Islamic Finance Revision Notes v 5

8/2/2019 Islamic Finance Revision Notes v 5

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Islamic Finance

Revision Notes

Shujau

1-2012 Shujko


2/36

Topics

1. Concept of Brotherhood

2. What is Islamic Finance

3. Riba

4. Gharar

5. Differences between Riba and Profit

6. Five principles of Muamalah

7. qard ul-hasan

8. Mudarabah (equity)

9. Bai Bithaman Ajil-BBA

10. Musharaka (equity)

11. Musharakah Mutanaqisah

12. Ijarah

13. Ijarah Muntohia Bitamleek

14. Al bai principles- sales & purchase

15. Difficulty for islamic banking

16. Late charge

17. Parallel Istisna

18. Bay al dayn

-2011 Shujko 2


3/36

3-2011 Shujko

Principles of Islamic FM

Goal of a firm

Goal of a firm

-2011 Shujko 3

Profit max.

In shariah instruments

1. Profit maxi.

2. Wealth maxi.

3. Profit & wealth max.

From tislamic

perspective

1. Based on shariah

2. To ensure human well being

& social eco. Justice

3. Wealth belongs to

Godhumanmearely

trustees of his wealth

4. Profit sharing or distribution

5. Mandatory transfer of

profit/wealth from better

offfs to worse off6. Zakat

1. Mudharabah

2. Shirkah3. Murabahah

4. Musharakah

1. Profit maximization

2. Normal & abnormal profits

3. Goals of the firm

4. Islamic view on profit

5. Alternative Suggestion by

Muslims

6. Multiplicity of objectives7. Implication on the economy

8. Profit maximization that is

not allowed

Other topics

Islamic view

point &

alternative

Islamic view point:

1. Concept of Halal & haram

2. Islam exhorts its belivers to

excel in this life as well as in

the hereafter. . Quran 2:198,62:10

3. Conflic arises bet. Wealth &

virtue

Alternatives:

1. Satisfactory profit

2. No profit.injury to the

consumers or competitors

3. Not be maxi. .good of

soceity & to satisfy the needy.


4/36

4-2011 Shujko

What is Islamic Finance

Definition

-2011 Shujko 4

Principles

Reason for

growth

Features:

1. Basis of IF denounces

usury or riba

2. Asset based as opposed

to currency based

3. Based on element of

shariah

Principles:

1. Prohibition or Taking interest

2. Risk sharing

3. Prohibition of speculative

beh. Gharar

4. Do not violate the rules of

shariah &

boardsalcohol,pork

5. Money is seen as potential

capital.

Future

challenges

Growth Reason:

1. To opr in shariah compliant

products

2. Increase in oild wealth & their

influence in decision making

3. Increase in compet. & ethical

focus

4. Fasted growing religion & 2

largest religion

Shariah compliant current &

saving account

1. Absence of interest

2. Profit sharing

3. Qardhassan- interest free

loan

Challenges:1. What is the overall demand

2. Are std. set by shariah scholars

3. What risks associated with IF

4. Need future regulation

5. To create awareness &

understanding

6. Danger of muslims not taking IF

products

Musharaka (equity

participation):

1. Parties involved

contribute in varying

degrees of assets,

techincal expertise.

2. All parties invest in

capital

Murabaha (cost plus):

1. Undertaking a trade with a

markup

2. Used for shrot-term financing

3. E.g. bank pur. An asset fr

supplier with the resale based

on the cost plus an agreed

markup. Mostly on financing

property.

4. Fixed markup identified at the

outset

Instruments

Ijara (leasing):

1. One party lease an asset

for a specific amount of

time & cost from another

party, usually a bank.

2. Bank bear all the risk

Mudaraba (partnership

financing):

1. Once party provides

the labour while the

other provides the

capital

Istinaa (commissioned

fanufacture)

1. Solution for

manufacture of goods

2. With a promise to

produce a specific

product that can be

made under certain

agreed specification at

a determined price

and on a fiixed date

Shirkah:

is a business partnership where

two or more partis pools their

financial resources and expertise.

