ISLAMIC BANKING

CERTIFICATION PROGRAM -
REFRESHER
LEARNING Basics of Islamic Banking

OUTCOMES Islamic Banking VS Conventional

Islamic Liability Principles

By the end of this course, you
would be able to:
Pool Management & Weightages

Islamic Asset Principles

Islamic Asset Products
 Contents
S.No Topics Slide No.
1 Objectives of Islamic Banking 7
2 RIBA / Gharar / Mayser (Qimar) 9
3 Islamic Banking VS Conventional – Similarities & Differences 23
4 Islam, Banking & Finance 28
5 Sources of Sharia'h 31
6 Concept of & Qard & Amanah 38
7 Islamic Bank & Its Funds 40
8 Avenues of Earning of Islamic Bank 44
9 Islamic Modes of Financing 47
10 Types of Contracts 49
11 Rules Of Sale In Islamic Finance 51
 Contents
S.No Topics Slide No.
Equity Based Mode of Finance
12 Musharakah (Partnership Contract) 54
13 Mudarabah (Partnership Contract) 66
14 Weightages & PLS 74
Trade Based Mode of Finance
15 Murabaha (Sale Contract) 78
16 Salam / Istisna (Sale Contract) 84
Services and Rental Based Mode of Finance
17 Ijarah (Services and Rental Contract) 87
 Contents

S.No Topics Slide No.

18 Wakala and Takaful 89
19 Tawarruq 96
20 KIBOR 98
21 Risk Management at Banks 101
22 Islamic Banking – One Pager 103
23 Sharia’h Compliance Department – Overview 104
Objectives of Islamic Banking
 Objectives of Islamic Banking

Avoid Impermissible Transactions Fulfilling the Halal

Customer Needs
a i. Riba c
ii. Gharar (transaction with
uncertainty)
iii. Mayser / Qimar (Gambling)

Promote Participation &

Sharia'h Compliant
Asset Backed Financing
b d
RIBA / Gharar / Maysir (Qimar)
Definition of RIBA
• RIBA literally means increase, addition, excess, expansion or growth.

• A conditional or understood increase versus a loan is Riba.

• It is reported from Hazrat Ali (RA) that The Holy Prophet ‫ صلى هللا عليه وسلم‬has said:

‫كل قرض جر منفعة فهو ربا‬

“‫”ہر وہ قرض وج (قرض دےنی واےل وک) افدئہ اچنہپتا وہ وسد ےہ۔‬
“Every loan that derives a benefit (to the creditor) is Riba”
RIBA According To Quran &
Sunnah
RIBA According To Quran &
Sunnah
‫& ‪RIBA According To Quran‬‬
‫وسد ےس قلعتم دحنپ (‪)2‬‬
‫اوبہرریہ ےتہک ںیہ ہک روسل اہلل ﷺ ےن فرامتا‪ :‬رعماج یک‬
‫رات ںیم ھچک ولوگں ےک تاس ےس زگرا نج ےک ٹیپ‬
‫‪Sunnah‬‬
‫اکمونں ےک امدنن ےھت‪ ،‬اں ںیم تاہر ےس سانپ داھکیئ دےتی‬
‫ےھت‪ ،‬ںیم ےن اہک‪ :‬ربجالیئ! ہی وکں ولگ ںیہ؟ انہوں ےن‬
‫اہک‪ :‬ہی وسد وخر ںیہ۔‬
‫(انب امہج ‪،‬اتکت ااجتلرہ ‪،‬تات التغلتظ یف ارلتا ‪،‬دنسم ادمح )‬
‫وسد ےس قلعتم دحنپ (‪)1‬‬
‫• رضحت اجنر ریض اہلل عنہ ےس روانپ ےہ ہک روسل اہلل‬
‫ﷺ ےن تنعل یک وسد اھکےن واےلرپ اور وسد وسد‬
‫ک‬
‫الےن واےل رپ اور وسد ےنھکل واےل رپ وسد ےک وگاوہں رپ‬‫ھ‬
‫اورفرامتا وہ سب(گناہ ںیم) نرانر ںیہ۔‬
‫• ( حیحص ملسم اتکت ااسملاقت تات نعل ا لک ارلتا و ومہلک‬
‫‪،‬رتذمی و دنسم ادمح)‬
 Riba Al Quran Riba Al Hadith

