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In the name of ALLAH, the most Beneficent, the most Merciful
Dedicated to
All who helped me out in this humble effort and those who guided me for
preparation for the life hereafter, particularly my father Shamsuddin Khalid
Ahmed Ansari, my mother Aasia Khalid, my grandmother Umme Zubair
and my teacher and mentor M. Basheer Juma.
THE BOOK
The staggering development of Islamic banking at global level
has necessitated education and training for the bankers, business and
industrial communities and savers / investors who are looking
increasingly for financial products which are in harmony with the
tenets of the Shariah. The major challenge in Pakistan, where efforts to
promote Islamic banking were started afresh after the historic
judgment of the Supreme Court of Pakistan in 1999, is creating
awareness among all stakeholders about the theory and practice of
Islamic banking and finance.
The book Managing Finances A Shariah Compliant Way by
Omar Mustafa Ansari is a useful addition to the available material in
this regard and a valuable guide for all those who want to manage their
personal or Companies funds in lines with the tenets of the Shariah.
Being an Accountant and Auditor by profession and by dint of his
involvement in Shariah related audit of Islamic banking institutions
over last few years, the author sufficiently understands the most
proper way of banking operations and managing investments
according to the principles of the Shariah. The book has been written
with special reference to Pakistans financial market. I would say that it
is a must reading for the Companies CFOs and the general investors.
(Muhammad Ayub)
Director Training, Development and Shariah Matters
Institute of Islamic Banking and Insurance, London
June 19, 2007
THE AUTHOR
Omar is a Chartered Accountant by profession. Presently he is
associated with Ford Rhodes Sidat Hyder & Co. Chartered
Accountants (a member firm of Ernst & Young Global) as a Partner.
Omar has gained substantial experience in the audit and
related services to local and multinational companies operating in
diversified sectors. His area of specialization is providing audit and
other services for Islamic finance industry. His portfolio of clients in
Islamic finance industry, over past few years, includes Islamic
commercial banks, Takaful companies, Islamic Mutual Funds and
Modarabas.
Besides audits and related services, Omar has acquired
diversified experience in respect the fields of Islamic finance and
banking including Shariah compliance inspection, Shariah audits,
internal Shariah review, development of Shariah compliance inspection
manual and operating manual for Islamic commercial banking and
financial institutions.
Omar has been one of the key speakers and trainers for
training courses for Islamic bankers, arranged by the National Institute
of Banking And Finance (NIBAF) an institute run by the State Bank
of Pakistan. These courses are carried out by NIBAF in its campuses
in Karachi and Islamabad. His main topics include the accounting for
Islamic financial products, auditing the Islamic financial institutions,
governance and risk management for Islamic financial institutions,
besides a few basic Islamic financial products. He is also serving as an
alternate member on the committee for review of Takaful rules,
constituted by the Securities and Exchange Commission of Pakistan.
Omar has been speaker and anchor man for various seminars
and workshops on Islamic finance and related topics on various
forums, particularly various accounting and auditing professional
bodies. Topics for these Seminars include accounting issues for
Islamic banking, tax issues for Islamic banking, Takaful, Shariah
compliance and audit for Islamic finance and Sukuks.
