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Prepared for, Jb. Md Nurul Islam Senior Vice President Islami Bank Bangladesh Ltd. Ramna Branch, Dhaka

Prepared by, Ahmed-ur Rahim Zubair Id No: 6-175, Sec: B, 6th Batch BBA (Major in Finance) Department of Finance University of Dhaka Mohshiu Ahmed Patwary Id No: 991101, Sec: A 7Th Batch, BBA (Campus) Uttara Campus Asian University of Bangladesh

Rumana Ahmed Rumpa

MBA (Major in HRM) Id No: 200410656 9th Batch, MBA (Regular) Uttara Campus Asian University of Bangladesh

June 29th , 2005 Acknowledgment

We are deeply indebted to a large number of people for that kind suggestion and cooperation. First of all we like to give special thanks to our coordinator Jb. Habibur Rahman, of IBTRA for giving us a important topic for preparing this report. We profoundly grateful to Jb. Abul Hossain SVP, IBBL Ramna Br. the former branch manager, Jb. Md. Nurul Islam SVP IBBL Ramna. Br. current branch manager, Jb. Manjurul Islam AVP IBBL Ramna Br., Jb. Nabi Newaz Khan PO GB in charge, Jb. Ahsanullah Mondol PO Investment in charge, Jb. firoz Alam PO in charge Foreign Exchange of Islami Bank Bangladesh Ltd. for their supervision, guidance and cooperation. This report, with all the interpretation on practical orientation in bank with the function a mechanism in the field of banking activity, would not be possible without help and cooperation of the officers engaged in the Ramna branch of IBBL. They have willingly supplied all the practical knowledge and interpretation for making this report so convenient with the purpose of our BBA/MBA program. The acknowledgement is made especially to Jb. Dawood Khan, Jb. Abul Hasan, Jb. Sazzad Jahid Khan, Jb. Ahmadullah, Jb. Tayeb Hamidi, Jb. Rafiqul Islam, Jb. Monirul Alam, Jb. Jahirul Islam, Jb. Jakir Hossain, Jb. Sariful Alam, Jb. Anwar Hossain, Jb. Abul Khaer, Jb. Khalilur Rahman, Jb. Babul Hossain Dhali, Jb. Jahid Hossain, Jb. Islamil

Hossain, Jb. Md Mozammel Hossain, Jb. Abdul Mojid Akhand, Jb. Mujibur Rahman, Jb. Ehsanul Karim, Jb. Nuruzzaman Chowdhury, Jb. Md. Rahed, Jb. Md. Tofazzal Hossain, Jb. Kazi Arifur Rahman, Jb. Habibur Rahmen, Jb. Sazzad Hossain, Jb. Mizanur Rahman, Jb. Helal Uddin, Jb. Aminuzzaman, Jb. Bodiuzzaman, Jb. Jahangir Hossain, Jb. Idris Miya, Jb. Harunur Rahisd, Jb. Md. Hanif, Jb. Raju Ahmed. Finally and most important, we want to know our special gratitude to Almighty Allah for helping us doing the whole activity.


Now a day, modern education, internship report is a un separated part of learning. In any kind of work study regarding business deals (organization, company, service or bank) what ever it would be we need information and know how to prepare it. Assignment is one of the main way to called information and procedures for business deals. No doubt, Different modes of investment for banking services specially Islamic perspective, we are assigning to made a report or assignment as the paramount study at business practices for our practical knowledge. The important of BBA/MBA courses are two coordinated between theory and practice. This assignment will help us to bridge the gap between theory and practicality. Farther more, this has also linked up with the student of BBA/ MBA and the current situation of business world. That is why this task provide us the great pleasure and in touch with the professionalism.

Page Part-1


Objective of the study Scope & Methodology of the study Limitation of the study Objectives of Islami Bank Special feature of the Bank

Bai- Mechanism 1. Bai- Murabaha


Modes of finance followed by IBBL

2. Bai-Muazzal

3. Bai-Salam

4. Istisna Sharing Mechanism 1. Mudarba

2. Musharaka Ownership Mechanism 1. Hire purchase

2. Leasing

Basic Characteristics of Modes of Finance


Financing Plan Mode-Wise Finance Sector-Wise Finance


Part-5 Findings
Conventional Bank vs. Islami Bank Obstacles of IBBL



Banking plays an important role in the economy of any country. In Bangladesh Muslim constituted more than 80% of its population. These people possess strong faith on Allah and they want to lead their lives as per the constructions given in the holy Quran and the way shown by the prophet Hazrat Muhammad (Sm). But no Islamic banking system was developed here up to 1983 The Traditional banking is fully based on interest it is commonly meant as commercial banks. But interest is absolutely prohibited by Islam. As a result the people of Bangladesh have been experiencing such a non-Islamic and prohibited banking system against their normal values and faith.

The present world especially the third world is affected by unemployment socioeconomic injustice inflation, inequitable distribution of income and wealth etc. The main aim of traditional banking is to earn profit by borrowing and lending money in exchange of interest. As a result there is an unfair competition among the bankers and among the customers. Under conventional framework a bank borrows to lend and it mobilizes savings/deposits by borrowing from savers and lends those deposits to productive interest on deposits and advances respectively. The banks generally maintain a difference is known as interest-spread which is the main income of an interest-based bank. In the Islamic banking system the bank receives no interest. In this case IB receives its entire deposits from the investment of the clients on the basis of profitsharing places it to the actual entrepreneurs on the basis of the profit sharing. So, it is clear that in case of the traditional banking systems, a fixed percentage of interest, irrespective of income earned is paid to the depositors. The depositors of IB are never deprived of excess income, which the bank may make at the end of year. Not only this traditional bank give fixed interest rate even when they incur operational loss. The critics of Islamic banking system are of the opinion that both are found same in terms of deposits mobilization and advances investment. Banking functions of IBBL is an important aspect in our economy as it has broken the line of interest based traditional banking system through the introduction Islamic Shariah based banking. Since its commencement in 1983, it has already gained a good reputation in customers as well as the masses of people of Bangladesh. Islamic Banking is especially important in the world countries, which are characterized by unemployment, inequitable distribution of income and wealth, etc. But there are so many constraints in our country in functioning the Islamic banking activities. This paper is an attempt to evaluate the Modes finance of Islamic Bank Bangladesh Ltd. (IBBL) in terms of productivity and effectiveness. Since it is difficult to measure the productivity of a bank, especially the interest-free IBBL, as it does not any visible product. Some specific indicators have been selected for the purpose of measurement of productivity.

Bangladesh is one of the largest Muslim countries in the world. The people of this country are deeply committed to Islamic way of life as enshrined in the holy Quran and the Sunnah. Naturally, it remains a deep cru in their hearts to fashion and design their economic lives in accordance with the precepts of Islam. The establishment of Islami Bank Bangladesh Limited on March 13, 1983, is the true reflection of this inner urge of its people, which started functioning with erect from March 30, 1983. This bank is the first of its kind in South-East Asia. It is committed to conduct all banking and investment activities on the basis of interest fee profit-loss sharing system. In doing so, it has unveiled a new horizon and ushered in a new silver lining of hope towards materializing a long cherished dream of the people of Bangladesh for doing their banking transactions in line with what is prescribed by Islam. With the active cooperation and participation of Islamic development bank (IDB) and some other Islamic banks, financial institutions, government bodies and eminent personalities of the middle east and the gulf countries, Islami Bank Bangladesh Limited has by now earned the unique position of a leading private commercial bank in Bangladesh.

Objective of the study

To understand the prevailing mechanism of modes of finance of Islami bank.

To study the performance of modes of finance of Islami bank.

To highlight the characteristics of modes of finance of Islami bank.

To highlight the major problem of modes of finance facing by Islami bank.