TYPES OF Also known as,

Also known as,
RIBA Riba An
Riba Al Fadhl &
Nasiyah & Riba
Riba Al BAI
Al Jahiliyah
RIBA AL FADHL
RIBA AL FADHL
RIBA AL JAHILIYAH
RIBA AL JAHILIYAH
It has different forms in the days of Jahiliyah:
1. Claiming an increased amount over the principal with a clearly stipulated condition.
2. Charging a monthly return from debtor while keeping principal amount remain till the
day of maturity.
3. In sale transaction, commodity is sold on a fixed price on deferred payment basis.
Upon maturity if buyer does not pay, Seller allowed extension in time on additional
payment. The above was the saying of non-believers referred into the Holy Qur’an.
Definition of Maysir /Qimar
• Qimar / Maysir means gambling.
• Technically, it is an arrangement in which possession of a property is contingent
upon the happening of an uncertain event.
• By implication it applies to a situation in which there is a loss for one party and
a gain for the other without specifying which party will lose and which will gain.
Definition of Gharar
• Gharar is an uncertainty, hazard, chance or risk.
• It means any element of absolute or excessive uncertainty that can lead to
dispute in any business or a compensatory contract about the subject of
contract or its price, or mere speculative risk.
• It leads to undue loss to a party and unjustified enrichment of other, which is
prohibited.
• A compensatory agreement that has any element of Gharar is not Valid from the
Sharia'h point of view irrespective of whether the parties of the agreement
agree upon the contract or not.
Examples of Gharar
• Sale of Flowers before they appear on trees / plants.

• Sale of Fish that comes in one throw of net.

• Sale of Any one of the animals from all the herd.

• Sale of milk in the udder of animal without measurement.

Islamic Banking VS Conventional –
Similarities & Differences
Islamic Banking VS Conventional – Similarities

▪ Physical Appearance ▪ Type of Accounts

▪ Staff Outlook ▪ Type of Financing
▪ Type of Services ▪ KIBOR as a Bench Mark
▪ Money Market Players ▪ SBP
▪ Banking Terminology ▪ Interest Based Economy
 Islamic Banking VS Conventional – Differences
Islamic Banking Conventional Banking
Current Account Loan Loan
Current Account

CACA
Remunerative & Saving
Remunerative & Saving Mudarabah Loan
Account
Account
Mudarabah Loan
Term Deposit
Types of Diminishing
Sale Musharakah / Ijara Loan
Contents 02
Car Finance
Diminishing
Home Finance
Contents 03 & Term Musharakah Loan
Finance
Musawamah /
Credit Card &04Personal
Contents Loan
Tawarruq
Finance

Business & Working Capital Murabaha / Istisna /

Salam / Tijara Loan
Finance
Islamic Banking VS Conventional Banking

Conventional Banking

Money (Loan)

Bank Customer

Money (Loan) + Money

(Interest)
Islamic Banking VS Conventional Banking

Islamic Banking

Good & Services

Bank Customer

Payment
Islam, Banking & Finance
Sources of Shariah
Definition Of Sharia’h
Lexical Meaning: Plain Way

Technical Meaning: The Divine Law

Sources Of Sharia’h

▪ The Holy Qur’an

▪ The Sunnah of the Holy Prophet
( ‫)صلی هللا عليہ و سلم‬
▪ Ijma’ (Consensus of the Jurists)
▪ Qiyas (Analogy / Reasoning)
▪ The Holy Qur’an
– Qur’an is the last of revealed books of Allah. It was revealed to his last messenger
Hazrat Muhammad S.A.W by Hazrat Jibreel A.S.
‫قرآن ہللا کی نازل کردہ کتابوں میں سے آخری کتاب ہے جوآخری رسول حضرت محمد صلی ہللا علیہ وسلم پر حضرت‬
‫جبرائیل علیہ السالم کے ذریعے‬-‫نازل ہوئی‬

– How many of you recite Qur’an ?