TABLE OF CONTENTS
PREFACE .............................................................................................................1
INTRODUCTION TO ISLAMIC FINANCE ................................................... 3
BASIC DIFFERENCE BETWEEN THE ISLAMIC AND SECULAR ECONOMIC
SYSTEMS............................................................................................................................... 4
PILLARS OF ISLAMIC ECONOMIC SYSTEM .................................................................... 5
ZAKAT AND USHR .............................................................................................................. 6
SADAQAT AND KHAIRAT ................................................................................................... 6
PROHIBITION OF RIBA ..................................................................................................... 6
WHY INTEREST IS HARMFUL FOR THE SOCIETY?...................................................... 7
EMPHASIS ON PROHIBITION OF RIBA ........................................................................... 9
WHAT QURAN SAYS REGARDING RIBA? ........................................................................ 9
AHADITH AGAINST RIBA ................................................................................................ 10
IS MODERN DAYS INTEREST ALSO A TYPE OF RIBA?............................................. 11
LAW OF INHERITANCE ................................................................................................... 11
ENCOURAGEMENT OF TRADE AND COMMERCE ...................................................... 13
RESTRICTIONS ON UNFAIR TRADE PRACTICES.......................................................... 13
KHUMS ............................................................................................................................... 14
OTHER TAXES .................................................................................................................. 14
IS MERELY IMPLEMENTATION OF ISLAMIC ECONOMIC SYSTEM SUFFICIENT? 15
IS ISLAMIC BANKING TRULY ISLAMIC?....................................................................... 16
INTEREST-FREE BANKING INTRODUCED IN 1980S .................................................. 16
ISLAMIC BANKING AS INTRODUCED NOW ............................................................. 19
OPERATIONS OF ISLAMIC BANKS ................................................................................. 20
SOCIO-ECONOMIC EFFECTS OF ISLAMIC BANKING ................................................. 20
WHY ISLAMIC BANKING?............................................................................................... 21
SHARIAH COMPLIANT BUSINESS A FEW CHARACTERSTICS ......... 23
CORE ACTIVITIES OF BUSINESS ................................................................................... 24
UNLAWFUL BUSINESSES ................................................................................................ 24
CAPITAL STRUCTURE OF BUSINESS AND SOURCES OF FINANCING...................... 25
PROFIT AND LOSS SHARING AMONGST PARTNERS ................................................. 26
ARRANGEMENTS FOR FINANCING ............................................................................... 26
BASIC TOOLS OF INTEREST-FREE FINANCING ........................................................ 27
DEALINGS WITH THIRD PARTIES ................................................................................ 28
DEALINGS WITH EMPLOYEES ....................................................................................... 28
PROFIT AND LOSS SHARING BASED FINANCING .................................31
(i)
LOANS ................................................................................................................................ 31
MUSHARAKA AND MODARABA ...................................................................................... 32
MODARABA AND TYPES OF MODARABA ..................................................................... 33
WHY MODARABA? ........................................................................................................... 34
CERTAIN CONTROVERSIES REGARDING MODARABA ............................................. 36
SHARIAH PROVISIONS APPLICABLE TO MODARABA ................................................ 36
MUSHARAKA ..................................................................................................................... 39
BASIC TYPES OF SHIRKAH ............................................................................................. 40
TYPES OF MUSHARAKA ................................................................................................... 40
PRACTICAL APPLICATION OF MUSHARAKA BASED TRANSACTIONS ..................... 42
PARTNERSHIPS ................................................................................................................. 42
PROVISIONS OF PARTNERSHIP LAW NOT IN COMPLIANCE WITH SHARIAH ...... 43
LIMITED LIABILITY COMPANIES.................................................................................. 44
LIMITED LIABILITY CONCEPT ..................................................................................... 44
ARTIFICIAL JURISTIC PERSONALITY CONCEPT ........................................................ 45
ARE LIMITED LIABILITY COMPANIES BASED ON MODARABA RULES? ............... 46
BASIC NON-COMPLIANCES OF SHARIAH IN COMPANY LAW .................................. 46
DOS AND DONTS FOR MUSHARAKA ARRANGEMENTS ........................................... 47
DIMINISHING MUSHARAKA ........................................................................................... 50
DOS AND DONTS FOR DIMINISHING MUSHARAKA ARRANGEMENTS.................. 51
HOW TO DIFFERENTIATE A MUSHARAKA FROM MODARABA?.............................. 53
TRADE-BASED ALTERNATES TO FINANCING ...................................... 55
BAY .................................................................................................................................... 56
BASIC PRINCIPLES OF TRADE ....................................................................................... 56
BAY MURABAHA.............................................................................................................. 59