To understand the basic difference in relation to conventional bank.

Scope and Methodology of the study

Mode of finance is much talked in the financial literature of economic development. This topic includes a vast area of financial literature. But this present study covers only the modes of finance of Islamic Bank, specially the modes & mechanism of finance of Islami Bank Bangladesh Limited (IBBL). This study is confined to only this bank other than conventional bank.

Limitation of the study

It is very difficult to analyze this issue without proper knowledge about Islamic banking and economy.

As it is not conventional so it bears some complexity to understand.

Some words are in Arabic terms that make it difficult.

It is time consuming to differentiate & understand interest & profit.

Objectives of Islami bank

It is a golden desire of every Muslim that his social and political lives should be in accordance with the divine guides prescribed in the holy Quran and the Sunnah. In the same tune of aspiration as above, he desires to follow a purified life in financial and business life. So, the objectives of the Islamic banking may be derived from the broader objectives of the Islamic economy. Two quotations may help us understand our objectives. Ibn al- Qayyim says: The basis of the Shariah is the wisdom and welfare of the people in

this world as well as the hereafter. This welfare lies in complete justice, mercy, wellbeing and wisdom. Anything that departs from justice to oppression, from mercy to harshness, from welfare to misery and from wisdom to folly, has nothing to do with the Shariah Al- Ghazali says, The very objective of the shariah is to promote the welfare of the people which lies in safeguarding their faith, their life, their intellect, their posterity and their property. Whatever ensures the safeguard of these five serves public interest and is desirable. However, M. Umer Chapra, in his book Towards a Just Monetary System discussed some of the most fundamental characteristics of Islamic money and banking system. Those are as follows: 1. Broad-based economic well-being with full employment and optimum rate of economic ground;

2. Socio-economic justice and equitable distribution of income and wealth;

3. Stability in the value of money to enable the medium of exchange to be a reliable unit of account, a just standard of deferred payments, and a stable store or value.

4. Mobilization and investment of savings for economic development in an equitable manner such that a just return is ensured to all parties concerned, and

5. Effective rendering of all services normally expected from the banking system.

Islamic economy including Islamic banking is now entering a new phase which calls fore

more integrative as well as a more critical approach to meet the present day complex financial needs. Now, the economists are faced with the challenging task of reviewing the whole situation emerging at least in three areas. Firstly, to bring together the works done by different economists into a comprehensive view of the monetary system of Islam in its fullness, as against concentrating on specific, sometimes even disjointed, elements of money and banking. Secondly, to review critically the different models of Islamic banking presented over the years in the context of the practice of Islamic banking with a view to refining the theory as well as improving the practice. Thirdly, it is essential to put the whole theory and practice of Islamic banking in the perspective of an Islamic economy and the Islamic moral and social order. Any element of the Islamic system, however important, cannot produce the desired results, if it is allowed to operate in isolation. It must lead to other complementary changes to complete the process.

Special features of the bank

Islami Bank Bangladesh Limited (IBBL) was incorporated on 13.03.1983 as a public company with limited liability under the companies act, 1913. The bank started functioning with effect from 30.03.1983 as the first Shariah based interest-free bank in South-East Asia. The bank is committed to run all its activities as per Islamic Shariah. IBBL through its steady progress and continuous success has, by now, earned the reputation of being one of the leading private sector banks of the country. The distinguishing features of IBBL are as under:

All its activities are conducted on interest-free system according to Islamic Shariah.

Investment is made through different modes permitted under Islamic Shariah.

Investment-income of the bank is shared with the Mudaraba depositors according to a ratio to ensure a reasonably fair rate of return on their deposits.

Its aims are to introduce a welfare-oriented banking system and also to establish equity and justice in the field of all economic activities.

It extends Socio-economic and financial services to the poor, helpless and lowincome group of the people for their economic upliftment particularly in the rural areas.

It plays a vital role in human resource development and employment generation particularly for the unemployed youths.

Its aim is to achieve balance growth & equitable development of the country through diversified investment operations particularly in the priority sectors and in the less developed areas.

Modes of finance followed by IBBL

Investment is the action of deploying funds with the intention and expectation that they will earn a return for their owners of a fund can deploy it through real investment or financial investment. When resources are spent to purchase fixed and current assets for use in a production process for trading purpose, then it can be termed as real

investment. For example, deposit of money with a bank, purchase of Mudarabah Savings Bond or share of a company. Financial investments ultimately takes form of real investment as it is meant for so. Since hoarding is condemned by Islam and a 2.5 percent annual tax (Zakat) is imposed on savings, the owner of a fund, if he is unable to make real investment, has no option but to invest his savings as a financial investment. Modes of finance followed by Islami bank are exercised under three principles. 1. Bai- (Buy & Selling) Mechanism

2. Sharing (Profit & Loss) Mechanism

3. Ownership Sharing Mechanism Modes of finance under three principles can be presented by using chart as follows-

Meaning: The terms 'Bai- Murabaha' have derived from Arabic words Bai and Ribhun. The word Bai means purchase and sale and the words Ribhun means an agreed upon profit. BaiMurabaha means sale on agreed upon profit. Definition: Bai-Murabaha may be defined as a contract between a Buyer and a seller under which the seller sells certain specific goods p0ermissible under Islamic Shariah and the Law of the land to the Buyer at a cost plus agreed profit payable on cash or on any fixed future date in lump- sum or by installments. The profit marked-up may be fixed on lump sum or in percentage of the cost price of the goods. There are different types of Murabaha as given bellow:

Types of Murabaha:
In respect of dealing parties Bai-Murabaha may be of two types. 1. Ordinary Bai- Murabaha:

Ordinary Bai-Murabaha happens between the two parties, i.e., the buyer and the seller, where the seller as an ordinary trader purchases the goods from the market without depending on any order and promises to buy the same from him and sells those to a buyer for cost plus profit, then the sale is called ordinary Bai-Murabaha. In this case the seller undertakes full risks of his capital invested on the business with a view to earn profit out of selling the goods purchased for. 2. Bai-Murabaha on order and promise: It occurs between the three parties- the buyer, the seller and the Bank - as an intermediary trader between the buyer and the seller, where the Bank upon receipt of order from the buyer with specification and a prior outstanding promise to buy the goods from the bank, purchases the ordered goods and sells those to the ordering buyer at a cost plus agreed profit, the sale is called 'Bai- Murabaha on order or promise', generally known as Murabaha. In this case, capital with profit is almost secured by promise. This Murabaha upon order and promise is generally used by the Islami Banks, which undertakes the purchase of commodities according to the specification requested by the clients and sale on Bai- Murabaha to the one who order for the goods and promised to buy those for its cost price plus a marked-up profit agreed upon previously by the two parties, the Bank and the client. Therefore, it is a sale of goods on profit by which ownership of the goods is transferred by the Bank to the client but the payment of the sale price (cost plus profit) by the client is deferred for a fixed period. To make it more clear, it may be noted here that Islamic Bank is financier to the client not in the sense that the bank finances the purchase of goods by the clients as conventional Bank does, rather it is a financier by deferring the receipt of sale price of the goods sold by the Bank to the client. There is a chance for happening of a loan and earning of interest under the wrong practice of Bai-Murabaha. If the bank does not purchase the goods or does not make any purchase agreement with

seller under this Agreement of Bai-Murabaha that will be a remittance of the amount on behalf of the client, which shall be nothing but a loan to him and any profit on this amount shall be nothing but Interest (Riba that are practiced in the traditional Banking system). Therefore, to make a true practice of Bai-Murabaha, purchase of goods by the Bank should be for and on behalf of the Bank and the payment of price of goods by the Bank must be made for and on behalf of the Bank. But on any way, the payment of price of goods is turned into a payment for and on behalf of the client or it is paid to the client any profit on it will be Reba (Interest that is allowed in traditional baking system but not allowed in the Islami Banking system because Islam prohibits all kind of interest. Important Features: It is permissible for the client to offer an order to purchase particular goods by the Bank dealing its specification and committing himself to buy the same from their bank on Murabaha. i.e.,. Cost-plus agreed upon profit. It is permissible to make the promise binding upon the client to purchase from the Bank that is he is to either satisfy the promise or to indemnify the damages caused by breaking the promise without excuse. It is permissible to take cash/collateral security to guarantee the implementation of the promise or to indemnify the damages. It is also permissible to document the debt resulting from Bai-Murabaha by a Guarantor or a mortgage or both like any other debt is permission. Mortgage/ Cash Security may be obtained prior to the signing of the Agreement or at the time of signing the Agreement. Stock and availability of goods is a basic condition for signing a Bai-Murabaha agreement. Therefore, the Bank must purchase the goods as per specification of the client to acquire ownership of the same before signing the Bai-Murabaha agreement with the client.