– How many of you recite Qur’an with translation ?
‫‪▪ The Sunnah‬‬
‫)صلی هللا عليہ و سلم( ‪̶ A word spoken, or an act done or ratified by the Holy Prophet‬‬
‫‪̶ It is a source of law because the Holy Quran itself has made it obligatory for every‬‬
‫)صلی هللا عليہ و سلم ( ‪believer that he obeys and follows the Holy Prophet‬‬
‫سولَهُ ِإن كُنتُم ُّم ْؤ ِم ِن َ‬
‫ین‬ ‫أ َ ِطیعُواْ ه َ‬
‫َّللا َو َر ُ‬
‫اہلل اوراس ےک روسل یک اطاعبرکو ارگ مت ومنم وہ(‪)8:1‬‬

‫سو ِل ِه النه ِبي ِ األ ُ ِمي ِ اله ِذي یُ ْؤ ِم ُن ِب ه ِ‬

‫اَّلل َو َك ِل َماتِ ِه َوات ه ِبعُوہُ لَعَله ُك ْم ت َ ْهت َدُون‬ ‫فَ ِ‬
‫آمنُواْ ِب ه ِ‬
‫اَّلل َو َر ُ‬
‫اامیں الو اہلل اور اس ےک روسل رپ وجیبن ںیہ ‪ ( ،‬یسک ےس) ڑپےھ وہےئ ںیہن ںیہ ‪،‬اہلل اور اس یک امتم تاوتں رپ‬
‫اامیں الےت ںیہ اوراں یک ریپویرکو تاہک مت دہانپ تاول۔ (‪)7:158‬‬
▪ Ijma’ (Consensus of the Jurists)
– In Islamic terminology, It is the unanimous agreement of the mujtahid scholars of the
Ummah concerning Sharia’h issue at any particular time after the demise of the Holy
Prophet.

My Ummah shall never gather on misguidance. (Tirmidhi)

▪ Qayas (Analogy / Reasoning)
– To apply a recognized rule of Shariah expressly mentioned in the Holy Quran and
Sunnah to a similar thing or situation by way of analogy.
Qard and Amanah
• Qard, from a Shariah point of view, is a noncommutative/non compensatory
contract, as it involves a facility granted only for the sake of Tabarru’ (donation).
Only the face value of the loan (Asl Al-Qard) is guaranteed and to be paid off on
demand.
• Qard can be used by the debtor for own need and Amanah can not be used by
Ameen for any purpose without owner’s consent.
• In case of Amanah, If the principle is destroyed without negligence so the
Ameen is not liable to pay.
• However, it is permitted that the repayment of Qard (loan extinguishing) is
made with an excess (tangible item, benefit, service, etc), provided that such an
excess is neither expressly stipulated nor implicitly pre-arranged (through
collusion or Tawatu’ or without letting such a gesture become customary
practice),in the contract of loan.
Islamic Bank & its Funds
As any other public limited company Islamic bank has internal and external sources of funds.

INTERNAL SOURCE OF FUND: EXTERNAL SOURCES OF FUND:

• Bank's capital: shareholder's equity • All types of deposits

• Appreciation in value of the assets
• Retained portions of earning/profit
• Islamic bank accepts deposit on two
basis
• Remunerative: deposit provider gets a
return
• Non-remunerative: deposit provider does
not get a return
 Remunerative - Deposits on profit and loss
sharing basis
E A
Islamic bank acts as “fund
Principal amount of fund could not managing partner” and fund
be guaranteed; provider acts as “fund supplying
partner”;
B
D Both get a return which is not
predetermined in relation with
Under this way of acceptance of principal amount (x% of principal);
fund both partner have
possibilities of bearing loss (fund
provider may lose money and
fund manager may lose efforts); C
Predetermination of distribution ratio of profit is
essential (x% of expected profit);
Non-Remunerative - Deposits on Qard basis

No loss Islamic
could be bank acts
assigned to as
fund borrower of
provider fund

The
principal is No return is
guaranteed given
in all
manners
Avenues of Earning of Islamic Bank
• Islamic bank cannot lend money as a remunerative product. Therefore, they need to do
asset-based transactions. Following are the main business activities of an Islamic bank

Bank act as an
Murabaha, Musawamah, owner/lessor/landlord of a
Salam and Istisna are non-consumable asset and
different products permit the tenant/lessee for Musharakah, Mudarabah,
offered under trade- use of the asset, Ijarah, Diminishing Musharakah
based financing called Islamic lease as well,
category. comes under this mode.