The profit ratio is also

predetermined. Losses are shared

in accordance with the financial

resources provided for the

project.Salam:

This product is based on the Islamic

financing structure of Salam, which

is a sale contract whereby the

purchaser (DIB) pays the price in

advance, and the seller (customer)

delivers goods with certain

specifications and certain quantity

on agreed future dates


5/36

5-2011 Shujko

Riba

Definition

-2011 Shujko 5

Prohibition

of Riba-

QuranProhibition of

Riba- Sunnah

Any interest or

predetermined payment

above and over the actual

amount of principle is

equivalent to Riba and is

strongly prohibited by the

Quran and the Sunnah

1. Al-Rum, 30:39

2. Al-Nisa, 4:161

3. Al-Imran, 3:130-2

4. (Al-Baqarah, 2:275-81

2:275 Allah has permitted tradeand has forbidden interest

Consensus

of Scholars

Hazrat Abu Hurairah radiyallahu

anhu reported that the Messenger

of Allah said: I came across some

people in the night in which I was

taken to the heavens.Their

stomachs were like houses wherein

there were serpents,which could be

seen from the front of thestomachs. I asked :O Gabriel! Who

are these people? He replied these

are those who devoured usury

Riba al-qard:

This is the stipulated interest

which the lender takes from the

borrower in consideration of the

time given to the borrower to pay

back the capital. It is HARAM

based on the Quran and the

Sunnah and the consensus of

Muslim scholars.

1. establish justice

2. The interest system is inherently

incapable of allocating available

liquid funds among firms

3. Risk sharing

4. No prift sharingonly risk

5. Goodwill affectbenefit to the

rich people.

6. Without taking any riks gets

money

7. Discourage productive work.

Riba al-buyu

This leads to the second use of

the word riba. It is also known as

riba al-buyu (riba on sale). The

most common form of riba al-

buyu is is known as riba al-nasiah,

which stands for increase in

exchange for an extension of

repayment period

Types of Riba

Riba al-fadl:

riba arising from exchange

of commodities

Gold for gold, silver for

silver, ....like for like, payment

made hand to hand. If anyone

gives more or asks for more,

he has dealt in riba. The

receiver and giver are equally

guilty

Majority of scholars prefer a

restrictive definition

Scholars who allow a

reasonable rate of interest

and prohibit only usury-

MarufDawalibi

Sheikh Tantawi, the Grand

Mufti of Egypt...supporting

Judaism prohibits usury for

two reasons

Many early Christian

theologians such as St.

Ambrose of Milan (d. 397 AD)

strongly supported forbidding

usury

Other

religions

Rations for

prohibition


6/36

Discounting

definition

calculating the present value of a

future amount 1. Bai dayn

Check the other slide on bai dayn

Project Discounting

from the Islamic

Perspective

1. Islam does not consider the

time value of money as tool of

earning

2. . However, Bay al-Muajjaland

Bay al-Salam are permissible in

Islamic law

1 Fi i l d N fi i l


7/36

Risk and Return

definition

Can define as possibility of

loss/damage to money/property

risk is a condition in which there is a

possibility of an adverse deviation

from a desired outcome that is

expected or hoped for

synonymous to the probability of a

known loss

Types of Risk

in Islamic

Finance

Application

Murabahah is most widely used

Islamic Finance Contract

- late payment

- Contemporary contract

Risks in Salam

Counter party risk

Commodities requireadditional cost for storage

Risks in Istisna financing

Countrer party risk

Default risk

Risks in Musharakah

Credit risk

Moral Hazard

Systemic instability

Components

of Islamic

Law Uncertainty (gharar)

- allows minor uncertainity

Inequality (Ghubun)

-Ghubun yasir (insignificant)

-Ghubun Fahish (significant)

Deception (Taghrir)

-Taghrir Qawli (related to

statements)

- Taghrir fili (deeds)

Classification

of Risk

1. Financial and Non-financial

2. Static and Dynamic Risk

-Dynamic- related to economy,

price level, taste, less

predictable,

-Static- Loss due to dishonesty-

difficult to prevent

3 . Fundamental and Particular risk

- Fundamental-not related toparticular individual, not

controllable, PEST

- particular risk: loss arise out of

individual events.