After purchase of goods the Bank must bear the risk of goods until those are actually sold and delivered to the Client, i.e., after purchase of the goods by the Bank and before selling of those on Bai-Murabaha to the client buyer, the bank shall bear the consequences of any damages or defects, unless there is an agreement with the client releasing the Bank of the defects that means, if the goods are damaged, bank is liable, of the goods are defective (defect that id nor included in the release) the bank bears the responsibility. The bank must deliver the specified goods to the Client on specified date and at specified place of delivery as per Contract. The Bank shall sell the goods at a higher price (Cost +Profit) to earn profit. The cost of goods sold and profit mark-up therewith shall separately and clearly be mentioned on the Bai- Murabaha agreement. The profit mark-up may be mentioned in lump sum or in percentage of the purchase/cost price of the goods. But under no circumstances, the percentage of the purchase/cost price of goods. But under no circumstances, the percentage of the profit shall have any relation with time or expressed in relation with time, such as per month, per annum, etc. The price once fixed as per agreement and deferred cannot be further increased. It is permissible for the bank to authorize any third party to buy and receive the goods on Bank's behalf the authorization must be in a separate contract. These features make Bai-Murabaha identical from all other modes of Islamic Investment. There are certain steps to accomplish a deal of Bai- Murabaha as shown below.

Steps of Bai-Murabaha Practiced by Islami Bank:

First Step: Submission of proposal: The client's sends a proposal with the specifications of the commodity for purchasing through the Bank and requests to make him known the date and method of payment of price, etc.

The Bank sends a quotation valid for a certain period mentioning the cost of the goods plus profit of the bank. Second step: Signing a promise to purchase: The client promises to buy the commodity from the bank on Bai-Murabaha basis (for the cost of the commodity plus the agreed upon profit) The Bank studies the request and determines the securities with terms and conditions for approval. Third step: The first sale contract: The bank informs the client of its approval of purchasing the commodity. The bank may pay the price immediately pr as per the agreement. The seller expresses its approval to the sale and sends the invoice. Fourth step: Signing of a Murabaha Sale Contract: The two parties (the bank and clients) sign the Bai-Murabaha sale contract according to the agreement of the promise to purchase.

Fifth Step: Delivery and Receipt of the commodity: The Bank authorizes the client or his nominee to receive the commodity The seller sends the commodity to the place of delivery agreed upon. The client undertakes the receipt of the commodity in its capacity as legal representative and notifies the bank of the execution of the proxy.

BAI-MUAJJAL (Deferred sale)


The terms "Bai" and "Muajja" have been derived from Arabic words 'Bai' and 'Ajal'. The word Bai means purchase and sale and the word 'Ajal' means a fixed time or a fixed period. "Bai-Muajjal" means sale for which payment is made at a future fixed date or within a fixed period. In short, it is a sale on Credit. Definition: The Bai-Muajjal may be defined as a contract between a Buyer and a Seller under which the seller sells certain specific goods (permissible under Shariah and law of the country), to the Buyer at an agreed fixed price payable at a certain fixed future date in lump sum or within a fixed period by fixed installments. The seller may also sell the goods purchased by him as per order and specification of the buyer. Bai-Muajjal is treated as a contract between the bank and the client under which the bank sells to the client certain specific goods, purchased as per order and specification of the client at an agreed price payable with in a fixed future date in lump sum or by fixed installments. Thus it is a credit sale of goods by which ownership of the goods is transferred by the bank to the client but the payment of sale price by the client is deferred for a fixed period. It may be noted here that in case of Bai- Muajjal and Bai-Murabaha, the Islamic bank is a financier to the client not in the sense that the bank finances the purchase of goods by the client, rather it is a financier by deferring the receipt of the sale price of goods, it sells to the client. If the bank does not purchase the goods or does not make any purchase agreement with seller but only makes payment of any goods directly purchased and received by the client from the seller under Bai-Muajjal / Bai-Murabaha agreement, that will be a remittance/ payment of the amount on behalf of the client, which shall be nothing but a loan to the client and any profit on this amount shall be nothing but interest. There fore, purchase of goods by the bank should be for and on behalf of the bank and the payment of price of goods by the bank must be made for and on behalf of the bank.

If in any way the payment of price of goods is turned in to a payment for and on behalf of the client, or it is paid to the client any profit on it will be Riba. There are some important features of Bai- Muajjal as given bellow: Important Features: It is permissible for the Client to offer an order to purchase by the bank particular goods deciding its specification and committing himself to by the same from the bank on BaiMuajjal I.e. deferred payment sale at fixed price. It is permissible to make the promise binding upon the Client to purchase from the bank, i.e. he is to either satisfy the promise or to indemnify the damages caused by breaking the promise without excuses. It is permissible to take cash/ collateral security to Guarantee the implementation of the promise or to indemnify the damages. It is also permissible to document the debt resulting form Bai-Muajjal by a Guarantor, or a mortgage or both like any other debt. Mortgage/ Guarantee/ Cash security may be obtained prior to the signing of the Agreement or at the time of signing the Agreement. Stock and availability of goods is a basic condition for signing a Bai- Muajjal Agreement. Therefore, the Bank must purchase the goods as per specification of the client to acquire ownership of the same before signing the Bai-Muajjal Agreement with the Client. After purchase of goods the bank must bear the risk of goods until those are actually delivered to the Client.

The Bank must deliver the specified goods to the Client on specified date and at specified place of delivery as per contract. The Bank may sell the goods at a higher price than the purchase price to earn profit.

The price once fixed as per agreement and deferred cannot be further increased. The Bank may sell the goods at one agreed price, which will include both the cost price and the profit. Unlike Bai- Murabaha, the bank may not disclose the cost price and the profit mark- up separately to the Client.

Meaning: The terms Bai and Salam have been derived from Arabic words. The words Bai means sale and purchase and the word Salam means Advance. Bai-Salam means advance sale and purchase. Definition: It is a sale in which an advance payment is made by the buyer, but the delivery is delayed to an agreed date. In the Bai-Salam, a financial transaction happens in advance in cash as a price of commodity whose delivery will be in a future date. It means deferred is the commodity sold (debt in kind) and price of the commodity described is to be aid immediately in advance. The Bai-Salam sales serve the interests of both parties: 1. The seller- gets in advance the money he wants in exchange of his obligation to deliver the commodity later. He benefit from the Salam sale by covering his financial needs whether they are personal expenses for productive activity. 2. The purchaser-heretic is the financing bank. The bank gets the commodity it is planning to trade on in the time it decides. Because the commodity becomes the liability of the seller who meet his obligation. The bank will also benefit from the cheap prices for usually salam sale is cheaper than a cash sale. This way the bank will be secured against the fluctuations of prices. The bank can sell on parallel salam commodity in the same kind as it has previously purchased on first salam without making one contract depend on the other. The bank

also has the option of waiting to receive the commodity and then sell it for cash or deferred payment. Important feature: Bai-Salam is a mode of finance allowed by Islamic Shariah in which commodity or product can be sold without having the said commodity or product either in existence or physical possession of the seller. If the commodity are ready for sale Bai-Salam is not allowed in Shariah. Then the sale may be done either in Bai-Murabaha or Bai-Muajjal mode of finance.