Trade-based Rental-based Partnership

Financing Financing Financing
Fee Based Services Money transfers L/C (Non-funded)
Lockers (safe-
keeping)

Online banking Debit Card and

Collections
services ATM services

Cash and Portfolio

Investment Brokerage
management
banking services services
advice
Islamic Modes of Financing
 Musharkah House/Autos/Running Finance
Equity based
Mudarbah Saving Accounts/TDRs
Islamic Modes of Financing

Murabaha,
Murabaha,
Musawamah
Musawamah & & Noor Card/IPF/Trade
Trade based Tawarraq
Tawarraq /Tijara
/Tijara

Salam & Istisna CBSME/Trade/Agri

Auto Finance
Ijarah
N/A in FBL
Services and Rental
based
Wakala Takaful/Banca/Mutual Funds
Types Of Contracts
 Types Of Contract
CONTRACT

Social Contract / Non-Compensatory

Financial Contract / Compensatory Contract
Contract

Trade Gift

Leasing Nikah

Employment Money lending

Partnership Guarantee (Damanat)

Paid agency Non-paid agency

Commission agency Rights transfer (Hawalah)

Our area of discussion

Rules Of Sale In Islamic Finance
 Law Of Sales Contract

Contract

Offer and Price

Subject Matter Contractors
Acceptance

• • Sane • Present
• By Words Existence • Specified
• • Mature • Unconditional
• By Acts Ownership • Quantified
• Possession • Non-contingent
• By Writing
• By Indicating • Valuable
• Halal Purpose
 Type of Sales
Money Profit/Loss Commodity
Motive

(‫)بیوع االمانۃ‬
Cost = Sale Price Tawliyah (‫)تولیہ‬
Disclosed

Cost < Sale Price Murabaha (‫)مرابحہ‬

Undisclosed
Cost > Sale Price Wadhee’a (‫)وضیعہ‬

General Bargain Sale Musawamah (‫)مساومہ‬

Musharakah (Partnership Contract)
 Meaning Musharakah’s literal meaning is of “Sharing”.

Derivation It has been derived from the word “Shirkah”, which means being a partner.

MUSHARAKAH
In the practical sense, it means that a joint enterprise is formed for
Brief
conducting some business in which all partners share the profit according to
Explanation an agreed ratio while the loss is shared as per the ratio of investment.

Scope It is an ideal alternative for the interest based financing

 Shirkat-ul-Milk Joint ownership of two or
more persons in a
‫شركت الملك‬ particular property.

TYPES OF
SHIRKAH
A partnership affected by
Shirkat-ul-Aqd mutual contract. It can
also be translated as a
‫شركت العقد‬ joint commercial
enterprise
 Diminishing Musharakah

• Diminishing or declining Musharakah is just like a Shirkah.

• Musharakah (partnership) between two or more persons.

• The additional feature of DM is decreasing ownership of one party through

purchase from one and selling from other

• DM is possible in both Shirkat ul A'qd and Shirkat ul Milk

 DM Features
• Diminishing Musharakah is a combination of different products/agreements.

• Diminishing Musharakah as a product could be offered in several ways.

• Normally it is presented with combination of Shirkat + Ijarah + Sale.

• Several agreements takes place in DM offering.

• Shariah prohibits the combination of two agreements in one, a well known

principle in Islamic finance.

• A basic rule for combined products is that every agreement should be

independent of the other.
 Components Of DM

• DM comprises of three components:

1. Joint ownership of the Bank and customer.

2. Customer as a Lessee uses the share of the Bank.

3. Redemption of the share of the Bank by the customer over a decided tenure.
 Fundamentals Of DM
• Every partner should enjoy the benefits and bear the responsibilities (risks and
rewards distribution)

• If one partner wishes to get other's share for use against payment of rent, this
arrangement (agreement) should be separate from ownership creation process;

• The promise of sell / buy should be obtained through separate documents;

• Preferably redemption of share should be done on market price, or on N.A.V

basis not on any pre-agreed price

• Proper preparation and execution of transaction documentation.

 DM based Islamic Banking Products
▪ House financing ▪ Corporate assets financing

▪ Purchase ▪ Big infrastructural financing

▪ Construction ▪ Plant and machinery financing

▪ Renovation ▪ Factory / building financing

▪ Balance Transfer Facility (BTF) ▪ Issuance of Sukuk

▪ Re-finance ▪ Sale and lease back

▪ Car financing ▪ Rescheduling

 Profit & Loss Sharing in Musharakah
• Ratio or the basis for sharing profit should be decided at the beginning of
partnership.