4. Pure and speculative risks

- speculative: gabling

- person who bough machine

Peril &

Hazard

1. Peril: serious danger, fir,

windstorm

2. Hazard: thing ahat can be

dangerous or cause damage.

pollution

Types of risk

1. Risk of non-compliance w r ift

2. Credit risk

3. Country risk

4. Investment risk

5. Liquidity risk

6. Operation risk

7. Market risk8. Rate of return risk


8/36

8-2011 Shujko

Gharar

Definition

-2011 Shujko 8

Prohibition

of Gharar

Gharar is generally

translated as risk, hazard or

uncertainty.

Metwally (2006) also

defined Gharar as

speculative transactions,

which are harmful to society

designed to prevent the weak

from being exploited

Classic

examples

substantial gharar (Gharar fahish):

prohibited

1. to ensure full consent and

satisfaction of the parties in a

contract.

2. protects against unexpected

losses and the possible

disagreements regarding

qualities or incompleteness of

information.

trivial gharar (Gharar yasir:

Tolerated

Types of

Garar

Classic examples

ofGhararare the sale of a fish

that is still in the sea, birds in

the sky, an unborn calf, and

un-ripened fruits on the tree

Rations for

prohibition


9/36

Differences between Riba and Profit

-2011 Shujko 9

Riba Profit

Definition Stipulated surplus from debt. It

exists as long as the

exchange/transaction gives rise to

inequality of counter values (al-

fadl) and determent in time of

exchange (al-nasiah).

Profit is the return on trade,

which is the result of

difference between revenue and

cost, encompassing the effort and

risk undertaken by the

entrepreneur.

Prohibition Prohibited in Islam Permitted in Islam

Counter-

values

Unequal counter-values Equal counter-values

Wealth

creation

Deals only with money, hence no

creation of additional stock of

wealth

Deals with real assets thus creates

real wealth from:

(a) Additional values from goods

sold.

(b) Increase in utility through

exchange

Does not include real investment

Will increase in time


10/36

Other topics

Five principles ofMuamalah1. Intention-

2. Hardship defect faciltiy.choice of two choose the easy one

3. Harm should not be inflicted or reciprocated

4. Certainty cannot be removed by doubt5. Customs. E.g practices

Principles ofmuamalah1. Mutual agreement

2. Avoidance of Prohibited items: sales & purchase in any

transaction, riba,,..Halaal contract3. Avoidance Ghararuncertainty, doubt

4. Capacity of parties.

5. Existing of subject matter

-2011 Shujko 10


11/36

11-2011 Shujko

qard ul-hasan

Definition

-2011 Shujko 11

Difference

bet Qh&

Sadaqah objectives

as a loan which is returned

at the end of the agreed

period without any interest

or share in the profit or loss

of the business

1. Repaid vs pure charity2. 18 times vs 10 times

Characteristics

1. To help the needy

2. Establish better relationship among

the poor & the rich people

3. Mobilise wealth among people in the

society

4. To perfrom a good deed..by s.a.w

5. Strengthen the nation economy

6. Facilitate the poor to create new job

mkt & bus. Venture7. Establish caring society

8. Remove social & economical

discrimination in soeicety

1. Legal capacity of both parties

2. Offer & acceptance

3. Date of payment

4. Contract should be writing

5. Two witnesses

1. Misinterpretation of concept

2. .Administrative

cost/management fee

3. Inflation

Rules

1. flexible ..no collateral.

2. Documentary procedures simple

3. Loans are usually small in size,

approval procedures rapid and

disbursement quick

4. no interest charges involved

5. The fund has easy access to capital

contributors and borrowers because

of its local base

6. The fund managers, who are drawn

from capital contributors, are fullyaccountable

Dubai Islamic Bank offers al-

qard ul-hasan

Islamic Republic of Iran

examples

Critical

issues

1 S l i h ld b d t i d


12/36

12-2011 Shujko

Murabaha

Definition

-2011 Shujko 12

Difference

w other

sales

Is a sales of a commodity at the price

the seller has purchased it, with the

addition of a stated profit known to both

the seller & buyer.