Practical Steps of the Salam Sale:

1.Cash sale or sale on Credit- The Bank pays the price in the contract meeting so that the seller makes use of it and covers his financial needs. The seller abides the delivery of the commodity on the specific due date. 2.Delivery and receipt of the commodity on the specific due Date: The bank there is several options at the disposal of the bank to choose one of them. a) The bank receives the commodity on the specific due date, and either for cash or on credit. b) The bank can authorize the seller to sell the commodity on its behalf as against fees (or without fees). c) Direct the seller to deliver the commodity to a third part (the Buyer) according to pervious promise of purchase, that is at an emphatic demand of purchase. 3. The sale Contract: The bank agrees to sell the commodity for cash or a deferred price higher than the salam purchase price. The buyer agrees to purchase and to pay the price according to the agreement.

Rules of Bai-Salam

1. Commodity Should be Known: It is a condition that the commodity should be known Ignorance about the commodity leads to dispute which invalidates the contract. 2. Monitoring By Specification: It is a condition that the commodity can be monitored by specification to the maximum possible degree, only negligible variation is tolerated If the commodity cannot Be monitored by specification salam is impermissible, because of ignorance that leads to dispute. 3. Availability of Goods for Delivery: It is a condition that the commodity is possible to deliver when it is due. That is the probability of its existence at the time of delivery is deemed to be high, if the contrary is the case, salam, is impermissible. 4.Salam n the Whole to be Possessed Partly: It is permissible to draw a salam sale contract on one whole thing but to be possessed at different times in specific parts. 5. Commodity a Liability Debt on the Seller: It is a condition that the commodity is a liability debt, The seller is obliged to deliver the commodity when it is due, according to the specification stipulated in the contract without abiding as to whether it is the product of his factory or the produce of his private firm or from others. 6. Salam on Existing Goods: Salam sale is impermissible on existing commodities because damage and deterioration cannot be assured before delivery on the due date. Delivery may become impossible, anything which is risky and elevator. 7. Salam on Land and Real Estates salam: Is impermissible on Land lots and real estates because the description or the real estate entails the location. If the location is determined then it is specified, which contradicts what the jurists agreed upon, that salam is a liability debt. 8. Salam on Special Item: Salam is permissible on a commodity of a specific locality if it is assured that it is almost always available in that locality and it rarely becomes unavailable.

9.Advance Payment: It is a condition that the purchase price in salam is specified and advanced to the seller at the contract meeting. 10. Date of Delivery Known: It is a condition in salam sale that the due date is known to avoid ignorance which leads to dispute. 11.Delivery mechanism Specified: It is a condition that the place of delivery is started in the contract if the commodity needs loading or transportation expenses. 12. Provision for Mortgage: It is permissible to take mortgage and guarantor on salam debt to guarantee that the seller satisfies his obligation by delivering the commodity sold, which is a liability on the due date. 13.Parallel Salam Contract: It is impermissible for the buyer of a salam commodity to sell it before receiving it .It is known that the Salam commodity is a liability debt ob the seller and not an existing commodity. Instead of that, it is permissible for the buyer to draw a parallel salam contract without connecting it to the first salam contract.

Definition: Instisna'a sale is a contracting which the price is paid in advance at the time of contract and the object of sales manufactured and delivered later A manufacturer, artist or craftsman may take orders, with or without advance payment, to make articles himself or hire labor to do so. The majority of the jurists consider Istisna's as one of the divisions of Salam, Therefore, It is subsumed under the definition of Salam, But the Hanafie school of jurisprudence makes Istisna's as an independent and distinct contract, The jurists of the Hanafie school have given various definitions to Istisna'a some of which are "That it is a contract with a manufacturer to make the something" and It is a contract on a commodity on liability with the provision of work" The purchasers called Mustasnia contractor and the seller is called "sania" maker manufacturer and the thing is called 'masnooa'

manufactured, built, made. Islami Bank can utilize Istisna'a in two ways. 1. It is permissible for the bank to buy a commodity on Istisna'a contract then sell it after receipt for cash installed or deferred price. 2.It is also permissible for the bank to enter into Istisna'a contract in the capacity of seller to the who demand a purchase of a particular commodity and then straw a parallel istisna'a Contracting the capacity of a buyer with another partition cake manufacture the -commodity agreed upon in the first contract. The first Istisna'a can be immediate or deferred ( the payment) The payment in the second Istisna'a can be each or deferred stated blow are the practical steps which the bank applies the modes of Istisna'a sale, parallel Istisna'a with reference to the nonexistence of any legal relation or financial obligation between. 1. The purchaser requesting Istisna'a (the end use) in the first contract, and 2..The (maker), manufacturer, (the builder), (the seller) who manufactures the article in accordance to the parallel Istisna'a contract. So any disagreements that may arise are settled under each contract separately according to the provision therein.

Rules For Istisna'a Sale:

1. It is a condition in the Istisna'a contract to stare in the clearest of terms the type dimensions and all the specification required, because it id a condition in all commutative contract the sold commodity must be known to avoid ignorance which leads to dispute. 2 Istisna'a contract is valid for objects that can be made. It is invalid for corn, wheat,

barley or fruit and all natural products whose sale on liability are a salam and not Istisna'a. 3 The object sold in Istisna'a is a fixed liability debt therefore it is permissible to be a valuable asset made according to special specification- nothing like it-as the customer wishes with the provision that to can be monitored buy description. For this feature Istisna'a is different from the salam, which is permissible only in similar assets. 4. The materials should be supplied by the maker. If they are supplied by the buyer, the contract is Ijara and not Istisna'a 5 The Istisna'a is not confined to what the seller makes after he contract, nut the maker will be satisfying his obligation if he brings in an article conforming to all the specifications. Whether it is his make before the contact or the make of some one else. The specifications demanded by the buyer are the most important as the commodity subject of contract is a liability debt. 6. The Istisna'a contract is a binding to the two parties, and no party has the right to retract, only if the commodity does not conform to the specifications demanded, can the buyer have the option. 7. Once the contract is drawn the ownership of the asset is affirmed to the buyer and the ownership of the price is affirmed to the maker. 8.It is not a condition in the Istisna'a contract to advance the price. Usually part of the price is paid in advance and the reminder will be withheld to the time of delivery and receipt of the commodity. 9. It is a condition that the period of delivery is specified whether it is short or long so as to avoid ignorance which leads to conflict between the two parties. 10. It is condition that the period of delivery is started of the commodity needs loading or transportation expenses.

11. The buyer may stipulate in the Istisna'a contract that the commodity shall be manufactured or produced by a specific manufacturer, or manufactured from specific materials. This is nor permitted in the case of salam sale.

Definition: It refers to a contact between two parties in which one party supplies capital to the other party for the carrying on of some trade on the condition that the resulting profits be distributed in a mutually agreed proportion while all loss is borne by the provider of the capital. Mudarabah is also known a Qirad and Muqaradah Mudaraba is a contract of those who have capital with those who have expertise Where the first party provides capital and the other party provides the expertise with the purpose of earring "halal" (Lawful) profit which will be devised between them in ration agreed upon. This mode serves the business interest of the capital owner and the mudharib (agent). The capital owner may not have the opportunity or the experience to make turn over capital and trade with it. On the other hand, the agent (the Mubarib) May not have the adequate capital to put to materialize his experience, such lackings of both parties bring them into a contract of Mudarabah. It had certain steps to be followed. The following is the steps of the Mudarabah contract.

