Islamic Finance

Islamic Banking and Finance Products

Zubair Mughal
Chief Executive Officer
AlHuda : Centre of Islamic Banking & Economics
Editor in Chief.
Islamic Banking and Finance News , True Banking.

2
PRODUCT TREE

Islamic Banking Modes
Partnership Based Trade Based Rental Based

Modes Modes Modes
Murabaha
Musharaka (Cost Plus Profit Sale) Ijarah
(Joint Venture Profit Sharing ) Musawama ( Leasing )
Mudaraba (Bargain sale ) Diminishing

( Trustee Profit Sharing) Salam Musharaka
(Commodity Sale)
( Transfer of Ownership)
Istisna
(Sale on Order)
Musharakah
 Characteristics
 All parties share in the capital
 All parties share profits as well as losses
 Profits are distributed as per agreed ratio
 Loss is borne by the parties as per capital
ratio
 Every partner is agent of other
MUSHARAKAH
May be in any
PROFIT agreed ratio
Rs. 100
Rs. 60 Rs. 40
Rs.1000 Rs.1000
PARTNER A VENTURE PARTNER B
Rs. 50 Rs. 50
LOSS
Rs.100
Must be according to
capital ratio
Mudarabah
 One partner (Rab al Mal) contributes capital

and the other (Mudarib) contributes his skills
or services to the venture
 Venture may for a fixed period or purpose
 Both share profit in pre-agreed ratio
 Loss is borne by Rab al Mal only, Mudarib
loses his services
MUDARABAH
PROFIT
60 % 40 %
CAPITAL SERVICES
RABBUL MAL VENTURE MUDARIB
ALL MONETORY LOSS LOSS OF SERVICES
LOSS
Trade Based Mode in Islamic Banking
and Finance
( Murabaha – Salam – Istisna etc.)
Basic Rules of Bai
 Existence of Product/Commodity
 Ownership of Product/Commodity
 Possession of Product/Commodity
Basic Rules of Bai
 Unconditional basis
 Product have value/Price.
 Bai on Such product which is

permissible in Islam.
Basic Rules of Bai
 Product Must be Identify, clear with all
demanding Qualities.
 Not based on any incident, struggle etc
 Price must be clearly identified.

Bai (Buying & Selling)
Basic Kinds of Bai

Kinds of Bai
 Bai Musawamah
 Bai Murabaha
 Bai Surf
 Bai Salam
 Bai Istisna’
 Bai Urboon
Basic Kinds of Bai
 Bai Eenna
 Bai Touliya
 Bai Wadhia
Bai
There are three basic type of Bai’s which
are using in Islamic Banking as the
mode of financing in Pakistan
 Murabahah
 Salam
 Istisna’
Murabahah
16
STAGES OF MURABAHA
 1. Promise Stage
 2. Agency Stage
 3. Acquiring Possession
 4. Execution of Murabaha
 5. After Execution of Murabaha
17
1- Promise stage
Stage One (a) for Murabaha financing
1 . Client approach the bank for facility through Murabaha.
Bank Client
Facility
approved
18
1- Promise stage
Stage One (b) for Murabaha financing
1 . Client and bank sign an agreement to enter into Murabaha.
Bank Client
Murabaha
Facility
Agreement
MOU
19
1- Promise stage
Stage One (c) for Murabaha financing
. Client submit the purchase requisition to the bank.
Bank Client
purchase
requisition
/Promise to the
bank.
20
2- Agency stage
2. Client appointed as agent to

purchase goods on bank’s behalf
Bank Client
Agreement to
Murabaha
Agency
Agreement
21
2- Agency stage
Stage Two for Murabaha financing
. Bank gives money to supplier

through client’s account for
purchase of goods.
Islamic Agreement to
Bank
Bank Murabaha Client
Agency
Agreement
Disbursement to the
Supplier 22
3. Acquiring Possession
Stage three for Murabaha financing
. Client purchases goods on bank’s