It is a cost-plus-profit sales.

Conditions:

1. the seller discloses the cost to thebuyer

2. and adds a known profit3. Payment: at spot, installment, in lump

sum after certain time.4. No rabaawi items, No burter

systems..gold for gold

5. Valid contractshariah complaint

1. Sale price should be determined.

2. Sale must be unconditional.

3. Assets to be sold:a) Should not be used for un-

Islamic purpose.b) Should be in ownership of the

seller at the time of sale; physical orconstructive.5. Asset to be sold must exist.

6. Contracting parties7. Offer/ acceptance

Elements

5 Steps

1. Based on trust (amanah),

cost/profit known

2. Musawamah- cost/pfofit is not

known

Conditions

Quran &

sunnah

1. Quran- And Allah has permitted

trade 2:275

2. Phrophet (S.A.W) purchase a femal

camel from abu bakruse as

transportation to mirage to

Madinah.

1. Customer & financial institu sign a

master agreemnt

2. FI appoint the customer as an agent3. Customer purchase on behalf of FI

4. Inform to FI about the purchase

5. FI accept the offer and sales are

concluded & ownership is

transferred

Defaults on

payment

1. Price cannot be increased.

2. In malaysia 1% can be charged once

3. Middle east payment on

charitable fund

4. Not stated in income

5. Can claim actual loss

Early

settlement

Majority of jurists says it

is not permissible to give

discounts.

Issues

1. The issue of promise

2. Using collateral

3. The guarantee third party

4. Rescheduling of payment

5. Securitization

Prohibited

element

Financing overhead exp

To obtain fund without intention

Third party conttract

Check the footnotes

Th fi h i i i d i d h i


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13-2011 Shujko

Mudarabah (equity)

Definition

Mudarabah

-2011 Shujko 13

Types

mudarabah

A form of partnership where one party

provides the funds while the other

party provides expertise.

The people who bring in money are

called "Rab-ul-Maal"

while the management and work is an

exclusive responsibility of the "Mudarib".

1. Al-Mudarabah Al-Muqayyada:

Rab-ul-Maal may specify a particular business or a

particular place for the mudarib, in which case

he shall invest the money in that particular

business or place. This is called Al Mudarabah AlMuqayyadah (restricted Mudarabah)

1. Credit risk

2. Country risk

3. Operation

4. Process

Risk

characteristic

The profit sharing ratio is determined at the time

of entering into the Mudarabah agreement

whereas in case of loss it is borne by the Rab-ul-

Mal only. 1. 2. Al Mudarabah Al Mutlaqah: However if Rab-

ul-maal gives full freedom to Mudarib to

undertake whatever business he deems fit, this

is called Al Mudarabah Al Mutlaqah

(unrestricted Mudarabah).

In relation to

nature of the contract :

Terminate unilaterally.

Cannot terminate whn commence ...

Capital:

Rabul Mal

Money or assets

, Management Shariah complainte activities

Exclusive mgt right.

Loss sharing.

profit sharing

Primary objective

Agreed rate

No pre-determined condition

Losses

liability exceeds the value of the assets at a

point

Negligence can cover loss.

Rules

mudarabah

Quran &

sunnah

1. Quran: others travelling

through the land, seeking

Allahs bounty 73:20.

2. Has be practised before the

prohpets S.A.W received the

first revelaation and did not

rise or show any objections.

Enhanced

features

1. Origination & Execution

2. Third party guarantee

3. Termination


14/36

14-2011 Shujko

Bai Bithaman Ajil

Definition

-2011 Shujko 14

characteristics

a contract of deferred payment sale i.e.

the sale of goods on deferred payment

basis at an agreed selling price, which

includes a profit margin agreed by both

partiesAll the components to determine the selling price

have to be fixed because the selling price has to

be fixed at the time the contract is made.

Hence, the profit rate for the BBA financing isfixed throughout the period of financing

BBA Vs

conventional

1. Customer identifies the asset to be

purchased.

2. Bank determines the requirements of the

customer, in relation to the financing

period and nature of repayment.