Steps of Mudarabah
1. Establishing a Mudharabah Project: The bank- the bank provides the capital as a capital owner.

The Mudharib- provides the effort and expertise for the investment of capital in exchange of a share in profit agreed upon. 2.The Results of Mudharabah: The two parties calculate the earrings and divide the profits at the end of Mudharabah; this can be done periodically in accordance with the agreement along with observance to legal rules. 3.Payment of Mudharabah Capital: The banks recovers the Mudharabah capital it contributed before dividing the profits between the two parties because profit is protection to capital in case of agreement to distribute profits periodically before the final settlement it must be on account until the security of capital is assured. 4.Distribution of wealth resulting from Mudharabah: In case of loss, the capital owner (the bank) bears the loss. In the event of profits, they are divided between the two parties in accordance wit the agreement between them with observance to the principle "profit is protection to capital" There are some legal rules for Mudharabah Mode of Finance, which are as follows.

Rules of Mudharabah:
1. Capital Must be Specific: It is a condition in Mudharabah that capital must be specific or its return to owner, so its amount must be known at the contract, and because the uncertainty about the amount of capital necessarily leads to uncertainty about the amount of profit, which represents an increment to capital. 2.Capital Must be in Currency: it is a condition that capital must be a currency in circulation. However, It can be merchandise only in condition that it is evaluated at the contract and the agreed upon value becomes the capital of Mudharabah. 3.Capital Not a Liability debt on Mudarib: It is a condition that in capital must not be a liability debt on the Mudharib, because the Mudharib is a trustee and in respect to the debt, it is a guarantor who can only be absolved after payment.

4.Mixing of Private Capital Permissible: It is permissible for a mudharib to mix its private capital with the capital of the Mudharabah, thus it becomes a partner, as well, and its disposal of capital on the basis of Mudharabah is permissible. 5.Delivery of Capital to Mudarib: It is a condition that the capital of Mudharabah must be delivered to the mudharib because not delivering it imposes constrictions on the withhold it imposes constrictions on the mudharib and restricts its power disposal. Some of the jurists permit the capital owner to withhold capital and release it gradually according to the needs of the mudharib since Mudharabah adjudges unrestricted disposal but not deliver. 6. Imposition of Restriction on Mudarib: It is permissible to impose restrictions on the mudharib if the restriction is beneficial and dose not constitute a constriction on the agent to attain the profit required and is not counterproductive to the purpose of the Mudharaba if the mudharib violates the restriction contravenes the beneficial condition, it becomes a usurper and guarantees capital to the capital owner. 7.Hiring Helping Hands By Mudarib: It is permissible for the Mudharib to hire assistance in difficult work, which it is unable to do by itself. Recourse shall be made to prevailing custom to determine that. 8.Disposal of the Mudharib: The disposal of the Mudharib is confined to what is conducive to the Mudharabah. It must lend or donate nothing of the Mudharabah capital It is also not allowed to purchase, for Mudharabah with more than its capital, nor is it allowed to go into partnership with others using the Mudharabah capital. All of the above is permissible if the capital owner consents and authorizes the agent to use its discretion. 9. No Security or Guarantee Except Negligence: No security on the Mudharib shall be stated in the Mudharabah contract except in case of negligence or trespass because the mudharib is a trustee on what is in its hold, capital is judged as a deposit. It is permissible to take a surety mortgage from the mudharib to guarantee the payment in case of negligence or trespass or violation of conditions, but it is impermissible to take

that as a guarantee to capital or profit, because it is impermissible for the Mudharib to guarantee Capital nor profit. 10. Profit Sharing as per Agreed Ratio: It is a condition that profit should be specific because it the subject of the contract and being unknown abrogates the contract. The contraction parties should stipulate in the contract the profit shares (in percentage) for each one. It is impermissible to stipulate a lump sum as profit to either party so as not to lead to the termination of profit by one of them. Profit in Mudharabah is distributed according to the agreement of the two contraction parties. They may agree on specific rations, be more or less. 11.Loss to be Borne by the Owner of the Capital : It is a condition that the capital owner bears alone the loss (the Mudharib bears nothing of it ) because loss is a decrease in capital and capital belongs to the owner. 12. Profit is Protection to Capital: The Mudharib shall collect its share of the profit only after obtaining the permission of the capital owner. Also the Mudharib is entitled to collect its share of profit only after capital is recovered , because the principle says "profit is protection to capital" In case of temporary division of profit before the final settlement, and the Mudharabah is contenting, the loss incurred later shall be made good from the profit distributed.

13. Recovery of Capital: The ownership of the mudharib becomes secure after the liquidation of the Mudharabah and the capital owner recovered its capital. Some of the Jurists hold the view that auditing is like division and possession. If two parties reach a final settlement after the liquidation of the assets and leave the Mudharabah, it is considered to be a new mudharabah and neither one makes good the loss of the other. 14.Not a Binding Contract: Mudharabah is terminated if one of the two parties rescinds it because it is an optional not a binding contract. Some of the jurists hold the view that Mudharabah is binding and it cannot be rescinded if the Mudharib

commences work.

MUSHARAKA (Partnership)
Meaning and definition: The word Musharaka is derived from the Arabic word Sharikah meaning partnership. Islamic jurists point out that the legality and legality and permissibility of Musharakah is based on the injunctions of the Holy Qura'n, Sunnah, and Ijma (consensus) of the scholars. It may be noted that Islamic Banks are inclined to use various forms of Shariakt- al -Inan because of its built on flexibility. At an Islamic bank, a typical Musharakah transaction may be conducted ob the following manner. One two or more entrepreneurs approach an Islamic Bank for the finance required for a project. The bank along with other partners provides complete finance. All partners, including the bank have the right to participate in the project. They can also waive this right. The profits are to be distributed according to an agreed ratio, which need not be the same as the different partners have provided the finance for the project Musharakah may be of two types: 1.Permanent and 2. Diminishing Musharaka which have been discussed below. a. Permanent Musharakah: in this case the bank participates in the equity of a company and receives an annual share of the profits on a pre-rate basis. The period of termination of the contract is not specified. This financing technique is also referred to as continued Musharakah. b. Diminishing Musharakah: Digressive or Diminishing Muaharakah is a special form of Musharakah which ultimately culminates in the ownership of the asset or the project by the client. It operates in the following manner. The bank participates as a financial partner, in full or in part, in a project with a given

income forecast. An agreement is signed by the partner and the bank through which the bank receives a share of the profit as a partner. However, the agreement also provides payment of a portion of the net income of the net income of the project as repayment of the principal financed by the bank. The partner is entitled to keep the rest. In this way, the full owner. Definition of permanent Musharakah. The contributions of the partners under this mode may be equal or unequal ratios of capital to establish a new income-generating project or to participate in an established one, whereby each participant owns a share in the capital structure permanently and deserves his share of the profit income. Such a partnership originally is intended to continue up to the dissolution of the company. But one can sell his share in the capital to withdraw from the project. The Islamic Banks can use the mode of Permanent Musharakah in many incomegenerating projects. They can finance their customers, for an intended projects, with pare of the capital required for the project in exchange of a share of the output as they may agree upon. They can also mostly leave the responsibility of management of the customer- partner and retain the right of super vision and follow up. It follows from the above discussion that there are three steps of permanent Musharakah which are given below. One- partnership in Capital The bank tenders part of the capital required in its capacity as a partner and authorizes the customer partner to manage the project. The partner tenders part of the capital required for the project and be a trustee on what he holds from the bank funds.