FACTORS DETERMINING SELLING PRICES................................................................ 59
TYPICAL MURABAHA SALE ............................................................................................ 61
MODERN-DAY MURABAHA ........................................................................................... 61
MURABAHA SALE AS A FINANCING TRANSACTION .............................................. 62
PROVISIONS IN APPLICABILITY OF MURABAHA ........................................................ 64
ISTIJRAR ............................................................................................................................. 67
TAWARRUQ........................................................................................................................ 68
BAY SALAM ....................................................................................................................... 70
APPLICABILITY OF SALAM SALE.................................................................................... 70
SHARIAH PROVISIONS IN SALAM .................................................................................. 73
PARALLEL SALAM............................................................................................................. 75
SHARIAH PROVISIONS IN PARALLEL SALAM .............................................................. 76
BAY ISTISNA ..................................................................................................................... 77
PRACTICAL APPLICABILITY OF ISTISNA ...................................................................... 77
SHARIAH PROVISIONS FOR ISTISNA ............................................................................. 80
PARALLEL ISTISNA .......................................................................................................... 82
LEASE-BASED ALTERNATES TO FINANCING........................................ 85
IJARA ................................................................................................................................... 85
(ii)
(iii)
(iv)
(v)
(vi)
Preface
PREFACE
Islam by its real meaning denotes the phenomenon of
completely following somebodys commands or surrendering against
someones will. In general understanding, it is the state in which
somebody follows the instructions of Allah Almighty. By nature, it is
not a religion as is understood in general and instead, it is a Deen
( )which stands for a complete way of life. Allah Almighty declares
in His Book, at not less than three places in the same wordings, that
He is the ONE who has sent HIS Messenger (SAAWS) with divine
guidance and the true way of life to overpower all other ways of life,
irrespective of the opposition of the pagans or polytheists ( ).
And if understood in the same manner, our Deen provides us
with a complete set of instructions to be followed in our whole life.
The matter of being a Muslim duly includes the state of adherence to
the complete set of instructions made available to us through the Holy
Quran and Sunnah. Alhamdolillah, there is, and always remains, a
group of Ahl-e-Iman, who have the desire to perform all of their
activities in accordance with the rules set by Allah Almighty.
Besides all other areas of life, our Deen also provides guidance
on the business, trade and financing matters. This study is a humble
effort to overcome the need of entrepreneurs and businessmen in
Pakistan, as well as, students of accounting, finance and business,
having a keen desire for running their businesses in accordance with
the basic principles of Islam in order to please Allah Almighty for
assurance of betterment of the life hereafter. In the newer terminology
and theories, employment is also a type of entrepreneurship in which
the employee renders his services against a specific return, and
accordingly, certain matters particularly relating to the employees have
also been included in this study.
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Preface
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Chapter One
Introduction to Islamic Finance
INTRODUCTION TO ISLAMIC
FINANCE
Islam by its real meaning denotes the phenomenon of
completely following the command of somebody. In general
understanding it is the state in which some body follows the
instructions of Allah Almighty. Islam, by its very nature, is not a
religion like any other religion. It is a Deen ( )which denotes a
complete way of living and provides us with a complete set of
instructions to be followed in the whole life of a Muslim. These
include the Ibadaat ( )and Muamlaat ( )i.e. the modes
of worship in different styles and the matters of dealings with others.
We know that being a Muslim demands the state of adherence to the
complete set of instructions made available to us through the Holy
Quran and Sunnah, irrespective of such instructions being included in
the Ibadaat or Muamlaat.
The set of instructions received, which we generally call our
Deen, in addition to other matters, provide us full guidance in the
matters relating to business. In this study, we will try to understand
and apply such principles in the affairs of managing the finances of a
business in Pakistan, within the framework provided by Allah
Almighty through its Messenger SAAWS.
Since, the most crucial issue for doing business in this era is
the matter of avoiding interest-bearing and similar transactions, a
major area of this study is devoted on interest-free financing alternates
and interest-free financial management. In this study, we have
considered most of the options available for an interest-free system. In
this respect, it is worthwhile to note that certain schools of thought
have objections of certain tools of Islamic finance on various grounds.
Similarly, it has also been established by almost all schools of thought
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Chapter One
Introduction to Islamic Finance
that a few of these tools are doubtful in a few aspects, hence, although
being permissible or Mubah (), it is advisable to avoid them.
Without going into the details for rationale of such comments, we
would just identify the situation in case of each of the tools and would
leave the matter on the judgment of the reader or recommend him to
consult his respective Shariah scholar to avoid any ambiguity.
