promise is not a legal binding and Morahib may go back on his
promise and the Rab-al-Maal takes the risks of the amount financed.
• In this situation the Arboon amount is kept as the stake of Morahib,
subsequently is used to cover the price margin where Rab-al-Maal can sell
the goods by reducing the price to attract the buyer.
• Secondly, Morahib purchases good acquired by Rab-Al-Maal on a deferred
payments basis and agrees to a payment schedule on various dates.
• On such arrangements the profitability of Rab-Al-Maal shall not be change
and pre-agreed price of resale of goods between the two parties of
Morabaha contract shall remain constant.
• Morabaha sale contracts allow the commodity sold it to the Morahib or in
case if these are refuses to purchase by Morahib then Rab-Al-Maal can sell
buy at best suitable price taking the advantage of Arboon.
• This prime clause of the contracts and it should be accepted by Morahib.
Morabaha mode of financing is widely used by Islamic banks for
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40. various financing requirements.
• To provide finance in various and diverse sectors
• To consumer finance for purchase of consumer durable such as cars and
household appliances
• To real estate to provide housing finance
• To the manufacturing sector for the purchase of machinery, equipment
and raw material etc.
• To finance short-term trade for which it is eminently suitable.
• To issue letters of credit for local and international procurements on
behalf of Morahib.
• To finance import trade in today form of FIM (Finance Imported
merchandise)
Fuqaha (Islamic Scholars)
Imam Malik Both parties in Morabaha Contract are legally bound to fulfill the
terms of contract. Any mis-declaration or mis-commitment from any party
towards the contract, offender would be liable to legal proceedings. Other schools
took it as religious obligation and legal binding if it is to the interest of the public.
Contract of such nature needs great technical accuracy and a sound knowledge of
Shariah. The binding nature of the Morabaha contract might require the
endorsement of the legislations in some Islamic countries where such
transactions are in practice.
Imam Baghi Contract concluded toward who purchases the camel because
of need of others and then sell at a higher price. Such contracts end in two sales,
• Firstly, they are purchased in cash.
• Secondly, they are sold on credit.
Financier pays cash for commodity at the request of Morahib then sells same to
Morahib on credit after adding its profit. In other words, financier by adding its
profit loan excess to original purchase price as interest which Morahib will have
to pay even if price of commodity falls. Such transactions fall under
classification of Riba as interest.
Imam Al Shafai
• If a man sees a commodity in the possession of another and agrees to
purchase the commodity with the profit set by seller; such transaction is
valid, as it is not binding to any of the party of the contract till the close of
the transaction.
• If a man purchases the commodity and agree to pay the profit, then sale is
valid as the purchaser himself agrees to offer the profit.
• If Morahib requests Rab-al-Maal to purchased separately the goods on
cash and then he shall buy in installments at later stage. The cash based
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41. sales accepted.
• Under second installation scenario sales would become valid provided
Morahib purchase on installment or at cash at an agreed price of contract
Imam Ibn Rashid
• Morabaha sales are approved sales, but sales by mutual consent are
preferable. “Sales by mutual consent are permitted because Morabaha
sales according to Imam Ahmed require honesty and integrity on the
part of the seller”.
• Temptations have the possibility of being led into inaccuracy in one’s favor
of sales which is agreed by mutual consent.
• In case seller cheats with price or capital, sale remains valid, but buyer get
entitlement to claim the difference from the seller or drop the sale.
• Some Fuqaha say that the buyer has no choice but is entitled to deduct the
difference.
• Morabaha sales are governed by the same conditions applied to sales in
general with most important aspect that both buyers and sellers should
know the amount of the financing and the yield.
The seller must declare,
• I bought for 100 and claim it for with a profit of ten which then is 110.
Selling in Installments of Differed Sales
• Time has to be agreeing on the price based on the period of credit term.
• Morahib must agree to pay on maturity.
• If unable to fulfill financier has the right to claim the goods by confiscating
his Arboon which ultimately covers the price including the compensation
for the loss of time.
• Morahib have to reveal quantity of stock in hand to financier.
• Any discrepancy to original delivered quantity would be paid by Morahib.
• In case of failure to pay, Morahib can be legally punished for
misappropriation and theft.
Some Fuqaha forbid such types of sale, considering the increase in price as
Interest, a category of Riba. While some of the Fuqaha permit such sales as it is
based on mutual agreement, and agree with Allah as said in Holy Quran:
Whereas Allah permitted trading and forbidden usury and O’ ye who believe!
Misuse not yours wealth among your selves in pride, except it be a trade by
mutual consent”.
Financial institutions use Morabaha financing in both ways,
• Differed sales of cost price for those who need the commodity for their
personal use and not for trade as seen in Consumer Financing.
• On short term basis with limited installments provided to those who
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42. cannot afford to pay in one go but with an ability to pay in installments.
Morabaha Cost-plus Financing
• This is a contract of sale between Financier and Morahib at a price which
includes a profit margin agreed by both parties.
• As a financing technique, it involves the purchase of goods by financier on
requested by Morahib.
• Goods then sold to Morahib with a built-in profit.
• Repayments in installments are specified in the contract as Morabaha
Cost-Plus Financing.
Selling in Installments of Differed Sales
• Differed sales or sales by installment could be carried out on the basis of
the cost price of commodity.
• No disagreement on such type of sale carried out and allowed.
• Differed sale could be at a higher price than actual one of the commodity.
• Some Fuqaha disagree on that type of sale. But most agree to such sales as
seller informs the buyer of cash price and price on deferred payment terms
as clear terms for two types of sales transaction.
Islamic jurists proposed forms of partnership to provide credit & finance for
Agricultural, Manufacturing and for trading purposes. These are:
Consecutive Partnership
• This instrument of financing is a real innovation on part of Islamic banks.
• Islamic banks take depositors of one financial year as partners in the
proceeds of that financial year without matching with the periods of
projects in which depositors funds are invested.
• Pending proceeds from previous years, for which accruals or provisions
were made, are included in the proceeds of the year in question.
• Yields corresponding to the same financial year are excluded if they are
not yet due and left to a future year.
• This accounting system is necessary to reconcile the depositors' withdraw
regardless liquidation of investment in which their funds are used.
• Continuity of the bank's investments which constantly flow in a mixed
basket to make regular accounts every financial year, as an accounting unit
for this basket
Agricultural Partnerships
Privately owned agricultural land could be utilized one of the three ways:
• Directly by the owner,
• Indirectly by renting it (Ijarah)
• Through agricultural partnership.
The two main frameworks in traditional Islamic law for agricultural enterprise
and both these techniques typically afford a partnership between capital and
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43. labor. These techniques are
Muzara’ a (share cropping)
Musaqa (water partnership or tree-sharing).
Sharecropping
Muzara' a (sharecropping or crop partnership) is a contract whereby landlord
puts his agricultural land at farmer's disposal to farm. Farmer undertakes to give
owner an amount of agricultural products. This framework is based on a
partnership between capital and labor.
Tree-sharing
Musaqa (water partnership or tree-sharing) is a contract whereby one person
trim and water fruit trees own by other person or are at his disposal, in exchange
for an amount of realize through the sale of the fruits on pre-agreed upon.
If a contract of Musaqa or tree sharing is related to fruitless trees, like willows
and sycophants, it is not valid. However, it would be valid in such trees as henna
whose leaves are used or trees whose flowers are used.
Chapter 9
Musharka financing
(Equity Participation or Venture Financing
Introduction
Musharka or Shirkah can be defined as a form of partnership where two or more
persons combine either their capital or labor together to share the profits &
enjoying similar rights and liabilities. It is a contract between two or more
persons who launch a business or financial enterprise to make profit.
Introduction & Back ground
43

44. 1. Dilemma in this modern world for entrepreneur is his capability to initiate
his idea for a new business.
2. He look to raise equity, capital or financing to enter business venture.
3. Firstly loan need collaterals arrangements, keeping in mind the impossibility.
4. Secondly borrowing that is made for the purpose is subject to the cost to be
paid in shape of interest ranges to 6% to 20% or more.
5. Thirdly cost to be paid on loan has to be determining on the volume of risk
and success.
6. If interest rate is 6% but the venture has a 10% chance of failing within a year,
the lender will probably charge interest at a rate of 16%.
7. High interest on compounding imposes heavy costs on the venture from the
start.
8. It increases the danger of failure and rise interest rate. If venture's prospects
can not be predicted with confidence, it is difficult to calculate an appropriate
interest rate.
9. Alternative for entrepreneur is admitting a partner to the business that is
entitled to receive a portion of profits from the venture in exchange for
contributing capital.
10. The partner's contribution and participation is pre determined.
11. There is no need to compute an interest rate and there are no fixed costs of
debt.
12. The partner will receive profits only if earned
Condition of Musharka
1. Musharka is a technique of financing used as a partnership.
2. Two or more parties provide finance for a project.
3. All partners are entitled to a share in the profits resulting from the project in a
ratio which is mutually agreed upon.
4. In case of loss it is shared exactly in the proportion of capital.
5. All partners have a right to participate in managing the project.
6. Any one can waive the right of participation in favor of partner or partners.
Historical Background Musharka
1. From the beginning of human society methods to meet day to day needs have
been changing with the change of social, economic, scientific, cultural and
political circumstances.
2. Especially habits, fashions and the standard of living.
3. These methods regulate the commercial activities and vary from place to place
and time to time.
4. The Arab society at the time of the rise of Islam had very simple financing
methods and forms of business peculiar to that society
5. Birth of Islam saw Musharka practice in Arabia in commercial activities.
6. Islam endorse and Prophet May Peace be upon Him perform business on the
basis of Musharka.
7. After Hijra Muhajireen and Ansar were declared by Prophet May Peace be
44

45. upon Him to be brothers.
8. Subsequently they joined as partners on Musharka, Muzara and Mussaqa
form trade and commerce.
9. Nature of transactions in the different forms was identical. These forms were
so developed that they became independent institutions.
10. Jurists formed detailed rules about the form.
11. There is a consensus of opinion among the jurists of all schools- of thought
that Musharka is a valid and legitimate contract in Islam.
12. The jurists, however differ over its form conditions and other details
Islamic Perspective
1. Islam stress on the socio economic development that tie individuals with
brotherhood and care like members of one single family.
2. This brotherhood is universal and not narrow-minded.
3. It is not tie by any geographical boundaries and take whole of mankind group,
tribe or race into one relation and that is universal partners for better earth.
4. The concept of brotherhood and equal treatment in society and before the law
is not meaningful unless accompanied by economic justice.
5. Receiving dues for individual who contribute to economic activity in society or
to the social product without any kind of exploitation of one by another.
The Prophet May Peace Be Upon Him warned:
"Beware of injustice for injustice will be equivalent to darkness on the Day of
judgment".
1. This warning is against injustice and exploitation and to protect the rights
of all individuals whether consumers, producers, distributors, employers
or employees with aim to promote welfare and ultimate goal of Islam.
2. Special significance is given to the relationship between the employer and
the employee which Islam places in a proper setting and specifies norms
for the mutual treatment of both so as to establish justice between them.
3. An employee is entitled to a "just" wage for his contribution to output and
it is unlawful for the employer to exploit his employee.
In case is with trader and consumer the dealing fair and transparent.
Two main forms of Musharka
Permanent Musharka
1. In this form the parties of Musharka participates in the equity of a project or
transaction and receives a share of profit on a pro rata basis.
2. The period of contract is not specified.
3. It can continue so long as the will of the parties.
4. This technique suits for long terms projects as funds and development are
committed and protracted.
Diminishing Musharka –
1. It allows equity participation on a pro-rata basis
2. System by which equity of parties keeps on reducing ultimately the ownership
45