Two-Results of the projects

The work in the project is for the growth of capital. The project may achieve positive or negative results. Three-The Distribution of wealth accrued from the project. In case of loss, each partner bears part of the loss proportionate to its share in capital. In case of earning profits, they are divided between the two parties (the bank and the partner) in accordance with the agreement.

Rules For Permanent Musharakah:

1. Capital Should be Specific: It is a condition that the capital of the company is specific, existent and under disposal. It is invalid to establish a company on non-existent fund of debt, for the purpose of profit, 2. Share of Equity: It is not a condition that partners have equal shares in capital, though variation in shares is permissible. It is subject to agreement. 3.Nature of Capital: It is a condition that the capital of the company is money and valuables. Some of the jurists permit participating with merchandise on condition it is evaluated in the contract and the value agreed upon becomes the capital of the company. 4.Active Participation of Partners: It is impermissible to impose conditions forbidding one of the partners from work, because the company is build on and each partner implicitly permits and gives power of attorney to the other partner to dispose of and work wit capital but it is permissible for one partner to singly work in the company by mandate of other partners. 5.No Security for Profit: A partner is a trustee on the funds in his hand from the company and he guarantees only in case of trespass or negligence and it is permissible to take a mortgage or a guarantee against trespass and negligence but it is impermissible to take security or profit or capital.

6. Ratio of Profit Prefixed: It is a condition that profit for each partner must be known to avoid uncertainty and it must be a prorate ratio to all partners and must not be a lump sum, because this contravene the requirement of partnership. 7. Variation in Share of Profit Permissible: In Principe, profit must be divided among partners in ratios proportionate to their shares in capital but some of the jurists permit variation in profit shares whereupon it is determined by agreement for one of the partners may be more dexterous and more diligent and may not agree to parity ,so variation in profit becomes necessary. 8. Not a binding contract: In principle, partnership is a permissible and not a binding contract, so it is admissible for any partner to rescind the contract whenever it wishes provided that this occurs with the knowledge of the other partner or partners, because rescinding the contract without the knowledge of other partners prejudices their interests. Some of the jurists are of the view that the partnership contract is binding up to the liquidation of capital or the accomplishment of the job accepted at the contract. Application of permanent Musharakah: Permanent Musharakah is helpful for large amount of investment in modern economic activities the Islamic banks can use Musharakah to a new or established firm by using permanent Musharakah as a mode of investment. The Islamic banks can make sufficient fund available to the customer for the long term. The Islamic banks may become active partners in determining the methods of production cost control, marketing etc. and to achieve the objectives of the establishment. They can also supervise and follow up the overall activities of the firm. The Islamic banks can share profit or loss with the (partners) clients in all situations of the firm. Definition of diminishing Musharakah: Diminishing Musharaka is an intention from the very beginning not to stay in and continue the partnership up to the liquidation of the company. The Islamic bank can give the other partner the right to purchase portion of the bank on the ownership [the

form for full payment at a time or by installment basis as per agreement with the partners (the client). The bank gradually can relinquish share to the partner, in exchange the partner pays the price to the bank periodically during a reasonable period to be agreed upon. after the discharge, the bank withdraws it claims from the firm and it becomes the property of the partner. Decreasing partnership is a mode innovated by the Islamic banks. It differs from the partnership. Those are mentioned below.

Steps of diminishing partnership

1. Participation in capital: The bank-tenders part of the capital required to the project In its capacity as a participant and agrees with the customer partner on a specific method of selling its share in capital gradually. The partner-tenders part of the capital required to the project and be a trustee in what is in its hands of the bank funds. 2. Results of the projects: The purpose of the work in the project is the growth of capital. The results of the project may be positive or negative. 3. The distribution of the wealth accrued from the projects: In the event of loss each partner bears its share in the loss in a ratio proportionate to its share in capital. In case of earning profits, are detonated between the two partners (the bank and the customer) in accordance with the agreement. The shares the sale must be concluded as a separate deal with no connection to the contract of the company. 4.The Bank sells its Share In Capital: The Bank- expresses its readiness, its readiness, in accordance with the agreement, to sell a specific percentage of its share in capital. The partner- pays the price of that percentage of capital to the bank and the ownership is transferred to the partner. This process continues up to the end of the partnership of the bank in the project and

that's by gradually transferring the ownership of the project customer/partner. In this way the bank has its principal returned plus the profit earned during the partnership advice versa. In the first Conference of the Islamic Banks in Dubai, the conferees studied the topic of partnership ending with ownership (decreasing partnership) and they decided that this mode can be applied in one of the following (ways) forms. The First Form: The Bank agrees with the customer on the share of capital and the conditions of partnership. The Conference has decided that the bank should sell its shares to the customer after the completion of the partnership and in an independent contract where the customer has the same provision. The Second Form. The band agrees with the customer in participating in the total or partial capital of a firm of prospective earning son the basis of the agreement with the right to relating the remainder of the income for the purpose of paying the principal of what the bank has contributed.

The Third Form. The shares of each partner (the bank and the partner) in the company are determined as stocks co comprising the total value of the asset (real estate) Each partner, (the bank and the customer) gets its share of the earnings accrued from the real property, If the partner so wishes it can each year purchase a cretin number of the shares owned by the Bank, The shares possessed by the bank shall be decreasing until the partner becomes the sole owner of the real property.

Rules for diminishing Musharakah.

In addition to all the legal rules that apply to the permanent partnership which also apply to the decreasing partnership, the following matters must the observed. 1.Participation and Sharing profit and Loss: It is a condition in the decreasing

partnership that it shall not be a mere loan financing operation, but there must be real determination to participate and all the parties shall share profit or loss during the period of the partnership. 2.Bank's Ownership and Right to Management: It is a condition that the bank must completely own its, share in the partnership and must have its complete right in management and disposal. In case the bank authorizes its partner to perform the work, the bank shall have the right of supervision and follow up. 3.Redeeming Bank's Share of Capital: It is impermissible to including the contract of decreasing partnership a condition that adjudges the partner to return to the bank the total of its shares in capital in assertions in addition to profits accruing from that share, because of resemblance to RIBA ( usury). 4.Bank's Promise to Sell It Share to the Partner: It is permissible for thee bank to offer a promise to sell its shares in the company to the partner if the partner pays the value of the shares. The sale must be concluded as a separate deal with no connection to the contract of the company.

Hire purchase Under Shirkatul Melk:

Meaning and Definition: Hire purchase Under Shirkatul Melk is a special type of contract which has been developed through practice. Actually, it is a synthesis of three contracts: 1. Shirkat

2. Ijarah and

3. Sale There may be defined as follows:

Shirkatul Melk:
Shirkatul means partnership Shirkatul Melk means share in ownership. When two or more persons supply equity, purchase an asset, own the same jointly, and share the benefit as per agreement and bear the loss in proportion to their respective equity, the contract is called Shirkatul Melk contract.

The term Ijarah has been derived from the Arabic words Air and Uirat which means consideration, return, wages or rent. This is really the exchange value or consideration, return, wages, rent of service of an asset. Ijarah has been defined as a contract between two parties, the Hiree and Hirer where the Hirer enjoys or reaps a specific service or benefit against a specified consideration or rent from the asset owned by the Hiree, it is a hire agreement under which a certain assert is hired out by the Hiree to a Hirer against fixed rent or rentals for a specified period.

Element of Ijarah:
a. According to the majority of Fuqaha, there are three general and six detailed elements of Ijarah.

The wording: this includes offer and acceptance.

Contracting parties: this includes a Hiree, the owner of the property, and a Hirer, the party that benefits from the use of the property.