3. Bank purchases the assets concerned.

4. Bank subsequently sells the relevantasset/property to the customer at an

agreed price, which consist of:

Actual cost of the asset to the bank i.e.

financing amount; banks profit margin.

Customer is to settle the payment by

installment payment through out the

financing /period

Conv:

loan is given on the basis of

debtor/creditor relationship

amount of loan is being charged

interest

quoted at a certain percentage

above the base lending rate (BLR)

over the loan period

BBA:

a seller-buyer relationship will be

established and the selling price is

fixed upfront

agreed installments will remain

fixed throughout the financing

perio

customers interest rate risk is

eliminated

BBA house

financing

1. Letter of offer

2. Property sale agreement

3. Property purchase agreement

4. Legal charge or,

5. Assignment and power of

attorney

6. Or any other Islamic financing

documents

legal

documents

advantages

1. The total cost of the property purchased is determined at

the time of contract or aqad.

2. There is no additional or hidden cost that will change

the price of the property purchased.

3. The transaction is transparent.

4. There is no element of uncertainties or Gharar.

5. Customers will know exactly when the financing will end.

6. There will be no compounding of arrears and outstanding

penalty charges.

7. Presently, there is no additional/penalty charge on

outstanding miscellaneous charges.

8. Repayment is not subjected to fluctuation of the BLR.

9. Allows better financial planning.

The elements of Musharakah includes:


15/36

15-2011 Shujko

Musharaka (equity)

Definition

-2011 Shujko 15

Elements &

conditions

The elements ofMusharakah includes:

offer and acceptance,

Contracting parties (two or more

contracting parties),

subject matter of the agreement (capital

and work).

cash, gold, silver or its equivalent

in value.

capital may consist of trading

assets such as goods, property and

equipment.

Types

1. Musharaka inan- unequal shares

partnership

2. Mufawadah- equal shares

partnership

Rules

Musharakah means relationship

established under acontract by the

mutual consent of the parties

for sharing of profits and losses,

arising from a jointenterprise or

venture.

Investments come from all

partners/shareholdershereinafter

referred to as partners.

Profits shall be distributed in

the proportion mutuallyagreed In

the contract.

Exisiting of parters

Capability of Partners

Distribution of profit

Sharing losses

Termination of musharakah

rules with

regard to p&l

a relationship established under a

contract by the mutual

consent of the parties for sharing of

profits and losses in the joint business.

1. Legal capacity of both parties

2. Offer & acceptance

3. Date of payment

4. Contract should be writing

5. Two witnesses

1. profit sharing ratio for each partner must be determined in proportion to the

actual profit accrued

2. not allowed to fix a lump sum amount for anyone of the partners or any rate

of profit tied up with his investment

3. profit based on his capital percentage

4. If investor is working his profit sharing could be higher

5. Sleeping partnr profit sharing should not be more then cpatial

contribution

1. Credit risk

2. Country risk

3. Operation

4. Process

Risk

characteristic

Loss is distributed exactly

according to the ratio of

investment and the profit is

divided according to the

agreement of the partners

Quran &

sunnah

1. Quran: help one another in

righteousness and piety 5:2

2. Sunnah: I am the 3 in parthner

as long as ther is no defector.


16/36

Musharakah Mutanaqisah

-2011 Shujko 16

Check the footnotes


17/36

17-2011 Shujko

Ijarah

Definition

-2011 Shujko 17

Ijara (leasing):

1. One party lease an asset

for a specific amount of

time & cost from another

party, usually a bank.

2. Bank bear all the risk

Quran &

sunnah

1. Quran: o my father, Hire

him, varily the best of

men for you to hire is the

strong, the trustworthy

28:267

2. Sunnah: pay the hired

worker his wages before

his sweat dries off

Features

1. Usufruct & services

2. Asset.

3. Ownership

4. Usage rights

5. Liabi lities

6. Lease period7. Rental amount

Enhanced

Features of

the contract

1. Default & compensation

2. Promise

3. Cancellation &

termination

4. Selling of leased asset

5. Takaful for ijarah

Acceptability:

Islam allows Ijara on the basis of

Facilitating the public who does not

want to own the assets.