• Profit should be allocated in percentages of profit (PSR=profit sharing ratio) and

not in a sum of money or a percentage of the capital or investment (ROI=return
on investment).

• ROI based Musharakah becomes invalid.

• Sharing of profit may be varying to proportionate capital contribution.

 Profit & Loss Sharing in Musharakah
• If A and B enter into a partnership and it is agreed between them that A shall be
given Rs. 10,000/- per month as his share in the profit, and the rest will go to B,
the partnership is invalid.

• Similarly, if it is agreed between them that A will get 15% of his investment, the
contract is not valid.

• The correct basis for distribution would be an agreed percentages of the actual
profit accrued to the business.

• A nonworking partner cannot share in the profit more than the ratio of his
capital contribution.

• The partner may agree to change the profit-sharing ratio later on

 Profit & Loss Sharing in Musharakah
• A partner may surrender a part of his profit to another partner on distribution
of profit. But it would be purely a voluntary act.

• As a matter of principle, the loss has to be shared according to the ratio of

capital contribution.

• Any other arrangement would be void.

Guarantee of principle or profit:

✓ In Shirkat ul Aqd, no partner can guarantee capital, part of capital, profit
or part of profit to another partner.

✓ For this reason, in Shirkat ul Aqd, any arrangement of exit from a

business partnership on pre agreed price, would not be permissible;
 FBL Products based on DM
• Consumer Lending refers to making a wide range of financing to individuals
for car, house, or furniture. It is different than loans awarded to a business
which is generally referred to as commercial lending.

✓ Car Finance
✓ Home Finance

Consumer Secured Financing:

It is a consumer financing where the financing is backed by collateral. e.g., vehicle, house
etc.

Consumer Financing Prudential Regulations (PR):

These are the set of instructions or minimum requirements defined by the State Bank of
Pakistan for extending finance facility to the individual.
Mudarabah (Partnership Contract)
• Mudarabah is a partnership in profit, whereby one party provides
capital and the other party provides Labour/Services.

• Investor is called “Rabb-ul-Maal”, and DEFINITION

• The working partner is called “Mudarib.” OF
• Investment is called “Ras-ul-Maal.” MUDARABAH
 Types Of Mudarabah
Mudarabah Mutlaqah Mudarabah Muqayyadah
(Un-restricted Mudarabah) (Restricted Mudarabah)

No restriction from the Rabb-ul- Business avenues/ sector

Maal regarding investment in any specified from the Rabb-ul-Maal
specific sector/ business (Investor)

Mudarib is bound to comply to

In this type of Mudarabah working these restrictions. However, they
partner can do any profitable should not unduly constrain the
business according to its market Mudarib form general business
norm operations
 Mudarabah Mushtarikah

• It is permissible for Mudarib to add capital in Mudarabah with the permission of

Rabb ul Maal.

• This transaction becomes a combination of Shirkah and Mudarabah. Therefore,

it is called Mudarabah Mushtarikah

• In such case, Mudarib and his Mudarib share in the profit will get profit on his
capital and to the extent of his share in the capital.
 Collective Mudarabah
• “Collective Mudarabah” means a Mudarabah in which multiple Rabb ul Maal has
invested with single Mudarib

• The funds collected from investors become a joint pool which is handed over to
a single Mudarib, who is normally a juristic person

• Collective Mudarabah creates two different relationships:

1. Relationship amongst the investors, which is Shirkah or Partnership
2. Relationship of all the investors with Mudarib, which is Mudarabah

• The share of Rabb ul Maal will be divided among them according to

Weightages.
 Rules Of Profit And Loss In Mudarabah 1/2
• The contracting parties should stipulate the profit shares (in defined terms) for
each one in the contract.

• The profit-sharing ratio should be

a) specific percentage
b) of the profit expected to be earned

• The profit-sharing ratio should not be

a) unknown
b) attributed to future settlement
c) linked with the capital (in terms of x% of the capital)
d) lump sum settlement
 Rules Of Profit And Loss In Mudarabah 2/2

• Losses in Mudarabah shall only be borne by Rabb-ul-Maal and not the Mudarib

• The Mudarib shall only be responsible for losses if they occur due to his
negligence and willful misconduct.