Subject matter of the contract: this includes the rent and the benefit.

b. The Hiree: the individual or organization hires/rents out the property of service is called the Hiree. c. The Hirer: the individual of organization hires / takes the hire of the property or service against the consideration, rent/ wages/ remuneration is called the Hirer. d. The benefit / asset: the benefit, which is hired/, rented out is called the benefit. e. The rent: the consideration either in monetary terms or in kinds fixing quantity of goods/money to be paid against the benefit of the asset or service of the asset is called the rent. Sale: This is a sale contract between a buyer and a seller under which the ownership of certain goods or asset is transferred by seller to the buyer against agreed upon price paid / to be paid by the buyer. Thus, in Hire Purchase Under Shirkatul Melk made both the bank and the client supply equity in equal or unequal proportion for purchase of an asset like land, building, machinery, transport etc. Purchase the asset with that equity money, own the same jointly, share the benefit as per agreement and bear the loss in proportion to their respective equity. The share part or portion of the asset owned by the bank is hired out to the client partner for a fixed rent per unit of time for a fixed period. Lastly the bank sells and transfers the ownership of its share/ part/ portion to the client against payment of price fixed for that part either gradually part by part or in limp sum with in the hire period or after the expiring of the hire agreement. Stages of Hire Purchase Under Shirkatul Melk: Thus Hire Purchase Under Shirkatul Melk agreement has got three stages:

Purchase under joint ownership

Hire and

Sale and transfer of ownership to the other partner Hirer.

Important features:
1. In case of HPSM transaction the asset/ property involved is jointly purchased by the Hiree (Bank) and the Hirer (Client) the Hiree and the Hirer become co-owner of the asset under transaction in proportion to their respective equity participation. 2. In HSPM agreement, the exact ownership of both the Hiree and Hirer must be recognized. 3. Under this agreement, the Hirer becomes the owner of the benefit of the asset but not of the asset itself, in accordance with the specific provisions of the contract, which entitles the Hiree, is entitled fore the rentals. 4. As the ownership of hired portion of the asset lies with the Hiree and rent is paid by the Hirer against the specific benefit, the rent is not considered as price or part of price of the asset. 5. In the HPSM agreement the Hiree does not sell or the Hirer does not purchase the asset but the Hiree promise to sell the asset to the Hirer part by part only. 6. The promise to transfer legal title by the Hiree and undertakings given by the Hirer to purchase ownership of the hired asset upon payment part by part as per stipulations are effected only when it is actually done by a separate sale contract. 7. As soon as any part of Hirees ownership of the asset is transferred to the Hirer that becomes the property of the Hirer and hire contract for that share/part and entitlement for rent there of lapses. 8. in HPSM, the shirkatul melk contract is effected from the day the equity of both partied deposited and the asset is purchased and continues up to the day on which the

full title of Hiree is transferred to the Hirer. 9. Effectiveness of the sale contract depends on the actual sale and transfer of ownership of the asset by the Hiree to the Hirer. 10. Under this agreement the bank acts as a partner, as a Hiree and at last as a seller; on the other hand the client acts as a partner, as a Hirer and lastly as a purchaser. 11. Ownership risk is borne by both the Hiree and Hirer in proportion to their retained ownership or equity. 12. The Hirer cannot, without obtaining prior written permission of the Hiree make any changes in the exact item of the hiree, or remove it from its place of installation and transfer into another location. 13. HPSM transaction facilitates the client to get benefit from the hired asset in exchange of rental and also to become full owner of the asset by purchasing it part by part. 14. The Hirer to secure the Bank (the Hiree) will pledges hypothecate or mortgage his portion or share rental, if any. in the asset and or any other asset of his own or third party guarantor to the Bank to fulfill his all liabilities/commitments including the accrued

Rules: 1. It is a condition that the subject of the contract and the asset should be known comprehensively. 2. It is a condition that the asset to be hired must not be a fungible one which can not be used mire than once or in other words the asset must be a non-fungible one which can be utilized more than once or the service of which can be separated from the asset itself.

it is a condition that the subject of the contract must actually and legally be attainable. 3. It is a condition that the Hirer shall ensure that he will make use of the asset as per provisions of the Agreement. 4. It is a condition that the Hirer shall ensure that he will make use of the asset as per provision of the agreement. 5. The hire contract is permissible only when the asset and the benefit derived from it is with in the category as per Islamic Shariah. 6. In a hire contract, the period of hire and the rental to be paid per unit of time be clearly stated. 7. Everything that is suitable to be considered a price, in a sale, can be suitable to be considered as rental in a hire contract. 8. It is permissible to advance, defer or install the rental in accordance with the agreement. 9. It is permissible to make the Hirer to bear the cost of ordinary routine maintenance, because this cost is normally known and can be considered as part of the rental. 10. If the hired asset is damaged or destructed by the act of Allah and if the Hiree offers a substitute with the same specifications agreed upon in the hire contract the contract does not terminate. 11. Under HPSM agreement, both the Hiree and the Hirer must pay their respective equity as agreed upon to purchase the demised asset under joint ownership. 12. Ownership of the asset of both the Hiree and the Hirer should be recognized as per law of the land.

Basic Characteristics of Modes of Finance

In the process of applying Islamic modes of finance some basic characteristics have emerged. The alternative risk sharing modes offered by Islami banks in lieu of interest are characterized by flexibility. Banks, in conditions of free market, can choose the most suitable formula set the suitable profit, margin or profit sharing percentages (according to type of activity, location clientele, pricing constraints etc.) design specific disbursement or repayment conditions to go with the formula etc. thus thee actual socioeconomic cost of providing goods or services to the community is better reflected in Islamic financing. This has its implications for rational resource allocation for the while community. Thee banking system can be made to act as a more potent resource allocater than the traditional one if the state so chooses in centrally managed or directed economics. More specifically the variety of modes used enables Islami banking to offer more effectively their services to the society in these areas.

Taxes and other fiscal resources:

Banks knows better the profit margin realized by their partners. They may be asked to deduct taxes on behalf of the taxing authority at the source. This would certainly boost tax collection. A similar effect may happen when banks (in their capacity as cofinanciers) pay customs duties, excise duties etc. directly to the state on behalf of the Musharaka operations- there by lessening possibility of tax evasion.

Adaptability to fiscal and monetary regimes by the state:

Islami banks can only trade in assets. If these are regulated then Islami banks can only extend finance to the available volume. Excess liquidity cannot go to finance speculative activities, as the banks do not stand to gain from financing these activities through overdraft arrangements. Islami bank cannot offer normal overdraft. Equally if price controls are enforced, Islami bank can help enforce observance either

when purchasing raw materials or selling the products. This can work more effectively if the whole system is Islamic since the breachers of the systems will be penalized by not having any finances extended to them. Compliance would be greater. An incomes and prices policy becomes more feasible to contemplate if the state machinery can have such an effective tool to check an unruly business community. Development: Because of their readiness to share labor Islami bank is an institutional standing than traditional banks in assisting development of their communities. This is especially so, for small industrial and agricultural sectors that are basically cutoff from normal commercial financing. Resource Mobilization: Islami banks trading activities and modes avail them of higher profit margins especially if they were efficient in turning over their activities at a higher rate. This enables them to offer higher profits for their investment account holders and enables them, there fore, to draw more of the public savings into investment accounts. Inflation: Islami banking investments are given for financing specific operations in terms of types of activities, duration and value. Thus there is a direct trade off between money going out of the bank and goods and services coming into the banks holds (by way of participation or sales contract). As such, Islamic finance cannot go to hoarding or monopolistic or market cornering activities, these activities are prohibited. Therefore, the Modes of finance of Islami Bank Bangladesh Limited work to lessen inflation in a very direct way.

