WORKING CAPITAL FINANCE

CONTEMPORARY AND
ISLAMIC WAYS

GROUP “D”
PREPARED BY

ASAD DANISH SIDDIQUI (1462)

SYED RAUF UR RAHEEM (1772)
AHMAR JAMAL CHANDNA (1884)
TALHA YOUSUF (1245)
ASIM RAZA (2134)
 INTRODUCTION TO WORKING CAPITAL

• Funds Deployment

• Period of Finance

• Investment in Current Assets

• Short-Term Capital

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 USES OF WORKING CAPITAL FINANCE

• Working Capital Provides ongoing

Investment

• Sustained Growth

• Long-Term and Short-Term

 GENERAL SOURCES OF WORKING
CAPITAL FINANCING
Sources of Working Capital Finance:

• OWN FUNDS
– Long Term Funds
– Equity Share Capital
– Reserves & Surplus

• BANK BORROWINGS
– Cash Credit, Packing Credit, Bills Discounting etc.

• CREDITORS

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PRIMARY FORMS OF WORKING CAPITAL
FINANCING
• Islamic Law of Contract disapproves the
contemporary methods due to violation of
law of contract
OPTION REASON FOR REJECTION

1 Line of Credit. INTEREST BASED

2 Accounts Receivable (AR) Loan. DEBT SOLD FOR BIGGER
UNEQUAL DEBT
3 Factoring. DEBT AGAINST DEBT
4 Inventory Loan. LOAN AGAINST UNFINISHED
GOODS AS SECURITY.
5 Term Loan. INTEREST BASED

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 THE ISLAMIC SOURCES OF WORKING
CAPITAL FINANCING

• Working Capital Financing:

1. Murabaha
2. Istisna
3. Ijara
4. Mudarabah
5. Musharakah

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 MURABAHA
• Asset based
• Trade finance / Acquisition finance
• Unconditional contract of sale; goods, cost price,
mark-up and payment date = defined and agreed
• Profit from marked-up sale price (not interest) paid
in instalments
• Examples:
– import-export finance
– infrastructure project financing
 ISTISNA’A
• Asset based
• Funding agreement for production, manufacture or
construction of asset to agreed specification: all
specifications, delivery options, payment conditions
and pricing must be agreed in contract
• No fixed delivery date and no payment in full at
outset required
• Advance funding of:
– major industrial, construction and real estate
development
– project finance
– large equipment e.g. ships, aircraft
 IJARA

• Asset based
• Hybrid between conventional operational and
finance leases; a business process
• Analogous to secured loan
• Examples:
– aircraft finance
– Working capital management
– ship finance
– project finance
 IJARA WA-IKTINA

• Asset based
• Lease with option for lessee to purchase
leased asset
• Analogous to finance lease / hire purchase
contract
• Examples:
– medium term trade finance of equipment
– refinancing under sale and leaseback
 MUDARABA

• Risk sharing; profit and loss sharing

• Limited partnership: one partner provides
capital; other partner provides
expertise/effort and makes business
decisions
• Restricted or unrestricted
• Examples:
– funded participation arrangement
– establishment of investment fund
 Musharaka

• Risk sharing; profit and loss sharing in same

proportions
• General partnership / joint venture
arrangement between financier and investor
• Provides working capital financing as a
venture; greater risk-reward factors and
greater investor say in project management
 THE ISLAMIC SOURCES OF WORKING
CAPITAL FINANCING

MURABAHA ISTISNA’A IJARA MUDARABA MUSHARAKA

Asset Based Asset Based Asset Based Sharing; Profit And

Trade Finance Funding Hybrid Profit And Loss Loss Sharing
Unconditional Agreement Analogous Limited General
Contract No Fixed Partnership Partnership
Profit From Delivery Date Restricted Or Provides
Marked-up Advance Unrestricted Working
Funding Capital

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Thank you!

Questions?
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