• Increase in value of Mudarabah capital before the start of business without any
efforts of Mudarib will be considered part of the capital and will not be treated
as Profit.
 Scope of Mudarabah for Banking System
• Mudarabah as a mode of finance may be used by Islamic Banks for the
following purpose:

Relationship with Large Enterprise

Project Finance
depositors Financing

Interbank
placements by
Treasury
Weightages & Profit and Loss Sharing
Mechanism
 Weightages
• Is an absolute number, does not signify anything until compared with other
category Weightages.

• It simply gives an idea about the difference in the profit rates between these
categories.

• Weightages are assigned to Investment products as per their tiers & tenures.

• Remember! Customers get returns according to the tiers they are booked in.

• Mudarib Profit Sharing Ratio & Weightages are announced on a monthly basis
before start of month. Once declared, they can not be changed for the entire
month.
 Weightages
An illustration
Barkat Saving Account Weightages Rate

Tier 1 - 0 to 4,999,999 MM 1.1 6.00%

Tier 2 – 5 MM & Above 1.2 6.25%

Barkat Kamil Account Weightages Rate

Tier 1 – 0 to 9,999,999,999 0.01 0.10% (The lowest Weightage therefore the lowest expected rate)

Barkat Investment Account Weightages Rate

1 Month – BMIC (Monthly Payout)

Tier 1 – 0 to 4,999,999 MM 1.3 6.50%
Tier 2 – 5 MM & Above 1.4 6.75%
3 Month – BMIC (Monthly Payout)
Tier 1 – 0 to 4,999,999 MM 1.4 6.75%
Tier 2 – 5 MM & Above 1.5 6.85%
6 Month – BMIC (Monthly Payout)
Tier 1 – 0 to 4,999,999 MM 1.6 7.00%
Tier 2 – 5 MM & Above 1.7 7.50% (The highest Weightage therefore the highest expected rate)
✓ Declared Profit Sharing Ratio (PSR) 40:60
✓ Declared Weightages as per Schedule.
• Different Average Deposits
• Different Deposit Products
• Different TDRs tenors.
• Different profit payment frequencies TDRs
Step – 1 Step – 2
Income distribution Income distribution
between Mudarib & Rub-ul- among Rub-ul-Maal
Maal through PSR through Weightages.

Income 100,000/- PKR PKR 60,000/-

40,000/- Clients
Rub-ul- Maal
Sharia’ah
Compliant Islamic Bank Loss among
Assets Funds / Investment The Mudarib Funds / Deposit
Rub-ul-Maal will
be distributed as
per Capital /
Investment Ratio.
Loss PKR 100,000/- (Without Negligence of Mudarib)

Note: The above example is of a Profit Distribution scenario, where the Bank’s own equity is not involved.
Murabaha (Sale Contract)
• Islam prohibits charging fixed interest on money but permits charging fixed profit
on sale of goods.

• In order to ascertain their profit Islamic banks therefore use a sale-based

transaction (Murabaha) instead of a term loan for financing purchase of assets
by their clients acting as agent of Bank), especially for working capital
requirements.

• Murabaha is a particular kind of sale.

• Where the transaction is done on a “cost plus profit” basis i.e., the seller
discloses the cost to the buyer and adds a certain profit to it to arrive at the final
selling price
• The product of Murabaha that is being used in Islamic Banking as a mode of
finance is something which is slightly different from a Murabaha used in normal
trade.

• The distinguishing feature of Murabaha from ordinary sale (Musawamah) is

✓ The seller discloses the cost to the buyer

✓ And a known profit is added.

• Banking Murabaha is a contract wherein Islamic Bank, upon request by the

customer, purchases an asset from a third party (supplier/ vendor) and resells
the same to the customer usually against a deferred payment (Bai Mujjal).
• It is called Murabaha to the Purchase Order.

• It is a bunch of contracts completed in steps and ultimately suffices the financial

needs of the customer.

• As Banking Murabaha is a kind of sale, there must be a seller and buyer, and
something needs to be bought and sold.

• In such transactions the Bank is the seller, the customer is buyer and a
commodity/goods are exchanged between them.
 Application
• Murabaha can be used to finance the purchase of any assets which is recognized
as Mal-e-Mutaqawam (valuable) under Shariah and posses a tangible form. For
example murabaha can be used to finance the purchase of:

1. Raw Material
2. Equipment
3. Consumer Goods
Penalty on Late Payments

• As soon as the Murabaha is executed (Offer & Acceptance Signed) the

Murabaha price becomes a receivable (Dayn) for the Bank.