Ijarah Mawsufah fi al-Zimmah

-the asset needs to

be described in detail in advance

but is not available at the time of

the contract. The asset must be

delivered on a future agreed date.

Ijarah (leasing)

Refers to a contract under which the

lessor leases equipment, building or

other facilities to a client at an agreed

rental rate and pre-determined lease

period upon the aqad (contract). The

ownership of the leased equipment

remains in the hand

of a lessor.

How can lessee own the

product

Ijarah Muntahia

bi al-Tamlik or

Al-Ijarah Thumma al-Bai

Ijarah Muntahia bi al-Tamlik

The ownership is transferredat the end of lease period.

Usage of Ijarh

1) Property financing,

2) vehicle financing,

3) project financing,

4) personal financing

5) structured products


18/36

18-2011 Shujko

TawarruqCommodities

Murabahah

Definition

-2011 Shujko 18

Is a transaction based on the

purchasing of a commodity on

credit and selling it to a

person other then the initial

seller for lower price in the

form of cashDifference

bet Twa. &

bai inah

1. Ina: between two parties

2. Tawarruq: between 3

parties,

See the footnotes

An example of the current utilisation oftawarruq is as offered by HSBC Amanah's

Personal Finance, where the customer buys

metals from the bank at a pre-agreed profit

margin (which sum is payable in

instalments), and then sells the metals on

the customer's behalf to an international

broker (wthe proceeds of which sale is

transferred into the customer's account

examples

Types1. Classical tawarruq/ or real t

2. Organised tawarruq or

manage t

Bai Inah is a mode of financing wherein the

financier sells goods to the customer on credit

terms, with a mark up of the price, and

subsequently purchases the same goods from the

customer at the spot price.

Othertopics

1. Whey are mutawarriq sales of

commodity at a lower price?

2. The ruling of Tawarruq

3. Conditions

4. The steps

5. Diff. regulated tawarruq & giqhi

tawarruq

6. Areas of application


19/36

Ijarah Muntohia Bitamleek

It is a lease whereby the bank will buy and lease out equipment required by the customer for anagreed rental fee. However, it differs from Ijarah in that such an arrangement provides an option forthe customer to acquire the ownership at the end of a specified period

The bank may also enter into a sale and leaseback agreement with the customer whereby the bankwill purchase the asset from the customer and leaseback under Ijarah or Ijarah MuntohiaBittamleek arrangement.The accounting implications for the bank will remain the same as for Ijarah/ Ijarah Muntohia Bittamleek transactions.

Ijarah Muntohia Bittamleek concludes with the legal title in the leased asset being passed

to the lessee. This includes the following types: gift (transfer of legal title for no consideration)

transfer of legal title (sale) at the end of a lease for a token consideration or otheramount as specified in the lease contract

transfer of legal title (sale) prior to the end of the lease term for a price that isequivalent to the remaining Ijarah instalments applicable under gradual transfer of legal title(sale) of the leased asset.

Ijarah and Ijarah Muntohia Bittamleek contracts have three major elements:

offer and acceptance two parties: the bank as lessor (the owner of the leased asset) and the client as lessee (the party who reaps

the services of the leased asset)

the object of the Ijarah contract, which includes the rental amount and the service (transferred to thelessee).

-2011 Shujko 19


20/36

Al bai principles- sales & pur

Subject matter Existence

Condition

Possession & ownership

Avoidance of riba

Avoidance of gharar

Delivery of the asset

Trade based on shariah principles

Legal capacity Mutual consent

The object should be know to both parties

The price of the object should be known to both parties.

-2011 Shujko 20


21/36

Difficulty for islamic banking

Human resources

Thinking paradigm

Working in conventional banking envrionment Infra structure..

-2011 Shujko 21


22/36

Late charge

We may charge an administration fee for any late or partialpayments but this cannot be charged to cover opportunity cost.

f the fee paid is more than our actual expenses incurred, we willdonate the excess to a public charit

Not allowed in shariah

Not as a source of income. Charitable contribution for default payments.