behalf and takes their possession.
Client purchases
goods and takes
Transfer of Risk Vendor possession
Bank Client
23
4. Execution of Murabaha
Stage four (a) for Murabaha financing
. Client makes an offer to purchase

the goods from bank.
Bank Client
Offer to
purchase
24
4. Execution of Murabaha
Stage four (b) for Murabaha financing
. Bank accepts the offer and
sale is concluded.
Murabaha
Agreement
+
Transfer of Title
Bank Client
25
4. Execution of Murabaha
Stage four (b) for Murabaha financing
. Client pays agreed price to bank

according to an agreed schedule.
Usually on a deferred payment basis
(Bai Muajjal)
Payment of Price
Bank Client
26
GENERAL MECHANICS
VENDOR ISLAMI BANK Agreement CUSTOMER

C
• The customer approaches the Bank with the request for

financing
• The Bank purchases and receives title of ownership
from the vendor
• The Bank makes payment to the vendor
• The Bank transfers the title over to the customer upon
payment
• The customer makes payment up-front or on a deferred
basis 27
Theory & Practice of Murabahah
Documentation:
 Declaration
 Securities as per security documents
 Demand Promissory Note
 Schedule of payment
Credit
Risk
Dimensions Liquidity
Credit
Credit
Prising risk
Banking
Risks
Market
Foreign Exchange
Solvency
Operational
29
Murabahah Calculation Exercise
:
Purchase of poultry feed stock

 Murabahah Facility: 180 Days
 Payment: Six monthly installments
 Rate of Profit: 10% p.a.
 Carriage cost: 5%
 Murabahah transaction: Rs. 50,000
 Securities: Personal surety or Pledge

of feed stock, etc.
Murabahah Calculation Exercise
Particulars Amount (Rs.)

Cost of goods Rs. 50,000
Rate of Profit 10% p.a.
Carriage 5% of cost
Total cost 50000 x 5% 50000 + 2500
=52500
Profit calculation 52500 x 10% x 6/12 = 2625
Murabahah Price 52500+2625= 55125
Amount of 55125/6 = 9187.50 Cost = 8750
Installment Profit= 437.50
Bai
Important Note
Following 3 Basic Rules of Bai are
exceptional for Salam & Istisna’
 Existence of Product/Commodity
 Ownership of Product/Commodity
 Possession of Product/Commodity
Salam
 Pay 100% amount in Advance.
 Product must be quantified, identified
and Measured with quality.
 Date of delivery, Time, Place must be
mentioned clearly in advance.
 Salam is not valid for a specific
farm/land/garden.
Istisna’
 Not necessary to pay the 100% amount
in advance Like Bai salam.
 Price must be decided on beginning of
the contract.
 Qualities, features of that product must
be clearly identified.
Thank you

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Islamic Banking and Finance Products

Islamic Banking Modes

Partnership Based Trade Based Rental Based

Mudaraba (Bargain sale ) Diminishing

 One partner (Rab al Mal) contributes capital

RABBUL MAL VENTURE MUDARIB

ALL MONETORY LOSS LOSS OF SERVICES

 Product have value/Price.

 Bai on Such product which is

 Not based on any incident, struggle etc

 Price must be clearly identified.

Basic Kinds of Bai

 5. After Execution of Murabaha

1 . Client approach the bank for facility through Murabaha.

1 . Client and bank sign an agreement to enter into Murabaha.

. Client submit the purchase requisition to the bank.

2. Client appointed as agent to

. Bank gives money to supplier

. Client purchases goods on bank’s

. Client makes an offer to purchase

. Bank accepts the offer and

. Client pays agreed price to bank

VENDOR ISLAMI BANK Agreement CUSTOMER

• The customer approaches the Bank with the request for

Purchase of poultry feed stock

 Securities: Personal surety or Pledge

Particulars Amount (Rs.)

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