• As per the rules of Islamic fiqh any amount charged over and above the
“Dayn” amount will be Riba.

• Hence we cannot charge any late payment charges.

• We may, however, ask the customer to undertake to pay charity in case of

overdue so as to create a disincentive for him to delay the payment.
Salam / Istisna (Sale Contract)
 Concept of Salam
Definition of Salam
• Purchase of a commodity for deferred delivery in exchange for immediate
payment according to specified conditions.

• Therefore, Salam is a contract whereby the seller undertakes to supply some

specific goods to the buyer:

i. At a future date.
ii. In exchange of an advance price fully paid at the time of the
transaction.
 Concept of Istisna
Definition of Istisna
• It is a contract of sale of specified items to be manufactured or constructed
with an obligation on the part of the manufacturer or builder to deliver them to
the customer upon completion.

Application
• Furniture
• Agriculture Products
• Construction of real estate such as buildings, warehouses, showrooms,
shopping malls, residential towers and villas,
• Manufacturing activities in the construction of aircrafts, ships, machines and
equipment, etc.
Ijarah (Services and Rental Contract)
 Concept of Ijarah

• Ijarah literally means “To give something on rent”.

• The term “Ijarah” is used in two contexts:

i. ‘To employ the services of a person on wages’ from the word “Ujra’h”
e.g. “A” hires a porter at the airport to carry his luggage.

ii. Another type of Ijarah relates to paying rent for use of an asset or
property.
Wakala Model
Takaful
 Concept of Takaful

• Takaful is derived from an Arabic word ‘Kafala’ meaning "To Guarantee“

• A system of Islamic Insurance based on the principle of Ta’awun (mutual

assistance) and Tabarru’ (Gifts, give aways, donations) where the risk is shared
collectively by the group Voluntarily.

• This is a pact amongst a group of members or participants who jointly

guarantee themselves against loss or damage to anyone as defined in the pact.
 Concept of
Insurance? ? Practice of
Insurance?

Shari’ah has no objections as to the concept or objectives of insurance ; it has

reservations only with the way it is being practiced.
Insurance Vs. Takaful
Risk
Conventional transfer transfer
Insurance mechanism

Risk
sharing
Takaful sharing
mechanism
Benefits of Takaful
Tawarruq
 What is Tawarruq?
2) Sells commodity on
Sell a commodity at spot after its Sells commodity on cash
1) deferred payment at cost
purchase on deferred basis to have liquidity
plus profit

Seller Buyer 3rd Party

3) 4)
Sells
Commodity
on Deferred
Basis
Buyer
(Customer)
Seller(Bank)
Agreement Purchase
Seller Buyer
Musawammah Commodity
(Bank) (Customer)
Contract
KIBOR
 ‫اسالیم کنیب روایتی وکنیبں ےک تایمہ رشج وسد)‪ (KIBOR‬وک اےنپ عفن ےک نیعت ےک ےئل ایعمر ویکں انبےت ںیہ؟‬
‫وجات‪:‬‬