Pursuant to the investment policy adopted by the bank, a 7-year perspective-financing plan from 1995-2002 has been drawn up and put into implementation. This plan aims at diversification of the investment port-folio by size, sector, geographical area, economic purpose and securities to bring in phases all sectors of the economy and all types of economic activities and different economic groups of the society with in the fold of Banks investment operations. Recently another 5-year plan from 2003-2007 has been adopted by the bank keeping the same in view, side by side with commercial and industrial investment operations, many special financing schemes like rural development scheme, house-hold durable scheme, investment scheme for doctors, transport investment scheme, small business investment scheme, small transport investment scheme, micro-enterprise investment scheme and real estate investment program, targeting different economic groups have been introduced by the bank as part of their financing plan.

Mode-Wise Finance:
(Taka in Million)

Mode-wise finance by IBBL is very high in Bai- Murabaha & Hire- Purchase and very low in Mudaraba.

Composition of Modes of Finance (2001):

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Sector-Wise Finance:
(Taka in Million)

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Findings Conventional Bank vs. Islami Bank

The modes of finance followed by Islami bank ensure the investment system that is permitted by Islamic Shariah. Islami banks modes of finance is mainly based on buying and selling practice, not based on interest. Its other modes of finances are based on sharing basis and hire purchase under sirkatul melk. On the other hand the modes of finance follows by conventional banks are based on interest, which is prohibited by Islam. In its attitude to interest Islam is un-ambiguous. The Quran prohibits interest in unequivocal terms. Bank lending without interest is a departure from the traditional banking system we are accustomed to. In principles, they are alike, so they in function. The banks with or without interest attend to the economic needs of the community supplying necessary finance for trade, commerce and industry or individual borrowers. Without interest traditional bank lending is inconceivable but profit or trading modes in bank lending replace interest in the Islamic banking. If interest sustains traditional bank lending then trading modes of bank lending sustains Islamic banking, which is the experience of IBBL over the last 2 decades. Interest is more or less fixed but profit/loss is naturally variable. Interest being fixed is secure and return is assured of profit on the contrary has on such security. Therefore, so long profit is positive there is the assurance of return. In this case, the difference between the two banking system vanishes and the positive profit more or less equates with interest in case of investment made by IBBL the chance of loss is very low as the banks management pattern and selection process of customers and project for investment is different from conventional bank in very good sense. Though

chance of loss is very low, IBBL can incur loss because of the unexpected nature of risk. Then what happens to IBBLs investment when profit is negative? Herein the efficacy of Islamic banking is put to test. This leads to actual working off an Islamic bank. The nature of IBBL is essentially cooperative. The bank shares the profit & loss with the customer. There is thus a unity of purpose. The relationship between lender & borrower changes. They are all partners sharing weal & woe together. They rise and fall together. This essential principle of shirakat (cooperative) banking enables IBBL to sale smoothly avoiding pitfalls of speculation, un-economic investment leading to loss or ultimate crush. All are vigilant. All work out for a common goal and all loopholes are accordingly warded off. Furthermore IBBL is in a position to avail of the expert services of technicians, researchers and all persons well versed in particular sectors of economy or specialized in particular trade, commerce and industry. The cumulative result of cooperation complemented with the benefit of export knowledge and guidance are reflected in the elimination of the possibility of risk of loss. In case of lending of conventional bank the nature of banking is not cooperative. It is in the sense that the conventional bank receive a fixed income or profit in both the situation of borrower (profit or loss) but does not bear the loss when customer (borrower) become loser in the use of bank money, not because of his own fault. Thus there is no unity in purpose in case of conventional banks lending (investment). The lender (banker) and the borrower are not at all partners sharing weal & woe together. They do not rise and fall together. The absence of cooperative banking among them leads to speculation, un-economic investment leading to loss or ultimate crush. As Islam feels comfort to look at money only as a means of transaction and nothing else, and as it heats money illusion, IBBL as a bank following Islamic shariah made investment through utilizing buying & selling modes. But in case of lending of conventional bank money is considered as the stimulating force for everything including investment. Money is placed next to God, which is not acceptable to Islam. To IBBL as an Islamic bank money is considered as servant and not as master. IBBL consider money only as a means of transaction. Moreover all the investment scheme of interest based traditional bank is based towards

interest or profit, but a good number of investment schemes of IBBL are oriented towards the benefit & development of the deprived, poor section of people or the service holder with limited income. IBBL only invest in that section which is beneficial to the society. It does not invest in those sections, which is harmful to society even though the profit is higher in that section. This characteristic of investment of IBBL is absolutely absence in the investment undertaken by the conventional banks.

The process of establishment of Modes of Finance by Islami Bank Bangladesh Limited in Bangladesh has not been without obstacles. Despite tremendous popular support IBBL in Bangladesh could not yet achieve the desired level of success. There are many reasons for this, but the direct ones are:

Legal frame- work for Islami Bank

Default by fund users and income loss on overdue investment

Manpower for Islami Bank

Government securities and Islamic Money Market

Legal frame- work for Islami Bank

The absence of necessary legal framework is one constraining factor for Islami Bank. All the financial and commercial law of the country is interest oriented. Even the tax structure has a bias towards loan financing. Interest cost on borrowed funds is exempted from taxed where as dividend paid on funds mobilized as equity is subject to tax at varying rates ranging up to 50%. Under IBBL the loan mechanics are required to be replaced by Shariah laws like Musharaka, Mudaraba, etc. Though the Banking

Companies Act, 1991 has validated their mechanics it does not have comprehensive provisions to define the right and obligation of the parties to such transactions.

Default by fund users and income loss on overdue investment

The absence of special legal provisions for Islami Bank has given certain undue advantages to unscrupulous clients. They avail of bank facilities under Bai-Muajjal and Murabaha mechanics only to default causing income loss to the financier bank. Suitable legal provisions could have avoided this income loss on overdue investments.

Manpower for Islami Bank

Most importantly for smooth implementation and successful replication of modes of finance of Islami banking, a band of people is needed having a different type of knowledge, skill and orientation. Such people are needed for Islami bank as well as for link institutions. The people working in the Islami bank and in the link institutions will have to have diverse but complementary expertise and should have commitment for the cause.

Government securities and Islamic Money Market

All the governmental approved securities in Bangladesh are interest bearing. Naturally the Islami bank, which is committed to avoid interest, cannot invest the permissible part of their statutory liquidity reserve and overnight surpluses in those securities. As a result they deposit their entire reserve in cash with Bangladesh Bank. Similarly, the overnight surpluses also remain un-invested. But the conventional banks of the country do not suffer from this limitation. They receive interest on part of their credit balance kept with Bangladesh Bank as SLR. Besides, they invest a part of their liquidity reserves in Govt. securities, which yield then around 8.5% per annum.

Islami Bank Bangladesh limited has made a revolution in the conventional banking especially in the field of bank investment. IBBL became successful in proving that bank investment (lending) can be made properly, profitably following profit & loss sharing concept with abolishing interest, and which is also beneficial to human being & society.

And these all characteristics of bank investment are absolutely absent in case of conventional bank. Banking without interest seems feasible as far as it goes. But it still awaits a fair trial without which it will be dogmatic to pass any judgment on it. Practical experience is therefore no guide as to its success or failure. The rate of return can fall to zero as envisaged in Islam only in an ideal society in which future can be perfectly foreseen and social security prevails from cradle to grave. In this case even on single country can unilaterally work out the system because of closer international ties and interdependence. Therefore, such a system pre-supposes an international community imbibed with a sense of cooperation and universal brotherhood and sprit of Islam. Strictly Business WASHINGTON Americans dip into credit for August The Federal Reserve said Friday that Americans increased borrowing on credit cards and auto loans as consumer debt rose at an annual rate of 2.7 percent in August ... Find out how you can buy and sell anything, like things related toprivate road construction on interest free credit and pay back whenever you want! Exchange FREE ads on any topic, like private road construction!
OCTOBER 8, 2005 9:12 PM

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OCTOBER 8, 2005 9:12 PM