Modes of Islamic Financing

Group Members
Fahad Maqsood Muhammad Abdullah Fahad Pervaiz Shehriyar Gogi F11mb033 F11mb043 F11mb037 F11mb019

Preview
1. Introduction
2. Modes of Financing 3. Difference between I.B and C.B

Importance of Trade in Islam

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Islam has given an immense importance to trade. The nobility of this profession is obvious from the fact that it was the chosen profession of prophet Muhammad (PBUH).

WHY ISLMIC BANKING

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Before explaining the concept what is Islamic Banking the elaboration of concept why Islamic Banking is very important. Islam is a complete code of life that provides guidance regarding each aspect of life.

WHY ISLAMIC BANKING

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The primary objectives of Islamic Economic System are as under. Equal Distribution of wealth Social justice These objectives can never be achieved in Interest/Riba based economic systems.

WHAT IS ISLAMIC BANKING

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Now we come to our core question

Islamic banking has been defined as banking in consonance with the ethos and value system of Islam and governed by the principles laid down by Islamic Shariah.

Vision & Mission by SBP

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Vision Statement

To make Islamic banking the banking of first choice for the providers and users of financial services.
Mission Statement To promote and develop Islamic Banking industry in line with best international practices, ensuring Shariah Compliance and transparency.

Islamic Banking Modes

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Partnership Based Mode

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Musharaka:

Musharaka is a relationship between two parties or more that contribute capital to a business and divide the net profit and loss pro rata.

Characteristic of Musharaka
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All parties share in capital.

All parties share profit as well as losses.

Profits are distributed as per agreed ratio. Loss is borne by parties as per capital ratio.

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Mudaraba

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One partner (Rab al Mal) contributes the capital and the other (Mudarib) contributes his skills or services to the venture. Venture may fixed period or purpose. Both share profit in pre-agreed ratio.

Loss is borne by Rab al Mal only, Mudarib loses his sevices.

Trade based Modes

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Murabaha A contract sale between the bank and its client for the sale of goods at a price which includes a profit margin agree by both parties. As a financing technique, it involves the purchase of goods by the bank as requested by the client. The goods are sold to the client with a mark-up. Repayment, usually in installments is specified in the contract.

Murabaha

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The profit in Murabaha can be determined by mutual consent either by lump sum or through an agreed ratio of profit to be charged over the cost.

Use of Murabaha in I.B

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The following are the uses of Murabaha: 1. Purchase of raw material, goods and merchandise of all kinds and description 2. Purchase of equipments. 3. Import of goods and merchandise.

Salam

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Salam means a contract in which advance payment is made for goods to be delivered at a future date. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract.

Istisna

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A contract of sale in which a supplier of the goods or services is asked to supply goods of definite specifications at agreed rates, place and time of delivery. The price of the goods is paid in advance, but the goods are manufactured and delivered at a later date.

Rental Based Mode

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IJARAH A lease agreement whereby a bank or financier buys an item (like a building, equipments etc) for a customer and then leases it to person over a specific period, thus earning profits for the owner of the asset by earning rental income.

Diminishing Musharakah

Based on Shirkat-ul-Milk
Means joint ownership in a property

Three components
Joint ownership of the Bank and customer

Customer as a lessee uses the share of the

bank Redemption of the share of the Bank by the customer

Basic Transaction Structure

BANK

Joint Ownership
Rent

CUSTOMER

Musharak a The customer approaches the Bank with the request for Project/Machinery/House financing
The Bank enters into a Musharakah (Joint Ownership) agreement with the customer and both of them pay their respective shares to the seller of the asset.

Customer pays rent for the use of banks share in the property

BANK

Joint Ownership
Gradual Transfer of Ownership

CUSTOMER

The customer approaches the Bank with the request for Project/Machinery financing The Bank enters into a Musharakah (Joint Ownership) agreement with the customer and both of them pay their respective shares to the seller of the asset.

Musharak a

Customer pays rent for the use of banks share in the property Ownership of the asset is gradually transferred to the customer upon payment of asset price.

BANK

Joint Ownership
Gradual Transfer of Ownership

CUSTOMER

Musharak a
The value of Banks share in Musharakah property is divided into units, which it sells to the customer. Units will be worked out by dividing Banks financed amount by number of months for which finance to be allowed. With each purchase of unit by the customer, the Banks share in the Musharakah property starts diminishing, whereas customers share starts increasing, correspondingly. Finally, the customer becomes the sole owner of the property after having purchased all units from the Bank, along with the rentals thereon.

DIFFERENCE BETWEEN ISLAMIC AND CONVENTIONAL BANKING

Islamic Banking Functions and operations are based on Shariah principles Conventional Banking Functions and operations are based on fully man made principles

DIFFERENCE BETWEEN ISLAIC AND CONVENTIONAL BANKING

Islamic Banking Promote risk-sharing between provider of capital (investor) and user of funds (entrepreneurs) Conventional Banking Investor is assured of predetermined rate of interest

DIFFERENCE BETWEEN ISLAIC AND CONVENTIONAL BANKING

Islamic Banking Aim at maximising profit but subject to Sharia'h restrictions Partners, investor and traders, buyer or seller relationship Conventional Banking Aim at maximising profit without any restrictions Creditor-Debtor relationship

DIFFERENCE BETWEEN ISLAIC AND CONVENTIOANL BANKING

Islamic Banking Encourage asset-based financing and based on commodity trading Conventional Banking Based on money trading. Money is a medium of exchange and not a commodity, its sale and purchase is prohibited in Islam.

DIFFERENCE BETWEEN ISLAIC AND CONVENTIONAL BANKING

Islamic Banking Conventional Banking It is almost risk free banking and depositor has no risk of losing its money because interest is guaranteed.

No right of profit if there is

no risk involved. The profit and loss sharing depositor may lose money in case of loss.

Thank you