46. of the asset on any one or more participants is transfers.
3. Partners gets dividend on their equity and if any of the partner sell or buy
other partner some of its equity, it is allowed to do so.
4. Equity held by partner progressively reduced and at a certain time equity held
by any partner reach to ZERO.
5. Disposal of total equity an end of Musharka
6. Musharka form of financing is being used by Islamic banks to finance Project
Financing and Working Capital.
Types of Musharka
Shirkah -Al-Milk (non-contractual)
It involves co-ownership and form when two or more persons get joint-ownership
of some asset without a formal partnership agreement. It is a proper partnership
as the parties concerned willingly entered into a contractual agreement for joint
investment and the sharing of profits and risks. Example
1. Two persons receiving an inheritance or a gift of property which mayor
may not be divisible?
2. Partners have to share property or its income in accordance with their
share until they decide to divide.
3. If the property is divisible and partners still decide to stick together, It is
Shirkah al-Milk Ikhtiyariyyah (voluntary).
4. If it is indivisible and they are forced to stay together it is characterized as
Jabriyyah (involuntary).
Shirkah al-Uqood (contractual partnership)
1. The agreement need not necessarily be formal and written, it could be
informal and oral.
2. Just as in Modaraba, the profits can be shared in any equitably agreed
proportion.
3. Losses must, however, be shared in proportion to the capital contribution.
Type of Al-Uqood:
In Fiqh Shirkah al-Uqood divided into four kinds:
Al-Mufawada (full authority & obligation)
1. In Mufawada partners are adults,
2. Equal in their capital contribution,
3. Their ability to undertake responsibility along with their share of profits and
losses on the transactions.
4. They have full authority to act on behalf of the others
5. Jointly and severally responsible for the liabilities of their partnership
business, provided that such liabilities have been incurred in the ordinary
course of business.
6. Each partner can act as an agent (Wakil) for the partnership business and
stand as surety or guarantor (Kafil) for the other partners
46

47. Al-Inan (restricted authority & obligation)
1. Inan involve all partners need not be adults or have an equal share in the
capital.
2. They are not equally responsible for the management of the business.
3. Their share in profits may be unequal, but this must be clearly specified in the
partnership contract.
4. Their share in losses would be in accordance with their capital contributions.
5. Shirkah Al-Inan the partners act as agents but not as sureties for their
colleagues.
Al-Abdan (labor, skill and management)
1. Shirkah al-Abdan is where the partners contribute their skills and efforts to
the management of the business without contributing to the capital.
2. They use their expertise, experience and goodwill that give confidence and
strength to the venture either on profit or wages..
Al-Wujuh (goodwill, credit-worthiness and
1. Partners use their goodwill, their credit-worthiness and their contacts for
promoting their business without contributing to the capital.
2. Both these forms for partnership, where the partners do not contribute any
capital, would remain confined essentially to small-scale businesses only.
These are of course models. In practice, however, the partners may contribute not
only finance but also labor, management and skills, and credit and goodwill,
although not necessarily equally
Modern Musharka and its Conditions
1. The modern business concerns being run on the basis of Musharka
2. Partnership: It is regulated by Partnership: It is regulated by-
3. Partnership rules framed by the government,
4. Business practices prevailing in the business community.
Limited Company
5. This type of Musharka is strictly controlled by the statutory rules framed by
the government Its commercial activities are, however, influenced by the
business practices.
Co-operative societies
6. This Musharka is also governed by statutory rules.
7. Its commercial activities are influenced by the practices prevailing in the
business community.
47

48. 8. The modern Musharka principally resembles Shirkah al-Inan. The details are,
however, considerably different due to change of Urf and other factors
including modem commercial techniques, economic conditions and legal
requirements.
9. Let us discuss briefly the conditions of Musharka, which are those of Shirkah
al-Inan. Other types of Musharka mentioned by jurists are nearly obsolete
nowadays.
10. Capital invested by partners may be unequal.
11. Majority of jurists, capital should be in shape of currency and not the goods.
12. Condition for capital in form of currency was imposed when it was difficult to
refer goods in terms of currency.
13. In barter systems jurists framed the rules, now goods are generally referred or
accounted for in terms of currency.
14. This condition is waived in limited companies and co-operative societies as
the capital is invested in the form of equal units of currency called shares and
the intended partners buy as many shares as they wish.
15. This practice has universally been accepted as urf and is therefore according
to Islamic principles.
Chapter 10
Ijarah Financing
(Asset Financing)
Definition
Leasing is a contract in which asset is transfers to user for an agreed period on an
agreed consideration “Ijarah is a lease contract as well as a hire contract”. Both
the contract are similar to each
48

49. In Islamic Finance Ijarah is a lease contract under which financial institution
leases equipment or a building to one of its clients against agreed rentals or
installments equal to the value of the assets.
The financier is known as Rab-al-Maal who financer equipment to Ijeer (User or
Tenant) or the equipment provider through financing is LESSOR and The
equipment user is LESSEE
Ijarah
Ijarah basically facilitate the cost to be spread for large purchases into affordably
installments for payment. In Ijarah either the end of the transaction is the
ownership of assets that acquired through lease financing or in another case the
equipment is returned to financier.
Ijarah Financing is a contract in which a lessee request for an equipment or a
property and lesser provide through its financing the specified and requested
equipment or property.
The Lessee agree to pays a monthly, quarterly, semi-annual or annual rent to
lesser for the right to use equipment a specific amount within agreed time of time
i.e. 12, 24, 36, 48, or 60 months OR what ever time agreed.
Historical Perspective
• Though leasing began in 2010 BC but modern leasing began in early fifties.
• Creation of the Investment Tax Credit in 1962 encourages growth through
"tax-oriented" leasing and new products were quickly developed to meet
the growing demand.
• Over the last 50 years, many leasing companies developed non-tax
oriented products such as income funds, operating leases, limited
partnerships, vendor programs, and end sharing in order to remain
competitive.
Equipment leasing blossomed over the last 20 years
• Banking industry started leasing by giving credibility to a market place
which had been previously regarded as a last-resort financing alternative.
• Accounting profession produced a document to help standardize lease
reporting in financial statements.
• Internal Revenue Service issued guidelines to aid lesser and lessees in
structuring leasing transactions.
Why do Lease Business?
Cash flow - Monthly payments are generally smaller for leases than for loans
and they usually require a smaller or no down payment.
Use vs. ownership - Many businesses have discovered they don't need to own
the equipment they use.
In past renting and leasing were limited, today's psychology it more to economics
rather than moralities of ownership
49

50. The Modern Concept of Ijarah
• Ijarah is an ancient technique which can be seen as leasing which is the
modem technique which can be compared with Islamic technique of
Ijarah.
• Leasing is based on fundamental concept of Ijarah, according to which one
does not have to own an asset in order to enjoy benefits of it.
• There are business examples which benefited from their investment in
fixed assets and made substantial capital profits from the sale of assets or
been able to improve their balance sheets by the revaluation of assets.
• Primarily profitability of a business lies in the effective utilization of its
resources. Therefore USE is important rather OWNERSHIP.
For example
• Investment appraisal made on some new venture. The choice of
purchasing or leasing is partially a matter of arithmetic and partially a
question of the availability of the capital.
• Ijarah provide usage by paying a rent with understanding to acquire the
ownership right on the equipment under Ijarah mode of financing.
Cross Road of Ijarah
1. Ijarah is a financing facility in which the Rab-al- Maal on the request of
user agree to finance the asset of any nature.
2. Ijarah is financing mode in which finance cannot be disburse directly to
the user of the finance.
3. An asset is arranged and handed over on the condition that user will pay
the rentals for its usage to a certain period and then return the assets upon
maturity back to the financer.
4. Ijarah can also be financed in which the price of the assets are taken in
installment over a certain period and assets is been given to the user to use
it and pay the rentals of the usage.
5. The rental is the earning of the user and payment of installments leads
towards ownership of the assets of user.
6. The early user pays the price of the assets the lesser number of rentals he
pay and less is the expense on him.
7. The financing amount is determined in accordance to the portion of gross
income of the user which he can afford to pay as rental and installment.
8. The gross income is declared by user and has to prove the authentic proof
of the income.
9. The financing amount base on the affordable level determines on the gross
monthly income of the user then divided into financing and equity.
10. The equity of the user is called as ARBOON (up-front or advance) and the
financing is added to the ARBOON that make the total financing amount.
11. The financing amount is inclusive of the direct and indirect cost on the
purchase of the assets and the installment is workout on the amount of
total cost and price less Arboon in number of equal installment which are
spread over the financing period.
50

51. 12. The user repay in two parts which are Installment that give right of
ownership on the asset which are also consider user’s saving
13. Rentals that are user expenses that he or she bears of using the asset.
14. the two agreements signed between user and financer have amounts of
financing, installments, rentals and cost.
15. Ijarah financing due to its special features supplement existing
conventional forms of lending and further increase speed investment in
the private sector.
16. Ijarah financing improve the capacity utilization, quality, production cost,
profitability, internal generation of cash for future investment, improve
saving conduct and international competitive capability to increase
construction industry.
17. Ijarah financing also suited to the programs of balancing, modernization
and replacement of common man need.
18. It involves a small dosage of investment which would carry relatively
smaller investment risks but would result in a quick value added.
19. It increase capacity utilization and thus contributes to the growth of the
economy and develops saving conduct by converting expenses into
compulsory saving.
20. It is asset transfer to another for use on an agreed period with financial
consideration according to the affordability level of the user.
21. Ijarah financing must have a useable asset.
22. It is necessary for a Ijarah contracts that body of property remains in the
ownership of the seller and only its usage is transferred to the user and
then over an agreed period he buys out the ownership of using property.
23. Ijarah Financing cannot be affected in respect of disbursement of money,
to user to acquire himself due to consuming nature of money. If anything
of this nature is acquired by the user, it would be consider as a loan with
all rules concerning the transaction of loan that would accordingly be
applied.
24. Any increase or decrease in the rental or financing on valid contract would
be treated as interest that is usually charged on a loan. The figure of
installment never changes however the number of rentals is increase or
decrease according to repayment practice.
25. All the liabilities emerging from the ownership shall be borne by the
financier, but the liabilities referable to the use of the property shall be
borne by the user.
Example of the contract in Property Ijarah
Ahmed graduated and joins the professional life at the age of 22 years. His
monthly income is estimated to Rs.20,000 in which he get 40% home allowance
that is Rs.8,000.
After three years he decided to buy a property and applied for LA Riba Home
Financing under Riba free financing mode.
51