‫اس ںیم وکیئ کش ںیہن ہک اسالیم وکنیبں ےک تاس اانپ ااسیوکیئ ایعمر وہتا اچےئہ ےسج وہ اےنپ عفن یک نییعت ےک ےیل اامعتسل رک ںیکس نکیل اس وقپ اسالیم‬
‫وکنیبں ےک ساےنم فلتخم زجنلیچ ںیہ ۔اں ںیم ےس اتک ہی یھب ےہ ہک اں یک اینپ امرٹیک اینت وھچیٹ ےہ ہک وہ اس وقپ اانپ چنیب امرک انبےن یک وپرنشی‬
‫ن‬ ‫ش‬ ‫تن‬
‫ںیم ںیہن ںیہ‪ ،‬اس ےئل اسالکم کنیب ‪،‬ونک ل کنیب اک چنب امرک ینعی (‪ )KIBOR‬اامعتسل رک رےہ ںیہ۔رشیع رو ےس (‪ )KIBOR‬وک عفن یک نییعت ےک‬
‫ےیل ایعمر انبتا‪ ،‬تااجنر ںیہن ےہ‪،‬اہتبل اسالکم وکنیبں ےک ےیل ہی رضوری ےہ ہک وہ رختد و فروخب اور رکاہی داری وریغہ ےک اعممالت رس ااجنم دےتی وہےئ‬
‫رشتعی یک امتم ہقلعتم رشاطئ اک احلظ رںیھک‪،‬لہٰدا طقف (‪ )KIBOR‬وک عفن یک نییعت ےک ےیل ایعمر انبےن ےس اسالکم وکنیبں ےک اجنر اور حالل اعممالت تااجنر‬
‫اور رحام ںیہن وہےت رشبہکیط اسالکم کنیب رختد و فروخب اور رکاہی داری وریغہ یک امتم رشاطئ وک وپرا رک رےہ وہں۔‬
‫اس تات وک مہ اتک منال ےس ھجمس سکتے ںیہ ۔منالرتد یک اتک داکں ےہ سج رپ وہ رشات اک اکروتار رکتا ےہ وج ےک اتک رحام اکروتار ےہ رتد اےنپ اکروتار‬
‫ںیم رشات وک دس دصیف عفن رپ ا ےگ فروخب رکتا ےہ رتد ےک نر انر ںیم اخدل یک اتک داکں ےہ سج ںیم وہ ولھپں اک وجس اتچیب ےہ ات اخدل اچاتہ ےہ ہک‬
‫ںیم اانپ عفن اانت یہ نیعتم رکوں وج رتد رشات ےنچیب رپ امکتا ےہ اس ےئل وہ اےنپ عفن وک رتد ےک عفن ےک ساھت وجر داتی ےہ اور اس وک ایعمر انب اتیل ےہ ۔ اس‬
‫اعمےلم ںیم طاہر تات ےہ ہک اخدل اک اےنپعفن وک رتد ےک عفن ےک ساھت وجرتا اور ایعمر انبتا رتہب ںیہن نکیل اس رطج رکےن ےس وکیئ ہی ہرزگںیہن ہک اتکس ہک‬
‫اخدل اک اکروتار رحام ےہ اور اس یک ا دمین تااجنر ےہ۔تالکل ایس رطج اسالیم وکنیبں اک ضعب وبجمرویں یک وہج ےس ‪KIBOR‬وک ایعمر انبتا ارگہچ ہک رتہب ںیہن‬
‫نکیل اس ےس اں ےک اعممالت وک رحام ںیہن اہک اجےئ اگ۔‬
Risk Management at Banks
 Risk Management at Banks

01 Investment in Large number of clients 06 SBP Prudential Regulations

02 Investment in Large number of products 07 Credit Administration Dept. (CAD)

03 Investment in Large number of Industries 08 Recovery Dept.

04 Professional Set-up/Credit / Risk Dept. 09 Special Asset Management Dept. (SAM)

05 CIB/Market Reputation/Financials. 10 Banking Courts

Sharia’h Compliance Department - Overview
 Sharia'h Board Faysal Islami
✓ Mufti Muhammad Abdullah
Resident Shariah Board Member

✓ Dr. Mufti Khalil Ahmad Aazmi

Shariah Board Member

✓ Mufti Muhammad Ashja Khan

✓ Mufti Muhammad Mohib ul Haq Siddiqui
Shariah Board Member
Chairman Sharia'h Board- Faysal Bank
✓ Mufti Abdul Basit
Shariah Board Member
 Definition & Responsibilities of Shariah
Compliance
Shariah Compliance is defined as:
Sharia'h compliance means complying with rulings, guidelines and Fatwa/resolutions issued by the Sharia'h Board of the
bank and SBP Sharia'h Advisory Committee and any other Sharia'h related regulatory requirement (“Sharia'h Guidelines”)
issued from time to time.

Sharia'h compliance function is to prevent, detect and address any and all deviations, illegalities and nonconformities from
Sharia'h Guidelines at FBL.

The Functions and Responsibilities includes :

1. Sharia'h Compliance Review
2. Secretariat of Sharia'h Board
3. Conduit between Management and the Sharia'h Board
4. Enforcement of Sharia'h Audit Reports
5. Facilitation for Islamic Finance Training
6. Other Functions
Islamic Helpline IP: 2300
‫زجاک اہلل‬