Other methods: E.g. nadhuru

Take actual loss

Publish names on gazette Thauzeeru

-2011 Shujko 22


23/36

Parallel Istisna

-2011 Shujko 23

Salam:

Ariculture

Have to pay in advance

Istisna:

Manufacturing

Agree on product

detailsPaymentsspot or

installment

if job is not

started..wasy can

cancle the agreemnt.


24/36

BBA

-2011 Shujko 24

Two party

No need to

mention the cost

Three party-agent

Wasy approach

bank, bank appoint

wasy as an agent to

find a developer.

Three party-nonagent

Pay down payment

& sell to the bank.

Bank re-sell to wasy

at markup

Other points:

No need to

disclose any cost or

profit


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May 2009- q1.b

House price 265000

Bank pays 240000

Downpayment 25000

***** Instalment 1:

1350*12*3=48600

1500*12*2=36000

1815*12*20=435600

Profit: 520200-240000= 280200

-2011 Shujko 25


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May 2009. sec b.1

Project total: rm 12 milllion

Captial sharing 60:40 bank & customer

Profit sharing 30:70 bank & customers

Ans:

a)2mill *.3=.6mill

b)2*.7= 1.4 million

c) .6*4/12*.6*100=33%

d)1.4*4/12*.4*100=116.71

e) Primary source for Ijtihad: Quran & Sunnah

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May 2009. sec b.2

Project rm 3 million

Profit 500k

a) .4*500k=200kb) .6*500k=300k

c) 200k*4=800k/3000k=26.6%

d) 300k*4/3000k=40%

e) Murabah.either cash or deffered payment,profit disclosed

Bbadiffered payment, profit no need to disclose

-2011 Shujko 27


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May 2009b.3

Cost 3500253.87

Booking fee 500253.87

Upfront payment 3mill *25%= 750k

Balance 2250000

A) 2.25mill * .025*3+2.25*.025*2=393750

B) 2.225/5=450k*3=1350k

Cost price + profit/no. of yerar

=1350k+168750(2.25*.025*3)/36450k*2+(2.25*.05*2)/24

C) add the above two

-2011 Shujko 28


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Jan 2011.sa.2

Project cost 500k

10% mgt fee onprofit

Sales 900k

Toal exp 250k

Capital bnk & dev 90:10

Profit bnk & dev 80:20

a) 900-500-250=150-15=135/ bank 108: dev 27

b) Profit 15+27=42

c) bank 108/450*100=24%; dev 27/50*100=54%

-2011 Shujko 29


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Sep 2009-se-b-2

Customer 1.8 million; bank 1.2

-2011 Shujko 30

murabaha


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31-2011 Shujko

CASE 1 & 2

Case 1

-2011 Shujko 31

payment

Spot payment

Deffered payment

Rules

1. Subject matter must exisit

2. Subjet mater should be in the

ownership

3. Subject matter must be phiscal &

constructive

4. Sales must be instant andabsolute

5. Should have valuesubject

matter

6. Subject matter should identified

to the buyer

7. Delivery certainty

8. Certainty of price

9. Sales must be unconditional

1. Customer identifies the asset to be

purchased.

2. Bank determines the requirements of the

customer, in relation to the financing

period and nature of repayment.

3. Bank purchases the assets concerned.

4. Bank subsequently sells the relevantasset/property to the customer at an

agreed price, which consist of:

Actual cost of the asset to the bank i.e.

financing amount; banks profit margin.

Customer is to settle the payment by

installment payment through out the

financing /period

Case 2


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Bay al dayn Bay al-dayn is an Arabic term for sale of debt as originated from two words; bay which means sale,

while dayn means debt. As far as bay al-dayn is concerned, it simply means a sale and purchasetransaction of a quality debt.

The selling of debts is to avoid the occurrence ofribabetween two debts and also to avoid any kindsofghararandmakhatara which may arise at the level of inability of a buyer from possessing what he hasbought as it is not permitted that the buyer sold before actual receipt of the purchased item.

there is a transparent regulatory system in the capital market to safeguard the maslahah (publicinterest) of the market participants..malaysia

Opinion of the past Islamic jurists

Hanafi Mazhab: Hanafis are unanimous in not permitting bay al-dayn with reason that the debt isin the form ofmal hukmi(intangible property) and the buyer takes great risk because he cannotown the item bought and the seller can not deliver the item sold.