52. He approach the Home Financing Company who explain his that he can afford
40% of his income for acquiring his home.
Ahmed need a property at a value of Rs.1,000,000 with total cost and expenses
added to Rs.50,000. Thus the price of the property reaches to 1,050,000.
Home Financing Company and Ahmed reach to an agreement that Ahmed will
contribute the 30% and Financing Company shall invest 70%.
Contract:
Property value: Rs.1,000,000
Tax 2%: Rs. 20,000
Documentation: Rs. 10,000
Fee, Commission: Rs. 30,000 Total Price Rs.1,050,000
Equity 30%: Rs. 315,000
Financing: Rs. 735,000
Monthly Income: Rs. 20,000
House Allowance : Rs. 8,000
Installment 70%: Rs. 5,600
Rental 30%: Rs. 2,400
Period: 131.25 Installments = 10 years 11 months
• After 10 years Ahmed paid Rs.735,000 + Rs.314,400 = Rs.1,049,400
• This is approximately 42.775% excess to financing facility.
• As he takes over the ownership of his home he make a valuation of his
home and found that the value has increase by 30% and his home is now
valued to Rs.1,300,000.
• His expenses to own the home decrease and he turn into premium from
expenses of 42.775% to premium at 23.880%
• Home that he bought through LA RIBA Home Financing at a total cost of
Rs.1,313,920 which deducted from the present value of the property
Rs.1,300,000 shall only burden him Rs.13,920 in 10 years 11 month.
• If the value decrease then he still hold a property that allow him to live in
it and the House Allowance convert into his monthly income instead of
rental expenses. He will still be beneficial.
• In developing countries, house allowances are non-taxable and this give
the Ahmed a benefit of Rs.800 per month as tax rebate on Rs.8,000.
Rs.800 in 10 years 11 month benefits him to user minimum of Rs. 104,800
additionally.
• On the other side if he pay early in 10 years instead of 10 years 11 month he
save 11 rental amount which equal to Rs. 24,400.
Summery
52

53. The product base on the affordability + Gross Income + Payment Schedule
application which means pay early is the profit to the user and loss to the
financier in profitability and pay late is income to financier and loss to user.
Comparison
1. A comparison between leasing and other similar forms of transactions,
such as rental, will give a clearer picture.
2. "Rent a Car business is a contract according to which the objects are
leased to individuals or a number of users for a much shorter period than
their actual useful life.
3. In contract law, the "rental contract" specifies the lease and the usage
for an indefinite period.
4. Like IBM's computer sales system which has an overwhelming world
market share.
5. To promote sales in an attempt to outstrip its competitors, with the belief
that it could control the progress of technological innovation of
computers.
6. Users of equipment leased on a rental system are major enterprises with
continuous usage of rented equipment in a short-lived, but the lesser is
charged with the responsibility for maintenance.
7. In the case of "rental" the lesser is moreover charged with the
responsibility for coping with the products obsolescence, so that it may
be termed as a service-oriented business.
Economic Role of Ijarah
1. Lease financing due to its special features supplement existing
conventional forms of financing and further increase speed investment
in the private sector.
2. There is a large requirement of balancing and modernizing for existing
industry.
3. Lease financing through balancing and modernization of existing
industry improve the capacity utilization, quality, production cost,
profitability, internal generation of cash for future investment and
international competitive capability to increase exports.
4. Lease financing is most suited to the programs of balancing,
modernization and replacement. It would involve a small dosage of
investment which would carry relatively smaller investment risks but
would result in a quick value added production. It would increase
capacity utilization and thus contribute to the growth of the economy.
5. Leasing is the contract
6. Asset transfer to another person for use on an agreed period with
financial consideration.
7. The subject of lease must have a valuable use.
8. It is necessary for a lease contract that body of leased property remains
in the ownership of the seller and only its usage is transferred to the
lessee.
9. Any thing that cannot be used cannot be leased.
10. Lease cannot be affected in respect of money, edibles, fuel and
ammunition etc. due to consuming nature of products.
53

54. 11. If anything of this nature is leased out, it would be consider as a loan
with all rules concerning the transaction of loan that would accordingly
be applied.
12. Any rent charges on this invalid lease would be treated as interest that is
usually charged on a loan.
13. All the liabilities emerging from the ownership shall be borne by the
lesser, but the liabilities referable to the use of the property shall be
borne by the lessee.
ExampleExample
Mr. Ahmed leased his House to Mr. Badar. All taxes on the house shall beMr. Ahmed leased his House to Mr. Badar. All taxes on the house shall be
borne by Mr. Ahmed as he is the owner While water tax, electric bills and allborne by Mr. Ahmed as he is the owner While water tax, electric bills and all
expenses pertain to the use of house shall be borne by Mr. Badar the lessee.expenses pertain to the use of house shall be borne by Mr. Badar the lessee.
Example
“A said to B “I lease you out my cars”.
• Lease is void unless leased car is clearly identified.
• Rental must be determined for whole period of lease at the time of
contracting a lease.
• It is permissible that different amounts of rent are fixed for different
phases during the lease period, provided that the amount of rent for each
phase is specifically agreed upon at the time of lease agreement.
• If the rent for a prior phase of the lease period has not been determined or
left at the option for the lesser, the lease will not be valid.
Example
Mr. A leases his house to Mr. B for a period of 5 years. The rent for the first
period is fix at an amount on monthly basis and it is also agreed that the rent of
every subsequent year shall be 10% more than the previous one.
The leases remains valid
• In this example Mr. A laid down a condition in the agreement that rent of
an amount per month is fixed for the first year only.
• Rent for subsequent year shall be fixed each year at the option of the
lesser.
• The lease is void, because the rent would be uncertain.
• Mostly in the long-term lease agreement it is not in the benefit of the
lesser to fix one amount of rent for the whole period due to the fact the
market conditions differ from time to time.
• In this case, the lesser has two options, either
• (a) He can contract a lease with a condition that the rent shall be increased
at a specified proportion after a specified period. Like six months or one
year.
Or
• (b) He can contract the lease for a shorter period after which the parties of
54

55. lease in fresh terms and conditions, but the renewal shall be affected by
mutual consent with full liberty to each one of them to refuse the renewal.
• In such case the lessee is bound to vacate the leased assets and return it
back to the lesser.
• Lesser cannot raise rent unilaterally for that reason any agreement to the
contrary is null and void.
• Rent or part thereof may be payable in advance before delivery of asset,
but the amount collected by lesser shall remain with him as account
payment and shall be adjusted to the rent after it is due.
• Lease period shall commence from the date on which leased asset has been
delivered to lessee, no matter whether the lessee has started using it or
not.
If leased asset has totally lost the function for which it was leased for and no
repair is possible then lease shall terminate on the day on which such loss has
been caused.
However, if the loss caused by the misuse or by the negligence of the lessee he
will be liable to compensate the lesser with the depreciated value of the asset as it
was immediately before the loss.
1. Like other modes of financing, lease is not originally treated as one.
2. It is simply a transaction meant to transfer the use of an asset from one
person to another for an agreed consideration.
3. Certain financial institutions have adopted leasing as a mode of finance
used in place of interest.
4. This kind of lease, generally known as the financial lease notable from
the operating lease that has many basic features of actual leasing
transactions with which it is distributed with.
5. When the financial institutions on interest free modes established in
the recent past they found that leasing was a recognized mode of
finance throughout the world.
6. On the other hand, they realized that leasing was a lawful transaction
according to Shariah and it could be used as an interest free mode of
finance.
7. Leasing has been adopted by the Islamic Financial Institutions, yet
very few of them paid attention to the fact that the financial lease has a
number of characteristics more similar to interest as the actual lease
transaction.
8. They started using same model agreements for leasing as were in vogue
among the traditional financial institutions without any modification,
while a number of their provision was not in conformity with the
Shariah.
9. The primary advantage of Ijarah over the conventional forms of
borrowing to finance equipment is that the ownership of the asset
remains with the lesser.
10. The financing is largely unrelated to the size of assets and the capital
55

56. base of the lessee, depending principally on the ability of cash flow to
service payments of lease rentals.
11. Ijarah is probably the most suitable mean to raise investment funds
especially for industries where rapid technological innovation is either
underway or desired, top class firms which are quickly expanding their
business or small & medium enterprises and firms which have
normally insufficient assets and capital base to meet normal collateral
requirements of most other forms of long term financing. The basic
security under the Ijarah arrangement is the "ownership of the
equipment". The title of ownership to the equipment remains with the
leasing company but in case of serious default, the equipment is
repossessed
Chapter 10
Sukuk
Financial Instrument
Sukuk is an Arabic word and plural of a word Sakk. It signifies legal instrument,
56

57. deed or Cheque. It is an Arabic name for a financial certificate which can be taken
similar to Bond.
Islamic Jurisprudence
Sukuk A financial product that develops input methods for capital resources.
It structure and engineered. It is an Islamic financial products bases of output
Fixed and guaranteed
Income or interest bearing bonds are not permissible in Islam. Sukuk is profit
base instrument that declare its outcome on the utilization of the money collected
on maturity of the term of investment.
Profitability: It profit is not pre-agreed, pre-determines or fixed. The total
investment is deducted from the cost to determine the Net Profit of the
transaction for which the Sukuk been issued. Upon realization of the Net profit
the total amount is distributed according the ratio of the investment in the capital
of the invested amount
Sukuk are securities
Meeting terms of Islamic Financial law and investment principles which
prohibits charging, paying interest & involvement of Riba.
Sukuk is a Financial Assets
Act in accordance with Islamic law and classified in accordance with their
tradability and non-tradability in the secondary markets
Islamic Investment Principles IIP: IIP is the part of ‘Shariah’, indirectly to
be an ‘Islamic Law’. Actually it is extensive to law as it cover general body of
spiritual and moral obligations and duties in Islam
A time-honored instrument for a contemporary use in post Islamic era
Sakk which are now called Sukuk were similar with Conventional Cheque. It is
a document representing a contract, Conveyance of rights, obligations or
financial transaction in conformity with the Shariah. Practical evidence in
archives indicates Sukuk as a product extensively used during medieval Islam for
transferring financial obligations originating from trade and other commercial
activities. Fundamental nature of Sukuk in modern Islamic perspective lies in
concept of asset monetization and Securitization that is achieved through the
process of issuance of Sukuk (Taskeek). Its great potential is in transforming an
asset’s future Cash Flow into present cash flow.
.
Sukuk may be issued on existing as well as specific assets that may become
available at a future date.
Sukuk is the key to structure capital as well cover the liquidity requirement for
permanent or temporary requirement
57

58. The need for tangible assets Shariah Rule
• Financing should only be raised for purpose specific and identifiable which
must have the Economical and social viability.
• Transactions under indebtedness are prohibited as a result conventional
bonds or debenture are not permitted.
• Sukuk returns and cash flows are linked to transaction workout Net Profit
of transaction without any guarantee of return.
• User of funds needs to utilize financing along with contributing its equity
in transaction.
• Contribution of Equity is the share of risk that user confirm in the
transaction.
• Sukuk funds are Equity of Sukuk owners that form into finance or funds
for venture
• Shariah accept with risk and return guideline of Islam.
Problem with interest or ‘Riba’ Bad Earning Shariah Rule
• Money is considers as measuring tool for value.
• Money is not a commodity.
• Money cannot be bought and sold in similar quality.
• Money to remain in circulation and cannot to be stagnant or in holding
• Money must have support of equal value with authentication.
• Money issuance on goodwill is an artificial value and such issuance is just
a paper printing.
• Money requires to be utilized to receive income or anything that has the
type of money alone.
• Money in exchange of money in similar quality is Interest a price of
Money which is ‘Riba’.
• Implication for Islamic financial institution is trading and financing,
receivables for anything other than equality.
• Conventional loan, lending, borrowing or debt base plastic currencies are
not permissible.
Problem of uncertainty ‘Gharar’
• Ambiguity in contractual terms or uncertainty in existence of an original
asset consider as unoriginal.
• Shariah add in the concept of ‘Public benefit’, that, overwhelmingly in the
public good may yet be transacted
• Hedging or mitigation of avoidable business risks may fall into this
category of Gharar but there is still much discussion yet to come.
Profit and acceptance of Loss
• Declaration of Results
• Financing is made available on 8 P formula
• Financing to be in clear confirmation:
58