Basic Difference between the Islamic
and Secular Economic Systems
The basic difference between the Islamic and Secular
economic systems is that Islam does not bind anybody to earn, save
and invest money except in such businesses which are declared
impermissible (Haram) on account of their very nature. On the
contrary, Islam does not allow concentration of wealth in a manner
that even a single person lives below the poverty line. In an Islamic
system, the poverty line does not reflect just a benchmark in form of
number of calories available to a human being, and instead, it reflects
the basic necessities of life in all respects. Zakat and Sadaqat are the
main tools used for the purpose in addition to the restrictions on
unreasonable trade practices, providing basic necessities to everybody
on controlled prices and prohibitions on earning profits over a
reasonable limit.
This study does not purport to cater the macro economics
issues, which we understand, have already been catered by works of
many of the respectable economists and scholars. Any of the readers
having interest in the subject, may consult such commendable studies.
Particularly, a few works by Maulana Syed Abul Aala Maududi,
Maulana Justice (Retired) M. Taqi Usmani, Dr. M. Nijatullah Siddiqui
and Dr. M. Umar Chapra should be consulted by every reader
interested in the concepts and details of an Islamic economic and
monetary system. Nevertheless, in order to bring the reader in the
same wavelength, we consider it necessary to discuss a few basic
concepts of Islamic economics.
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Introduction to Islamic Finance
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money lent to another party, it is not certain whether any real benefit
to the second party is achieved or not. On the other hand, the amount
of interest charged increases the amount of total circulation of money
in the economy. This amount of increase is generally not linked to the
productive activities, trading and services generated in the economy.
As a consequence of the same, the proportion between the amount of
money in circulation and the collective value of resources and assets
available in the economy is adversely disturbed resulting in inflation in
economy. This is a very simple example for understanding of the
concept for a general reader and is not intended to open door for
debates on the issue.
The governments, banks and other financial institutions have
now generated a huge volume of money in circulation, in excess of the
amounts of currency in circulation. This is generally created as a
consequence of interest-bearing loans in addition to the equity limits
and other techniques of creation of money used by the monetary
agencies / reserve banks, financial institutions and commercial banks.
Although as a part of risk management practices and through the
reserve banks monetary policies these practices are now controlled to
certain extent, even then, this ratio is not adequate in most of the
worlds economies. In view of the same, now our worlds whole
economic system has no foundations except for the public reliance on
the solvency of the financial institutions and rather on the respective
governments. Just imagine what will happen if American people loose
their reliance on the T-Bills. In past, we have evidenced a number of
bank failures which had an adverse impact on the whole economies.
Such weak foundations of the present economic system may
also be termed as the spiders web which, besides how large network
it has, is the weakest home as these systems do not take patronage
from Allah Almighty as proclaimed in the Holy Quran in the Surah
Ankabut Verse 41.
Because of the generation of wealth without corresponding
trading or productive activity or benefit in form of services, the whole
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Chapter Two
A Shariah Compliant Business A Few Characteristics
Chapter Two
A Shariah Compliant Business A Few Characteristics
Unlawful Businesses
Another factor important in the decision is whether these
activities are lawful in the eyes of the present government. In order to
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Chapter Two
A Shariah Compliant Business A Few Characteristics
make simple the decision we can take an example. All of us know that
smuggling of any sort is not a lawful activity. However, in Shariah
principles the business of purchasing some commodities e.g. wheat
from a country and selling it to another country is a Halal activity. In
such a situation it is difficult to decide whether smuggling of wheat is a
really Halal business.
In these circumstances, dissenting opinions of various
scholars are available. While it is considered advisable to obtain fatwa
in this respect, a general rule that may be derived is that the laws of the
land should be followed because these are generally developed in the
greater benefit of the society and the nation, unless these are against
the basic principles of Islam or unless the said nation is at war with
Muslims i.e. a Dar-ul-Hurb ( ) and Jihad has been declared
there against. Accordingly, in general, involvement in unlawful
businesses should be avoided although these appear to be Halal in
their substance.