Maliki Mazhab: The Malikis allow bay al-dayn subject to certain conditions as follows:

a)Expediting the payment;

b)Debtor present at the place of sale;

c)Debtor confirms the debt;

d)Debtor belongs to the group that is bound by law so that he is able to redeem his debt;

e)Payment is not the same type as dayn, and it fit so, and the rate should be the same to avoid riba;

f)The debt cannot be created from the sale of currency (gold and silver) to be delivered in future date;

g)The dayn should be goods that are saleable even before they are received. This is to ensure that thedayn is not ofthe food type which cannot be traded before qabadh occur; and

h)There should be no enmity between the buyer and seller, which can create difficulties to the debtor. Shafii Mazhab: The Shafii allows the selling of debt to a third party if

thedayn was mustaqir(guaranteed) and was sold in exchange for goods that must be deliveredimmediately. The debt is sold; it must be paid in cash or tangible assets as agreed.

-2011 Shujko 32


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Concept of Brotherhood

The believers are but brothers. (The Holy Quran, 49:10)

Strengthing brotherhood: zakath, Sadagh, Qadr al hassan,

Help those who are in debtease of debt

The brotherhood of muslim guarantee the safety and well begin ofsociety at large.

Conditions: .First, the relationship must be established purely for the sake of Allah.

This requires the brothers to abandon any type of personal interestthat they might hope to gain through their relationship.

must be paired with Iman and Taqwa.

should be of the Islamic manner and style. The fourth condition is that mutual advice for the sake of Allah

should be built on cooperation and meeting each other's needs inboth comfortable and difficult times.

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Concept of brotherhood

Strengthening the Ties of Brotherhood Here, dear brother, are some tips that may help deepen the bond of brotherhood between you and your

brothers:

1) Should you love a brother, tell him so.

2) When you meet one of your brothers, hasten to smile and shake hands with him.

3) If you take leave of a brother, ask him to make du'aa' for you.

4) Visit your brother often and on a regular basis.

5) When special occasions arise, congratulate your brother and join him in rejoicing

Some Benefits of Loving Your Brothers for the Sake of Allah A Muslim can find delight and great benefit in loving his brothers for the sake of Allah(A.W.J.) as is clear from

the following sayings of the Prophet Muhammad (pbuh).

The true believer savors faith by loving others for the sake of Allah(S.W.T.). Three traits, if found in a person,allow him to taste the sweetness of faith; one trait is to love a person for nothing else but to pleaseAllah(A.W.J.).

Allah surrounds the person who loves for His sake with His mercy and protects him from the great trials onthe Day of Judgment.

Love for the sake of Allah(S.W.T.) brings joy and peace to the Muslim.

Brothers who love each for Allah have hearts overflowing with peace and tranquility and faces that shimmerwith light and happiness.

Love for the sake of Allah is a trustworthy handhold of faith that never breaks; whoever clings to it is saved.Love for the sake of Allah is a sign of a perfect Deen and a pure heart and conscience.

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Brotherhood Vs conventional

Brotherhood:

Qadr al hasan

Zakath

Sadagah

CSR- reviledsource

Riba

Gharar

Quran & Sunnah

Money is a unitof wealth

-2011 Shujko 35

Convention: Profit base

Interest sourceof income

Time value ofmoney

Money as acommodity

Man made law CSR as

marketing


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Clarification areas

deposit products offered in Islamic Financial Institutions based onMudharabah deposit.

Wadia yadamana & wadia yad damana

Wadiah-based liability products

??? Mudaraba:

The debt owed to him by Ali.

He also requested Ali to collect the debt owed to him by his goodfriend, Osman.

Musharaka element & conditions Is it necessary, from the shariah perspective, that the house

purchased under Bai Bithaman Ajil (BBA) financing to be charged tothe bank? Support your answer with some argumentations. 9/10

2011 Shujko 36

Documents

Islamic Finance Revision Notes v 5