59. • Term and condition to pre-agreed
• Duties and Responsibilities to define
• Decision to be witness by active witnesses
• Arbitration to be integral part of agreement
• Agreement to be made by third person.
• Monitor to be external body.
• All matters to be in writing
Sukuk for Financing
• Sukuk is the source of financing
• Sukuk is the source for structuring Capital
• Sukuk is encouragement of saving conduct
• Sukuk is a trading instrument without excess to the face value
• Sukuk is specific and in general.
• Sukuk must be in clear period and validity.
• Sukuk return are declared on maturity.
Controversy
• Sukuk are widely regarded as controversial due to their visible purpose of evading
limits on Riba
• Traditional scholars do not believe that this is effective, referring to the fact that
Sukuk requires payment for Time Value of Money
• This consider as the basic application of Interest
• Present Sukuk offer fixed and guaranteed rate of return on investments,
similar to interest and it is risks free of particular venture for which Sukuk
were issued.
• In reality banks invest in assets and return from investment is spread over the
period. This flow of income is "fixed" and Rate is pre declare without utilization
of investment amount which given to investors.
• There is an asset in the background.
• There is more security for the investor.
• This security makes Sukuk increasingly appealing to global investors including
Muslims and non-Muslims.
• The soul of the Sukuk is not what is been practice and the return is simply an
Interest which deviate the principal of participation.
59

60. Chapter 11
Important Terms use in
Islamic Finance & Banking
1. Al Ajr: A commission, fees or wages levied for services.
2. Arboon: Margin, Advance or up-front
3. Amanah: Reliability or trustworthiness. Important value of Islamic society in
mutual dealings. It also refers to deposits in trust. A person may hold property in
trust for another, sometimes by implication of a contract.
4. Al Wadiah: Resale of goods at a discount to the original cost.
5. Al Wakala: Absolute power of attorney.
6. Al Rahn Al: Arrangement where a valuable asset is placed as a collateral for a
debt. The collateral is disposable in the event of a default. Pawn Broking.
7. Al Wadiah: Safe keeping.
8. Awkaf/Awqaf: A religious foundation set up to assist the poor and needy.
9. Bai Muajjal (Deferred Payment Contract) A contract involving the sale of goods
on a deferred payment basis.
10. Bai al Dayn Debt financing: Bai al-Dayn is a short-term facility with a maturity
of not more than a year. Only documents evidencing debts arising from bona fide
commercial transactions can be traded.
11. Bai al Salam This term refers to advance payment for goods which are to be
delivered later.
12. Bai Bithaman Ajil: This contract refers to the sale of goods on a deferred
payment basis. The client may be allowed to settle payment by installments
within a pre-agreed period, or in a lump sum. Similar to a Morabaha contract,
but with payment on a deferred basis.
13. Baitul Mal: Treasury.
14. Fatwah: A religious decree.
15. Fiqh: Islamic jurisprudence. The science of the Shariah. It is an important
source of Islamic economics.
16. Farman: Order or directives
17. Gharar: Uncertainty, hazard, chance or risk. Technically, sale of a thing which is
not present at hand; or the sale of a thing whose consequence or outcome is not
known; or a sale involving risk or hazard in which one does not know whether it
will come to be or not, such as fish in water or a bird in the air. Deception
through ignorance by one or more parties to a contract. There are several types of
Gharar, all of which are Haram. The following are some examples:
18. Selling goods that the seller is unable to deliver
19. Selling known or unknown goods against an unknown price
20. Selling goods without proper description
21. Selling goods without specifying the price
22. Making a contract conditional on an unknown event
23. Selling goods on the basis of false description
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61. 24. Selling goods without allowing the buyer to properly examine the goods
25. Gambling is a form of Gharar because the gambler is ignorant of the result of his
gamble
26. .Halal:That which is permissible. In Islam there are activities, professions,
contracts and transactions which are explicitly prohibited (Haram) by the Qur'an
or the Sunnah. Barring them, all other activities, professions, contracts, and
transactions etc. are Halal. An activity may be economically sound but may not be
allowed in the Islamic society if it is not permitted by the Shari'ah.
27. Hawala:Lit: bill of exchange, promissory note, cheque or draft. Technically, a
debtor passes on the responsibility of payment of his debt to a third party who
owes the former as debt. Thus the responsibility of payment is ultimately shifted
to a third party. Hawala is a mechanism for settling international accounts, by
book transfers.
28. HaramUnlawful.
29. Ijarah (Leasing) A contract where the bank or financier buys and leases
equipment or other assets to the business owner for a fee.
30. Ijarah Wa Iqtina (Lease to Purchase) This term refers to a mode of financing
adopted by Islamic banks. It is a contract under which the Islamic bank finances
equipment, a building or other facility for the client against an agreed rental
together with an undertaking from the client to purchase the equipment or the
facility. The rental as well as the purchase price is fixed in such a manner that the
bank gets back its principal sum along with some profit which is usually
determined in advance.
31. Ijtehad: effort, exertion, industry, diligence. Technically try of a jurist to derive
or formulate a rule of law on the basis of evidence found in the sources.
32. Istisnaa (Progressive Financing) A contract of acquisition of goods by
specification or order where the price is paid progressively in accordance with the
progress of a job. An example would be for the purchase of a house to be
constructed, payments are made to the developer or builder according to the
stage of work completed. This type of financing along with Bai salaam are used as
purchasing mechanisms, and Morabaha and Bai Muajjal are for financing sales.
33. Ju’alal: Predetermined price for performing any service.
34. Modaraba (Trust Financing to skill)
35. Modarib: Entrepreneur, a person having skills
36. Muamalat: Economic transaction or commercial activity.
37. Morabaha (Cost+Plus Financing in Trading)
38. Morahib: Trader
39. Musharaka: Venture or Equity Financing that become part of the Capital.
40. Mushariks: Partner
41. Musaqa: A contract in which the owner of the garden shares its produce with
another person in return for his services in irrigating the garden.
42. Muzara: A contract in which one person agrees to till the land of the other
person in return for a part of the produce of the land.
43. Qard Hasan: Financial assistance without profit on the condition that the
amount shall be paid back or the services shall be given against the financial
assistance.
44. Qimer: gambling. An agreement in which possession of a property is conditional
upon the happening of an uncertain event. By implication it applies to those
agreements in which there is a definite loss for one party and definite gain for the
other without specifying which party will gain and which party will lose.
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62. 45. Rab-al-Maal: In a Modaraba contract the person who invests the capital.
Riba: This term literally means an increase or addition. Technically it denotes
any increase or advantage obtained by the lender as a condition of the loan. Any
risk-free or "guaranteed" rate of return on a loan or investment is Riba. Riba, in
all forms, is prohibited in Islam. In conventional terms, Riba and "interest" are
used interchangeably.
46. Ruqa: Cheque or pay-order
47. Sadaqah: Charitable giving.
48. Shariah / Sharia: Islamic law derived from 3 Primary sources: the Quran; the
Hadiath (sayings of the Prophet Muhammad); and the Sunnah (practice and
traditions of the Prophet Muhammad) and three Secondary sources Qiyas
(Analogical deductions and reasoning), Ijma (consent of Islamic Scholars) and
Ijtehad (Legal reasoning).
49. Shirkah
A contract between two or more persons who launch a business or financial
enterprise to make profit. Shirkah = Musharaka.
50. Suftajal: Bill of exchange or a banking instrument used for payable at a future
fixed date and in other cases they were payable on sight. Suftajah is distinct from
the modem bill of exchange in some respects. Firstly, a sum of money transferred
by Suftajah had to keep its identity and payment had to be made in the same
currency. Exchange of currencies could not take place in this case. Secondly,
Suftajah usually involved three persons. 'A' pays a certain sum of money to 'B' for
agreeing to give an order to 'C' to pay back to 'A'. Third, a Suftajah could be
endorsed.
51. Sukuk is an investment certificate with specific purpose for a specific period in
which the owner title is endorse on the face and it is non-negotiable, not to be use
for collateral, not use as cash and non transferable. It is a certificate entitling the
holder to the benefits of the income stream of the assets backing the certificate.
Equivalent to a fixed income bond.
52. Takaful: This is a form of Islamic insurance based on the Quranic principle of
Ta'awon or mutual assistance. It provides mutual protection of assets and
property and offers joint risk sharing in the event of a loss by one of its members.
Takaful is similar to mutual insurance in that members are the insurers as well as
the insured.
53. Waqf: detention appropriation or tying-up of a property in time without end so
that no propriety rights can be exercised over the usufruct. The Waqf property
can neither be sold nor inherited or donated to anyone. Awqaf consists of
religious foundations set up for the benefit of the poor.
54. Zakat: contribution which is prescribed by Islam on all persons having wealth
above an exemption limit at a rate fixed by the Shariah. According to the Islamic
belief Zakat purifies wealth and souls. The objective is to take a part of the wealth
and distribute it among the poor and the needy. It is levied on cash, cattle,
agricultural produce, minerals, capital invested in industry, and business etc. The
distribution of Zakat fund has been laid down in the Quran (9:60) and is for the
poor, the needy, Zakat collectors, new converts to Islam, travelers in difficulty,
captives and debtors etc. It is payable if the owner is a Muslim and sensible.
Zakat is the third pillar of Islam. It is an obligatory contribution which every well-
off Muslim is required to pay to the Islamic state, in the absence of which
individuals are required to distribute the Zakat among the poor and the needy as
prescribed by the Shariah.
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63. QUIZ EXERCISE
1. Islamic Economic demands three main principles to be followed by an individual in his day
to day affairs and problems.
2. Name the three? IJMA (Gathering) (2) QYAS (Discussion) (3) AMAL (Act)
3. “All Powers and Ownership Belong to Almighty Allah
4. Man is the custodian of all ownerships of Almighty Allah”
5. In Islamic Finance matters pertain to money should be fare and transparent.
6. Interest is dominating 96% of the present monetary affairs of world.
7. First attempt to establish Islamic Financial House in the year 1960 in Egypt.
8. Islamic Economics encourage the Socio Economic Development and consider Financing
instead of Lending of Money.
9. From the pre-Islamic period, interest is considered as the prime factor of all monetary
matters and obligations.
10. Islamic financial system is based on the principles of Islamic economics and it is in
accordance with Islamic jurisprudence, guided by the Holy Quran.
11. Islamic economic system has no provision for RIBA,
12. Riba is the main difference between the conventional and Islamic financial system.
13. Islam is not against the profit.
14. Islam prohibits earning through lending,
15. Islam restricts unfair trading practices and other activities that are socially harmful in one
way or the other.
16. Activities like trafficking in drug; narcotics, illegal arms and adulteration in food convert
the trading income into Riba-Al-Fadl (Trade Riba).
17. In the Islamic economy, money is treated as the medium of exchange and currency cannot
be bought or sold with the similar currency.
18. In the conventional economy, money is given on the condition of a fixed return.
19. Interest is the price of the money.
20. In Islamic finance money is financed on profit/ loss and projects are pre-specified.
21. Rab-Al-Maal is the owner of finance.
22. Islamic banks apply divine system whereas conventional banks work on positive
concepts.
23. Law of the land plays an important role and it is often a hurdle in the growth of Islamic
banks.
24. Saving deposit is a decision that is taken by an individual.
25. Saving give a raise to the individual standard of living.
26. Saving give caution towards wastage and guide to make profit.
27. Saving and spending is the social conduct
28. Un-necessary saving is discouraged and moderate spending is encouraged.
29. Islamic Finance provide easy to investment in any legal product and services.
30. Restrict the saving to be invested in illegal form.
31. Compounding of saving return is prohibited.
32. Savings are invested of Profit & Loss Basis.
33. Savings results are transparent, short tenure with understanding of Profit & Loss.
34. Saving leads to Investment.
35. The rule of sharing Profit and Loss is Participation.
36. In investment expenditure is deducted from profit and not from capital.
37. Profit which can be distributed is net profit and not gross profit.
38. Riba Free Financial House can be money owner and participator or vice versa.
39. The Riba Free Financial Houses can be the second participator if it receives participation
from the first participator.
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64. 36. In investment expenditure is deducted from profit and not from capital.
37. Profit which can be distributed is net profit and not gross profit.
38. Riba Free Financial House can be money owner and participator or vice versa.
39. The Riba Free Financial Houses can be the second participator if it receives participation
from the first participator.
40. Investment in financial securities is only valid in shares and not in debentures.
41. In Conventional system traditions do not approve the Finance Houses to perform
investments by it whereas Riba Free Finance House break the tradition.
42. Participation should exist on joint liability between the financier and the financing in case
of loss and in case of profit.
43. Modaraba, Commenda, Qarad are three distinct concepts appropriate for Riba Free
Economic Activities
44. Modaraba is of Iraqi origin and found mostly in Imam Abu Haifa’s and Imam Ibn
Hambal’s schools of thought.
45. Modaraba is a partnership contract between two parties, persons or organizations.
46. In this form one brings the capital, the other shares his time and skills for a specified
project or transaction
47. In case of loss the Financier looses the Capital investment and Modarib lose its time, efforts
and reputation.
48. Modaraba on the basis of Qiyas is not allowed.
49. Qiyas in Modaraba is the unknown salary for an unknown activity
50. Rab-Al-Maal (the financier) does not have to take an active part in the daily operations as in
the case of employment.
51. There will be no return for Modarib if a profit does not result in the transaction
52. Only money is used as a medium of exchange in the Modaraba mode
53. A commodity in exchange of another commodity is not permissible.
54. Modaraba contract cannot be established with just anybody
55. In Modaraba experience, knowledge and skill of related business processes are an
essential condition of the contract.
56. In case of any dispute over the causes of a loss, the jurists permit the arbitration clause in
the agreement.
57. Liabilities cannot be the capital of Modaraba.
58. Return on capital is not guaranteed.
59. The capital of Modaraba should be deposited in cash with the Modarib in full trust and
confidence.
60. Modaraba becomes invalid if the return of finance is guaranteed.
61. It should be of known in quality and quantity and ignorance leads to differences and
disputes.
62. Profit Sharing should be at maturity of transaction.
63. Profit should not be paid in parts before the maturity of the transaction because payment
might exceed the share and any one partner might devour all the profit.
64. Modaraba is only achieved through participation because of profit & loss sharing contract,
based on justice and trust among the partners.
65. Modaraba. It cannot be roll-over under same agreement.
66. Almost all scholars have forbidden the usage of debts as Modaraba capital.
67. Rab-Al-Maal interference in the working disrupts the connection between capital and
Modarib.
68. Cooperation of Rab-Al-Maal is accepted.
69. Relationship as employee and employer between Rab-al-Maal invalidate Modaraba
transaction.
70. Share of profit has to be pre-agreed.
71. Modarib is entitling for Modaraba Management Fee out of gross profit and not from the
capital of Modaraba.
72. Modarib fee must be pre-agreed and term has to incorporate in the agreement.
73. Rab-al-Maal cannot impose the amount of percentage.
74. Assets of Modaraba transaction shall be the right of Rab-al-Maal and Modarib jointly.
75. Modaraba can be classified as, General purpose and Specific purpose Modaraba.
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65. 76. One Rab-al-Maal finances several Modarib at one time with different terms and conditions
of contract.
77. All activities pertain to Modaraba should be agreed in writing including functions and
operations in proper record, supported with documentary proof.
78. Modarib can invest the capital by self or by making similar contract with other person,
institute or organization without the permission of Rab-al-Maal but keeping him in
confidence.
79. Modarib status could be change to Rab-al-Maal and Rab-al-Maal could be Modarib too with
the condition of contract and agreement in transaction.
80. Banks can specify the purpose of Modaraba to safeguard depositor’s capital.
81. Bank can enter into a General Purpose Modaraba. But in case of being a Rab-al-Maal it only
enters into Specific Modaraba Contract.
82. Banks are not permitted to ask for guarantee against the loss of capital, but participate in
the transaction as partner by holding the assets of transaction excluding capital.
83. Modaraba can be in consolidation with other mode of financing permitted like Musharaka,
Morabaha, Ijarah, Havania and Musaqa.
84. Morabaha is trade related financing.
85. Word Morabaha is taken from Arabic word Ribh which means Profit.
86. Morabaha is a contract of sale in which a commodity is sold on profit and seller tell the
buyer his cost price as well as his profit he is adding to the cost.
87. Morabaha is a financing mode for trading activity of sale on profit.
88. The financier after the appraisal of the price and cost estimates its profit over the cost which
is settled as purchase price in advance.
89. The financier pay on behalf of the Morahib and deliver the goods after taking acceptance of
receiving the goods as per request
90. Morabaha is not capital base contract and funds are use as financing for purchases of
goods.
91. Morahib has to prove and satisfy the Rab-al-Maal of capabilities know-how of goods
requested and marketing and selling plans of the goods that are financed
92. Money cannot be lent directly to Morahib.
93. Financing against the procurement of goods or commodity requested, directly paid to
supplier in accordance to request of Morahib
94. The request must be in writing with clear specification of goods required along with the
supplier identification and price declared by the supplier.
95. Rab-al-Maal by self or through agent enters into purchase deal with the supplier of Morahib
and negotiates the price to a minimum possible level.
96. Supplier final price and Morahib declare price if differ this difference is part of earning for
Rab-al-Maal as efforts are involved which to be compensated.
97. Rab-al-Maal can also appoint its Moqqadum (agent) who is allowed to receive the delivery
of goods and commodities on behalf of Rab-al-Maal.
98. Morabaha transaction to be completed in two stages.
99. Morabaha sale contracts allow the commodity sold it to the Morahib or in case if these are
refuses to purchase by Morahib then Rab-Al-Maal can sell buy at best suitable price taking
the advantage of Arboon Margin deposit
100. Morabaha financing widely used by the Islamic Banks for various kinds of financing
requirements like manufacturing sector for purchase of machinery, equipment and raw
material etc.
101. Selling in installments of differed Sales Morahib must agree to pay on maturity.
102. This is a contract of sale between Financier and Morahib at a price which includes a profit
margin agreed by both parties.
103. Repayments in installments are specified in the contract as Morabaha Cost-Plus Financing.
104. Differed sale could be at a higher price than the actual one of the commodity
105. The two main techniques in traditional Islamic law for agricultural enterprise are Muzara’ a
share cropping and Musaqa water partnership or tree-sharing.
106. Both techniques typically afford a partnership between capital and labor.
107. Musharka is a contract between two or more persons who launch a business or financial
enterprise to make profit
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66. 108. All partners are entitled to a share in the profit resulting from the project in a ratio which is
mutually agreed upon.
109. In case of loss it is shared exactly in the proportion of capital.
110. All partners have a right to participate in managing the project.
111. Any one can waive the right of participation in favor of partner or partners.
112. In permanent Musharaka form parties of Musharaka participates in equity of project or
transaction and receives share of profit on pro rata basis.
113. In Diminishing Musharaka equity of parties keeps on reducing ultimately the ownership of
the asset on any one or more participants is transfers.
114. Shirkah -Al-Milk (non-contractual) involves co-ownership and form when two or more
persons get joint-ownership of some asset without a formal partnership agreement.
115. If the property is divisible and partners still decide to stick together, it is Shirkah al-Milk
Ikhtiyariyyah (voluntary).
116. If it is indivisible and they are forced to stay together it is characterized as Jabriyyah
(involuntary).
117. Shirkah al-Uqood (contractual partnership) agreement need not necessarily be formal and
written; it could be informal and oral.
118. Al-Uqood is in four types.
119. In Mufawada partners are adults.
120. Inan all partners need not be adults or have an equal share in capital
121. Ijarah is a Lease contract as well as a hire contract.
122. The financier is known as lesser who financer equipment for lessee.
123. Ijarah basically facilitate the cost to be spread for large purchases into affordable
installments for payment.
124. Leasing is the modem technique which can be compared with Islamic technique of Ijarah.
125. Leasing is the contract asset transfer to another for use on an agreed period with financial
consideration.
126. All liabilities emerging from ownership shall be borne by the lesser, but the liabilities
referable to the use of the property shall be borne by the lessee.
127. Leased asset shall remain in the risk of lesser throughout lease period.
128. Any earning, income, profit or benefits, earned, taken or received by wrong means, bad
intentions, shady practices or through wicked involvement are classified as the RIBA.
129. Any amount, earning or income which is taken, over and above to the principal amount,
without keeping risk factor, effort and activity to ________ only a _________ without
sharing in the loss is interest.
True/False
1. Islam is only a religion; it is not a complete political, social, financial & economic system for
the Islamic & Non Islamic Community. F
2. An Islamic economic system is very new system based on social justice and equality in all
respect. F
3. Islamic economic system is an independent system. T
4. In Islamic financial system compounding of saving return are not prohibited. F
5. Conventionally it is found that savers have higher participation in investment and lesser in
receiving in return. F
6. Conventional system restrict low ratio of saver on the saving return and allow higher return
to the saving fund operators. F
7. The Islamic economy is composed of three basic components. T
8. Islamic laws don’t permits three types of ownership, the individual ownership, the state
ownership and the public ownership. F
9. Islam is “Deen” and not the Religion. T
10. Islamic Economic system is based on five principles. F
11. Post Islam Era financial matters were commonly practiced system on the bases on
economical priorities (False)
12. System derived from Quran, Sunnah and Hadiath has the better title that signify motive
and concept of the system as Conventional Financial System (False)
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67. 13. Islamic Banking is limited to banking only and doesn’t cover capital formation, capital
markets, and all types of financial arbitration (False)
14. Conventional financial system deals primarily with the economic and financial aspects of
transactions (True)
15. Interest is an earning on lending of money by lender from Brower on condition that lender
shall charge a fixed amount of money in addition to the principal. (False)
16. Riba has nothing to do with influencing volume of savings. Practically it is rate of return on
investment that determines rate of saving (False)
17. Islamic Financial System do not neglect saving motives and does not stick on to Islam and
nature of human beings and their character (True)
18. In Islamic Financial System Compounding of saving return are not prohibited (False)
19. Exploitation by taking advantage of status and position is an example of interest (False)
20. The Islamic financial system employs concept of participation in enterprise, utilizing funds
at risk on a profit-and- loss-sharing basis (True)
Quiz on Islamic Financial Products
NAME THE FINANCIAL PRODUCTS
1 Profit determined on rents & volume of profit link to payment schedule
2 Selling expenses are the part of cost of the product
3 Arboon is the part of risk participation in trade transaction.
4 Loss of 1st term is cover through 2nd term of profitability in share price
5 The Capital of efforts is paid through Management Fee.
6 Affordability a combination of saving & expense of gross monthly income
7 In cost plus principle financing profit is pre agreed ratio on Net Profit
8 Venture Financing is made under the transaction mode
9 Assets financing is made under the transaction mode of
10 Inflation, holding and price growth can be curtail through
11 Sarif is the partner in financing mode
12 Capital cannot be in commodity of metal currency
13 BMR suits to financing mode fall under
14 Financing is made on the sale and purchase of net worth
15 Financier cannot interfere till the maturity of the transaction
16 Financing cannot be return it is adjusted by profitability
17 Capital contribution through issuance of financial instrument
18 Goods purchased & supplied and profit shared at pre agreed ratio after taking out
Management fee from GP
19 Capital cannot be structured until issuer contribute its equity
21 Rehen
22 Ruqa
23 Hawala
24 Shirakat al Anan
25 Shirakat al Wujuh
26 Jiberia Contract
27 Hawania Financing
28 Contract for water
29 Can be traded in secondary market but cannot be exchange not can be sold
30 The period of contract is not specified, it can continue so long as the will of the parties.The period of contract is not specified, it can continue so long as the will of the parties.
31 Purchase empty boxes from Bank at Rs.40 each and bank made
profit of Rs.5 each
32 Karim enter as partner & purchase shares of company at a price of Rs.12,000 & Bank
Muslim & Zafar earn Rs.1000 each on every share
Mr. Zafar applied for banking facilities from Bank Muslim. After detail appraisal the Bank
Muslim sanction the following facilities Name the Financial Products
33 Rs.10 million for the procurement of Raw Material
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68. 33 Rs.10 million for Capital Assets
34 Rs.10 million short terms financing on case to case basis on 60:40 profit transaction against
viability of the transaction with A, B & C.
35 Rs.20 million working capital for 3 years on buy back agreement under diminishing method.
36 Amount invested at 20:80 and imported Sugar Rs.200 mil & purchased from bank at
Rs.210 mil. (2 Transactions)
37 Added additional boiler at a cost of Rs.300,000 for 3 years.
38 Premium received on each share Rs.15 upon sale to issuer.
39 Acquired delivery van Rs.300,000 on three years payment terms.
40 Capital contributed and invested under BMR (2 Transactions)
1 In cost plus principle financing profit is pre agreed ratio on Net Profit
2 Cost of the product include the Selling expenses
3 Financier is responsible and worker is dutiable in the transaction.
4 Installment less affordable amount is the rent of the month
5 Net divided by base price is per unit share in transaction.
6 Affordability a combination of saving & expense of gross monthly income
7 Total Rent into number of facility month is the Profit of financier
8 Equity Financing develop Venture Financing in a transaction mode
9 Financier is allowed to take profit for buy and sell in the transaction
10 Inflation, holding and price growth can be curtail through
11 Sarif is the partner in financing mode
12 Capital cannot be in commodity or metal currency
13 BMR facility suits to financing mode fall under
14 Financing is made on the sale and purchase of net worth of venture
15 Financier cannot interfere till the maturity of the transaction
16 Financing cannot be return it is adjusted through by profitability
17 Financial instrument for Capital cannot be issued without Equity
18 Profit is share at pre-agreed ratio after deduction of management fee
19 Profit is divided by number of units to ascertain the current unit price
20 Both partner reduce their profit to sell goods less then agreed sale price
21 Capital cannot be in commodity and always in currency
22 Management fee shared among working partners if any partner is silent
23 Musharka financing is for
24 Morabaha Financing is for
25 Ijarah Financing is for
26 Modaraba Financing is for
27 Combination of Ribh and Riba is
B Chose the suitable words from below given words
28 Opposite to Rehen is
29 Rate is applied in the money matter relates to
30 Differed payment against delivery of goods
31 Money is a medium of exchange and not the
32 The value of commodity is determine to the money’s
33 Lending is liability and financing is
34 Advance against delivery of goods
35 P-S=GP-C=NP/ROI =
36 Landing lead to liquidation and financing end at
37 Man money and commodity are the three factors of
38 Financing is an act of money which is classified as the opposite to
39 43Market where money is bought and sold is known as
40 Financing increase capital base and decrease
41 Landing leads to liquidation and
42 Money is Potential capital, b joining with factor of production it become
43 Money cannot be treated as capital it is not in
68

69. 44 Bad practice to earn and gain is called
45 Income over to money share in ration is
46 Part of income that is kept aside to be spent at later time
47 Money is bought and sold and its price is called
48 Shirakat for Good will………….
49 Shirakat for Management Capabilities
50 Shirakat with Authority is for
51 Shirakat Contract for Minor Partner
52 Financing of irrigation
53 Financing for Agricultural
54 Financing for Animal Farming
55 Saving exercises a practical devotion of
56 Rule of Profit & Loss is
57 Investment in financial securities is only valid in shares and not in
58 The purpose of Islamic Banking Trading and these banks called as
59 In investment expenditure are not deducted from capital but from
60 Provision made to encounter losses and are deducted from profit are
Right Words to select
Arboon, By Muajjal, Profit , Lending, inflation , Circulation, Profit, Interest , ownership,
Lending, Commodity, By Salaam, Ownership, Productions, Monitory, Riba, Volume, Capital ,
Profit, Saving, Muzarat, Massraf, Participation, Al Wajuh , Al Inan , , Al Abdan, Hawania, Al
Mufawadah, Reserve, Debentures, Musaqqa , Worship, Profit
Comparison
Modaraba Ability Financing
Musharak Equity Financing
Morabaha Commodity Financing
Ijarah Assets Financing
Modarib Entrepreneur
Modarib Trader
Musharak Partner
Sarif User or Client
Rehen Security or Collateral
Arboon Equity or Advance against transaction
Shirakat Al Wajooh Partnership on Goowill
Shirakat Al Anan Partnership with Minor
Shirakat Al Abdan Partnership on the basis of Skills and
Capability
Shirakat Al Mufadah Partnership in Authority to Financier in
Modaraba Mode
Suftaja Bill of Exchange
Ruqa Cheque or Receipt
Hawala Money Transfer
Zarkari Financing
Quarz Loan
Hawania Financing for Animal Farming
Muzarat Financing for Agriculture
Musaqqa Financing for irrigation and water need and
69

70. use
Qarz-e-Hasana Loan for Human Ability Development
Zakat Socio uplifting of Men to be productive part
of community
Numerical & Solution
MORABAHA
Bank Muslim enter into the import and sale of5000 Mobile phone at a value of Rs.3800
each with additional cost of Per Piece Rs.400 for freight, Insurance Rs.350, Storage 300,
Tax Rs.100 and Selling Expenses Rs.250. Morahib added Rs.380 per peace as ARBOON
Bank Muslim issue Sukuk @ Rs.1000 each and Mr. Khalid brought 4100, Mr.
Muhammad 3800, Mr. Ahad 7600 Mr.Hasan 5100, Mr,Khan 3500. Morahib sold 4000
sets at Rs.6500 and 1000 set at Rs.6100. The Net profit was shared at the ratio of 50:50
which Bank Muslim converted into per Sukuk profit and distributed among investors
1. What is the each Sukuk profit? Rs.128.63
2. What is the profit earned by each investor?
3. What is the average Sale price of each Mobile phone?
4. What is the total purchase price?
5. What is the Total Cost over to the price of the Mobile?
6. What is ROI over to the total purchase amount?
Sukuk Price 1,000.0
Total
Sukuk
Sukuk Subscription 24,100,000.0 24,100.0 3,100,000.0 ROI
Mr. Khalid 4,100,000.0 4,100.0 527,385.9 12.86
Mr. Muhammad 3,800,000.0 3,800.0 488,796.7 12.86
Mr. Ahad 7,600,000.0 7,600.0 977,593.4 12.86
Mr.Hasan 5,100,000.0 5,100.0 656,016.6 12.86
Mr. Khan 3,500,000.0 3,500.0 450,207.5 12.86
Profit /Loss on Sukuk 3,100,000 128.63 3,100,000 12.86
Second Form Quantity Per Piece Total Amount
LPO Amount 5,000 3,800 19,000,000
Freight 5,000 400 2,000,000
Insurance 5,000 350 1,750,000
Storage 5,000 300 1,500,000
Tax 5,000 100 500,000
Selling Expenses 5,000 250 1,250,000
Bank financing 5,000 5,200 26,000,000
Add Arboon 10 380 1,900,000
Bank Financing 5,000 5,200 24,100,000
Total Purchase Price 5,000 5,580 27,900,000
Sale Price 4,000 6,500 26,000,000
Sale Price 1,000 6,200 6,200,000
Total Sale Price 5,000 6,440 32,200,000
Less Less Financing 5,000 5,200 24,100,000
70

71. Gross Profit 5,000 1,620 8,100,000
Less Arboon 5,000 380 (1,900,000)
Net Profit 5,000 1,240 6,200,000
Morahib 50 3,100,000
Bank 50 3,100,000
ROI 22.22
Modaraba
Bank Islami enter into the import and sale of 4000 Watches at a value of Rs.1000 each
with additional cost of Per Piece Rs.100 for freight, Insurance Rs.200, Storage 150, Tax
Rs.50 and Selling Expenses Rs.250. Morahib added Rs.400 per peace as ARBOON. Bank
Muslim issue Sukuk @ Rs.1000 each and Mr. Khalid brought 1800, Mr. Muhammad
1500, Mr. Ahad500 Mr.Hasan 600, Mr,Khan 1000 giving the total financing amount of
Rs.5.4 Million. Morahib sold 4000 sets at Rs.2400 and 1000 set at Rs.2100. The Net
profit was shared at the ratio of 50:50 which Bank Muslim converted into per Sukuk
profit and distributed the profit to the investors.
1. What is the each Sukuk profit?
2. What is the profit earned by each investor?
3. What is the average Sale price of each Mobile phone?
4. What is the total purchase price?
5. What is the Total Cost over to the price of the Mobile?
6. What is ROI over to the total purchase amount?
Sukuk Price 100.0 Total Sukuk
Sukuk Subscription 5,400,000.0 5,400.0 245,000.0 ROI
Mr. Khalid 1,800,000.0 1,800.0 231,535.3 12.86
Mr. Muhammad 1,500,000.0 1,500.0 192,946.1 12.86
Mr. Ahad 500,000.0 500.0 64,315.4 12.86
Mr.Hasan 600,000.0 600.0 77,178.4 12.86
Mr. Khan 1,000,000.0 1,000.0 128,630.7 12.86
Profit /Loss on Sukuk 245,000 45.37 694,606 12.86
Second Form Quantity Per Piece Total Amount
LPO Amount 4,000 1,000 4,000,000
Freight 4,000 100 400,000
Insurance 4,000 200 800,000
Storage 4,000 150 600,000
Tax 4,000 50 200,000
Selling Expenses 4,000 250 1,000,000
Total Purchase Price 4,000 1,750 7,000,000
Arboon 4,000 400 1,600,000
Bank Financing Amount 4,000 1,350 5,400,000
Sale Price 3,000 2,400 7,200,000
Sale Price 1,000 2,100 2,100,000
Total Sale Price 4,000 2,325 9,300,000
Less Financing 4,000 1,750 7,000,000
Gross Profit 4,000 575 2,300,000
Arboon 4,000 400 1,600,000
Net Profit 4,000 175 700,000
Morahib 35 245,000
Bank 65 455,000
ROI 12.96
71

72. Modaraba
Gulf Textile enters into Cotton Morabaha with Bank East & West for the amount of Rs.100
million against the Arboon participation of 20%. The Bank East & West floated Cotton
Trading Sukuk at a Base Price of Rs.100 each Sukuk. University Bank, Bank Community,
Bank Army, United Finance, Money Maker bought and Gulf Textile bought No of Sukuk
10,000, 15,000, 20,000, 20,000, 15,000, 20,000 respectively. Gulf Textile declare the
cost over to the price per bail at Rs.24,000 and cost Freight 250, Insurance 180, Storage
150, Tax 120, Selling Expenses Rs.300. Te Sale Price of 3000 Bails was reported at Rs.
26,000 per bail and 1000 Bails at Rs. 25,950. The transacted reported profit which was
distributed according to Sukuk holding by applying Sukuk Profitability Sharing method.
Give the following information separately:
1. What is the each Sukuk profit?
2. What is the profit earned by each investor?
3. What is the average Sale price of each Mobile phone?
4. What is the total purchase price?
5. What is the Total Cost over to the price of the Mobile?
6. What is ROI over to the total purchase amount?
Sukuk Price 1,000.0 Total Sukuk Profit ROI
Sukuk Subscription 100,000,000 100,000.0 3,800,000.0
University Bank 10,000,000 10,000.0 1,286,307.1 12.86
Bank Community 15,000,000 15,000.0 1,929,460.6 12.86
Bank Army 20,000,000 20,000.0 2,572,614.1 12.86
United Finance 20,000,000 20,000.0 2,572,614.1 12.86
Money Maker 15,000,000 15,000.0 1,929,460.6 12.86
Gulf Textile 20,000,000 20,000.0 2,572,614.1 12.86
Profit /Loss on Sukuk 3,800,000 38.00 10,290,456 10.29
Second Form Quantity Per Piece Total Amount
LPO Amount 4,000 24,000 96,000,000
Freight 4,000 250 1,000,000
Insurance 4,000 180 720,000
Storage 4,000 150 600,000
Tax 4,000 120 480,000
Selling Expenses 4,000 300 1,200,000
Total Purchase Price 4,000 25,000 100,000,000
Bank Financing
Amount 4,000 20,000 80,000,000
Sale Price 3,000 26,000 78,000,000
Sale Price 1,000 25,800 25,800,000
Total Sale Price 4,000 25,950 103,800,000
Less Financing 4,000 25,000 100,000,000
Net Profit 4,000 950 3,800,000
72

73. Ijarah
Bank Islami enter into Ijarah financing through syndicate financing and received contribution of
Rs.1 Million from NBP, Rs.1.75 Million from MCB, Rs.1 Million from HBL, Rs.2.5 Million from
FIB and self Investment Rs.5 million. Gull Fabric agrees pay Arboon 25% of total syndicate
contribution and agree the Repayment period of 48 months at 25% of GMI turnover Rs.1 million.
The equipment was purchase at cost of Rs.15 Million. Workout the transaction and reply the
below given questions in support of your working:
1. What is the Syndicate Amount? Rs.11.25 Mil
2. What is the Ratio of Investment of each investor? 8.89, 15.56, 8.89, 22.22, 44.44
3. What is the Price of the Equipment? Rs.15 mil
4. What is the Affordability Amount against Gross Monthly Turnover? Rs.330,000
5. What is the financing amount against total cost of the equipment? Rs.11,250,000
6. What is Ratio of Investment between Financier and Sarif? 25:75
7. What is the total amount paid by the Sarif for the equipment? 19,590,000
8. What is the saving and investment percentage? 23.44% & 9.56%
9. What is each investor share in profit percentage? 3.63%, 6.35%, 3.63, 9.07, 18.13
10. What is repayment amount? Rs.330,000
Investors Amount Earned % Share
1 NBP 8.89 1,000,000 408,000 40.80 3.63
2 MCB 15.56 1,750,000 714,000 40.80 6.35
3 HBL 8.89 1,000,000 408,000 40.80 3.63
4 FIB 22.22 2,500,000 1,020,000 40.80 9.07
5 Bank Islami 44.44 5,000,000 2,040,000 40.80 18.13
Principle Investment 100 11,250,000 4,590,000 40.80
Total Installment 48
Market Price 15,000,000
Tax - -
Insurance - -
Cost of Equipment 15,000,000
Less Equity (In %) 25.0 3,750,000 Financing %
Ijarah Financing Amount 11,250,000 75.00
Installments for Ownership 48 234,375.00 Profit PA
Rentals in % of Installment 40.80 95,625.00 10.20
Total Monthly Payment 330,000.0
Cost of the Equipment 15,000,000.0
Total Rentals 4,590,000.0
73

74. Total payment 19,590,000.0
Total Cost to Sarif
23,340,000.
0
Gross Monthly Income 1,000,000.0
Recovery Level 33.00 330,000.0
Saving 23.44
Expenses 9.56
Total Burden on Income 33.00
Ijarah
Bank Islami enter into Ijarah financing through syndicate financing and received contribution of
Rs.1 Million for NBP, Rs.1.5 Million from MCB, Rs.1.250 Million from HBL, Rs.3 Million from
FIB and self Investment Rs.4.5 million. Gull Fabric agrees to invest 25% of total syndicate
contribution and agree the Repayment period of 48 months at 25% of Gross Monthly Turnover of
Rs.1.5 million. The equipment was purchase by paying 1% Tax and 4% insurance equal to 1% per
year. Workout the transaction and reply the below given questions in support of your working
What is the Syndicate Amount?
1. What is the Ratio of Investment of each investor
2. What is the Cost Price of the Equipment?
3. What is the Affordability Amount against Gross Monthly Turnover?
4. What is the financing amount against total cost of the equipment?
5. What is Ratio of Investment between Financier and Sarif?
6. What is the total amount paid by the Sarif for the equipment?
7. What is the saving and investment percentage?
8. What is each investor share in profit percentage?
9. What is repayment amount?
Investors Amount Earned % Share
1 NBP 8.89 1,000,000 408,000 40.80 3.63
2 MCB 13.33 1,500,000 612,000 40.80 5.44
3 HBL 11.11 1,250,000 510,000 40.80 4.53
4 FIB 26.67 3,000,000 1,224,000 40.80 10.88
5 Massraf Pakistan 40.00 4,500,000 1,836,000 40.80 16.32
Principle Investment 100 11,250,000 4,590,000 40.80
Total Installment 48
Market Price 15,000,000
Tax - -
Insurance - -
Cost of Equipment 15,000,000
Less Equity (In %) 25.0 3,750,000 Financing %
Ijarah Financing Amount 11,250,000 75.00
Installments for Ownership 48 234,375.00
Rentals in % of Installment 60.00 140,625.00
74

75. Total Monthly Payment 375,000.0
Cost of the Equipment 15,000,000.0
Total Rentals 6,750,000.0
Total payment 21,750,000.0
Total Cost to Sarif 25,500,000.0
Gross Monthly Income 1,500,000.0
Recovery Level 25.00 375,000.0
Saving 15.63
Expenses 9.38
Total Burden on Income 25.00
Ijarah
NBP. HBL, UBL, ABL and Massraf Pakistan enter into syndicate financing to facilitate PTCL
Telecommunication Instrument under Ijarah mode at a cost of Rs.12 million. Each bank
participated with Rs. 1 mil, Rs.2 mil, Rs.2.5 Mil, Rs.3 Mil and Rs.1.5 mil. Profit and loss is agreed
in according to the ratio of participation. PTCL contributed 20% and declared its GMI through
this instrument Rs.1,000,000. Period of facility is 5 and affordability value declared at 30% of
GMI . In addition PTCL agree to pay Insurance and Taxes at their own cost and expense.
1. What are the Ratio of Investment of each investor
2. What is the Cost Price of the Equipment?
3. What is the Affordability Amount against Gross Monthly Turnover?
4. What is the financing amount against total cost of the equipment?
5. What is Ratio of Investment between Financier and Sarif?
6. What is the total amount paid by the Sarif for the equipment?
7. What is the saving and investment percentage?
8. What is each investor share in profit percentage?
9. What is repayment amount?
10. What is repayment amount
Investors Amount Earned % Share
1 NBP 11.76 1,200,000 540,000 45.00 4.80
2 MCB 19.61 2,000,000 900,000 45.00 8.00
3 HBL 24.51 2,500,000 1,125,000 45.00 10.00
4 FIB 29.41 3,000,000 1,350,000 45.00 12.00
5 Massraf Pakistan 14.71 1,500,000 675,000 45.00 6.00
Principle Investment 100 10,200,000 4,590,000 40.80
Total Installment 60
Market Price 12,000,000
Cost of Equipment 12,000,000
Less Equity (In %) 15.0 1,800,000
Ijarah Financing Amount 10,200,000
Installments for Ownership 60 170,000.00
75

76. Rentals in % of Installment 76.47 130,000.00
Total Monthly Payment 300,000.0
Cost of the Equipment 12,000,000.0
Total Rentals 7,800,000.0 76.47
Total payment 19,800,000.0 6.37
Total Cost to Sarif 21,600,000.0
Gross Monthly Income 1,000,000.0
Recovery Level 30.00 300,000.0
Saving 17.00
Expenses 13.00
Total Burden on Income 30.00
Modaraba
Muslim Bank Finance Mr. Ahad Rs.10 million, Mr. Hasan 12 million, Mr. Muhammad Rs.15
million and Mr. Siddiqi Rs.7 million For their transaction under 10% Management Fee and Profit
Sharing at 40:60, 50:50, 60:40 and 30:70 respectively. After Maturity the sales proceeds
reported as Rs.15.5 million, Rs.14 million, Rs.19 million and Rs.4.5 million respectively. Make the
necessary entries to work out the profit and loss sharing and give the following answers.
1. What is Bank Muslim Profit Rs.640,000
2. What is the loss reported by Mr. Siddiqi Rs.5,500,000
3. What is the Profit % of Bank Muslim 9.48%
4. What is the total earning of each Modarib Rs.3.13 Mi, Rs.1.7M , Rs.3.16 M
5. Write step by step process of this transaction each
Bank Muslim Investment 37,000,000
Bank Muslim Profit 3,510,000
Investment Amount 10,000,000 5,500,000
1 Mr. Ahad 40 1,580,000 3,950,000
Bank Muslim 60 2,370,000
2 Investment 1 12,000,000 2,000,000
Mr. Hasan 50 300,000 600,000
Bank Muslim 50 300,000
3 Investment 2 15,000,000 4,000,000
Mr. Muhammad 60 1,260,000 2,100,000
Bank Muslim 40 840,000
4 Investment 3 7,000,000 (2,500,000)
Mr. Siddiqi 30 -
Bank Muslim 70 -
76

77. Sales Proceed Reported at Maturity
1 Mr. Ahad 10 15,500,000 1,550,000
2 Mr. Hasan 10 14,000,000 1,400,000
3 Mr. Muhammad 10 19,000,000 1,900,000
4 Mr. Siddiqi 10 4,500,000 (2,500,000)
Modaraba
Mr. Ayub Finance Mr. Ahad Rs.15 million, Mr. Hasan 15 million, Mr. Muhammad Rs.15 million
and Mr. Siddiqi Rs.15 million For their transaction under 10% Management Fee and Profit
Sharing at 60:40, 30:70, 45:55 and 20:80 respectively. After Maturity the sales proceeds
reported as Rs.21 million, Rs.19 million, Rs.29 million and Rs.10 million respectively. Make the
necessary entries to workout the profit and loss sharing and give the following answers.
1. What is Mr. Ahad Profit
2. What is the loss reported by Mr. Siddiqi
3. What is the Profit % of Mr. Ahad
4. What is the total earning of each Modarib
5. Write step by step process of this transaction each
Mr. Ayub Investment 60,000,000
Mr. Ayub Profit 2,965,000
Mr. Ayub Investment 15,000,000 6,000,000
1 Muslim Bank 60 2,340,000 3,900,000
Mr. Ahad 40 1,560,000
2 Investment 1 15,000,000 4,000,000
Mr. Ayub Investment 30 630,000 2,100,000
Mr. Hasan 70 1,470,000
3 Investment 2 15,000,000 14,000,000
Mr. Ayub Investment 45 4,995,000 11,100,000
Mr. Muhammad 55 6,105,000
4 Investment 3 15,000,000 (5,000,000)
Mr. Ayub Investment 20 -
Mr. Siddiqi 80 -
Sales Proceed Reported
at Maturity
1 Mr. Ahad 10 21,000,000 2,100,000
2 Mr. Hasan 10 19,000,000 1,900,000
3 Mr. Muhammad 10 29,000,000 2,900,000
77

78. 4 Mr. Siddiqi 10 10,000,000 (5,000,000)
Modaraba
Mutamid Modaraba enter into Modaraba Financing with Mr. Salem for Rs.50 million at 60:40
without management fee. Mr. Salem enter into three financing transaction with Mr. Hasan Rs.10
million at 10% Management Fee, 60:40 profit sharing. Mr. Sultan Rs.15 million at 45:55 profit
sharing and 10 % Management fee Mr. Qasim Rs.25 million at 30:70 profit sharing and 10%
Management fee. On maturity the sales proceeds declared by the three Modarib were Rs.15
million, Rs.26 million &d Rs.19 million respectively. Workout profit & loss sharing and answer
below given answers.
1. What is Mutamid Modaraba Profit Amount & %
2. What is the loss Amount and % reported by Mr. Qasim
3. What is the total profit amount and % reported in the transaction by Modarib
4. What is the total earning of each Modarib
5. Write step by step process of this transaction each
Investment amount 50,000,000 6,020,000
Mutamid Modaraba 60 1,212,000 (4,000,000)
Mr. Salem Modarib 40 808,000 2,020,000
Investment 10,000,000 5,000,000
1 Mr. Hasan 60 2,100,000 3,500,000
Mr. Salem 40 1,400,000
2 Investment 15,000,000 11,000,000
Mr. Sultan 45 3,780,000 8,400,000
Mr. Salem 55 4,620,000
4 Investment 25,000,000 (4,000,000)
Mr. Qasim 20 -
Mr. Salem 80 -
1 Mr. Hasan 10 15,000,000 1,500,000
2 Mr. Sultan 10 26,000,000 2,600,000
78

79. 3 Mr. Qasim 10 21,000,000 (4,000,000)
Musharka
Iqra Corp. applied Working Capital financing of Rs.20 million from Massraf Al Pakistan and
declared its net worth of Rs.100 million divided into Unit at a value of Rs.100 each. During the
facility period the following results were reported by the company. 1st Year Profit Rs.500,000,
2nd Year Profit Rs.600,000, 3rd Year loss Rs.700,000 and 4th Year Profit Rs.900,000. After
receiving the 4th Year Profit Iqra Corp. purchase the total units from Massraf Al Pakistan at the
prevailing rate of the year of purchase.
Net worth of Sponsors 100,000,000 1,000,000 Base Share Price
Financier 20,000,000 200,000 100.00
Sponsors 800,000
1st Year Profit/loss 500,000.0
2nd Year Profit/loss 600,000.0
3rd Year Profit/loss (700,000.0)
4th Year Profit/Loss 900,000.0
Description Share Holding Share Profit Profit
1st Year Profit/loss 1,000,000 100.00 100.500
Financier 200,000 100.50000 20,100,000
Net worth after Finance 800,000 100.50000 80,400,000
Profit 500,000.0 0.500
2nd Year Profit/loss 1,000,000 100.00 100.600
Financier 200,000 100.60000 20,120,000
Net worth after Finance 800,000 100.60000 80,480,000
Profit 600,000.0 0.600
79

80. 3rd Year Profit/loss 1,000,000 100.00 99.300
Financier 200,000 99.30000 19,860,000
Net worth after Finance 800,000 99.30000 79,440,000
Profit (700,000.0) (0.700)
4th Year Profit/loss 1,000,000 99.30 100.200
Financier 200,000 100.20000 20,040,000
Net worth after Finance 800,000 100.20000 80,160,000
Profit 900,000.0 0.900
Sukuk
Scan Industries received an order from its principles for the value of Rs.1.910 million for a supply
of machinery parts. Scan with the assistance of its Bank Islami enter into Sukuk subscription and
set a base price per Sukuk at Rs.1000 and issued 1910 Sukuk out of which Scan Industries
purchase 250 Sukuk as an equity of the transaction and rest were sold to the below given buyer.
At the maturity the profit was realized and distributed at per Sukuk value. Working of the
transaction is given below.
Sukuk Price 1,000.00 1,270.29
Number of Sukuk 1,910.00
Per Sukuk Profit 270.29 Total
Sukuk Holders Amount No of Sukuk Profit Earn PAR Amount
Hasan 140,000 140.00 37,840.31 1.981 177,840.31
Ghulam Mohammad 150,000 150.00 40,543.19 2.123 190,543.19
Ayesha 350,000 350.00 94,600.79 4.953 444,600.79
Seema 120,000 120.00 32,434.55 1.698 152,434.55
Saboor 130,000 130.00 35,137.43 1.840 165,137.43
Abdul Malik 150,000 150.00 40,543.19 2.123 190,543.19
Abdul Wakeel 110,000 110.00 29,731.68 1.557 139,731.68
Bank Islami 160,000 160.00 43,246.07 2.264 203,246.07
Bank Muslim 170,000 170.00 45,948.95 2.406 215,948.95
Bank Pakistan 180,000 180.00 48,651.83 2.547 228,651.83
Scan Industries 250,000 250.00 67,571.99 3.538 317,571.99
Total
Subscription 1,910,000 1,503.60 516,250.00 27.029 2,426,250.00
Sales Proceeds 2,500,000
Gross Profit 590,000 Investment 1,910,000
Withholding Tax 73,750 12.50 Profit Earn 516,250
Net Profit & ROI 516,250 27.029 Total 2,426,250
FORMULAS
80

81. 1 Number of Sukuk = Investment Amount / Sukuk Price
2 Gross Profit = Total Subscription - Total Proceeds
3 Net Profit = Gross Profit - Cost
4 Profit Earn = No of Sukuk Holding X Per Sukuk Declare Profit
5 Per Sukuk Profit = Net Profit / Number of Sukuk
6 PAR (Profit at Ratio) = Profit Earn / 100 / Total Subscription
7 Total Amount = Investment + Profit Earn
How the Numerical Works
JARA Financing Equipment Financing
Trim Sheet for Ijarah Financing
Machine price Rs.5 million
Arboon 20%
Period 36 month
Gross Monthly Income Rs.400,000
Affordability at 30%
Tax 2% & Insurance 1% per year
1. What is the cost price of the equipment?
2. What is the financing amount?
3. What is the rental amount?
4. What is the total rental?
5. What is the Expense and Saving percentage
Total Installment 36
Market Price 600,000
Yearly Insurance (In %) 3 54,000
Rate X Principle /100 x No of Years = Total
insurance Cost
Income Tax. 1 6,000 Rate X Principle /100 = Total Tax Cost
Cost of Vehicle 660,000 Market Price + Cost
Less Equity (Arboon) 20 120,000 Market Price X Equity Rate /100
Ijara Financing Amount 540,000 Cost of Equipment - Equity
Installment for Ownership 36 15,000.0 Cost of Equipment / Period
Rentals in % of Installment 50 7,500.0 Affordability Amount - Installment Amount
Repayment Monthly 22,500.0 Monthly Installment + Monthly Rentals
Total payment 36 810,000.0 Market Price+Cost+Rental
Financing Amount 540,000.0 Market Price-Arboon+Cost =FA
Total Rentals Paid 270,000.0 Rent Amount x No Installment = TR
Arboon 120,000.0 Market Price X Equity Rate /100
Total Ijarah Adjustment 930,000 FA+TR+Arboon=Total Amount Paid
Gross Monthly Income 75,000
Recovery Level 30 22,500 GMI x AR /100
81

82. Saving 20.00 MI x 100/ GMI
Expenses 10.00 MR x 100/ GMI
Total Burden on Income 30.00
Financier Monthly Profit 1.4 7,500.0 Total Rental % / Total Period
Yearly Profit 16.7 90,000.0 Monthly Profit % x 12
total Period Profit 50.0 270,000.0 Monthly Profit % x Total Period
Sukuk
Ahmed 12%, Mr. Muhammad 15%, Mr. Siddiqi 25%, Mr. Kashif 8%, Bank Islami 11% and
Financial Institution Group 19% @ Rs.20,000 per Sukuk. The total subscription amount was
invested with Sitara Chemical Company at 10% Management Fee and Profit Sharing 40:60. On
the maturity the Sitara Chemical Declared 30% gross profit over the Capital. After deduction of
10% Management Fee and 40% Sitara Chemical Company profit the Net Profit was distributed
among the investors according to their ratio of investment. Give the following details: (Format to
be followed)
1. What is the total number of Sukuk issued?
2. What was the Sukuk price at the maturity?
3. What was the Gross Profit Amount and Share of Profit amount of Bank Islami?
4. What is the profit amount of each investor?
5. Explain step by step working of this transaction?
Sukuk Value of
Total
Amount No of Price
Sukuk of subscription Sukuk
Sukuk Subscription 100,000 500,000,000 5,000 5,000.00
Sukuk Holders Invest Subscription Sukuk Sukuk ROI
Ratio 500,000,000 Holdings Profit
1 Mr. Hasan 10 50,000,000 500 (29,452,500) (58.91)
2 Mr. Ahmed 12 60,000,000 600 (35,343,000) (58.91)
3 Mr.Muhammad 15 75,000,000 750 (44,178,750) (58.91)
4 Mr. Siddiqui 25 125,000,000 1,250 (73,631,250) (58.91)
5 Mr.Kashif 8 40,000,000 400 (23,562,000) (58.91)
6 Bank Islami 11 55,000,000 550 (32,397,750) (58.91)
7 Financial Group 19 95,000,000 950 (55,959,750) (58.91)
82

83. Total 100 500,000,000 5,000 (294,525,000)
Principal investment 500,000,000
Less Sales & Services 32,500,000
Gross Profit (467,500,000)
Less Management Fee 10 (46,750,000) (420,750,000)
Modarib Profit 30 (126,225,000)
Net Profit (294,525,000)
Profit on each Sukuk (58,905.00) -58.905
1 No of Sukuk 1250
2
Sukuk Price at
Maturity 21,250
3 Gross Profit 7,500,000 519,750
83