Capital Structure of Business and
Sources of Financing
For a Shariah compliant business, the second condition is that
the capital structure of the business should be in accordance with the
injunctions of Islamic Shariah. Ideally the capital of the business
should be brought from Halal sources and should not contain any
interest-based or any other prohibited financing. In case of extreme
pressures; that may be termed as Iztirar, if such financing exists,
maintaining of an adequate debt equity ratio is a must for which
different benchmarks have been set by various scholars. Nevertheless,
the majority of scholars consents that such debts should, in any case
(even in Iztirar), not be higher than 1/3rd of the total capital.
Such impermissible debts include the interest-based loans,
debentures, lease financing under conventional finance lease,
redeemable capital and preference shares. Other financing and
financial services options including L/Cs particularly Usance L/Cs,
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Chapter Two
A Shariah Compliant Business A Few Characteristics
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A Shariah Compliant Business A Few Characteristics
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A Shariah Compliant Business A Few Characteristics
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A Shariah Compliant Business A Few Characteristics
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Chapter Two
A Shariah Compliant Business A Few Characteristics
Page - 30
Chapter Three
Profit and Loss Sharing Based Financing
Page - 31
Chapter Three
Profit and Loss Sharing Based Financing
BORROWER
LENDER
Rs. 1,000
In Islamic society, all Muslims are not only encouraged but are
actually required to give loans to all those in need without any
hesitation. They are further required to waive such loan, if the debtor
is not in a position of making repayment. In other words for those
who believe in the life hereafter, the Qard-e-Hasana is the best option
in order to please Allah Almighty. However, it is not mandatory and in
Islamic society, no one can be forced to make loans on this principle.
Musharaka and Modaraba
Musharaka ( )or Shirkah ( )may be termed as a
partnership. It generally denotes a business run in partnership with
efforts and capital investment from all the partners. Modaraba
( )is another form of partnership in which any or a few of the
partners do not actively take part in the activities of the business which
may be termed as a dormant partnership in the modern terminology.
Page - 32
Chapter Three
Profit and Loss Sharing Based Financing
Modaraba Al-Muqayyaddah ( ) or
Restricted Modaraba whereby purpose of
Modaraba is specifically mentioned and complied
with; and
Page - 33
Chapter Three
Profit and Loss Sharing Based Financing
Modaraba Al-Mutlaqah ( ) or
Unrestricted Modaraba in which the Modarib is
at freedom to undertake whatever business he deems
fit.
Why Modaraba?
Modaraba arrangement provides maximum benefit to both
the parties, i.e. the Rab-ul-Mal and the Modarib. It enables the Rab-ulMal to utilize his capital and the Modarib to utilize his
entrepreneurship and skills whereas the profit and loss distribution
system is based on the principles of logic and equitability.
Modaraba is generally used for the following purposes:
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Chapter Three
Profit and Loss Sharing Based Financing
MODARIB
(BORROWER)
EFFORTS
INVESTMENT
PROFIT
(In Agreed Ratio)
MODARABA (PARTNERSHIP)
LOSS
(To Be Borne By
the Rab-ul-Mal
Only)
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Chapter Three
Profit and Loss Sharing Based Financing
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Chapter Three
Profit and Loss Sharing Based Financing
Chapter Three
Profit and Loss Sharing Based Financing
Chapter Three
Profit and Loss Sharing Based Financing
Musharaka
The literal meaning of Musharaka is sharing. The root of the
word Musharaka in Arabic is Shirkah, which means being a partner.
Musharaka is a very common mode of finance under Islamic modes of
financing. Particularly, on the liability side of an Islamic financial
institution, this mode is used as a first choice.
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Chapter Three
Profit and Loss Sharing Based Financing
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Chapter Three
Profit and Loss Sharing Based Financing
MUSHARIK 2
(BORROWER)
INVESTMENT +
EFFORTS
INVESTMENT
PROFIT
(In Agreed Ratio)
MUSHARAKA (PARTNERSHIP)
LOSS
(To Be Borne In
the Ratio of
Capital
Investment)
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Chapter Three
Profit and Loss Sharing Based Financing
Partnerships;
Limited liability companies and bodies corporate;
Term financing to customers in order to finance the
projects, as well as, to make sufficient liquidity
available to the customers, by the Islamic Banks and
financial institutions;
Redeemable capital having a few rights in running the
business, e.g. the right of appointment of director.
However, redeemable capital without any rights to
indulge in business should be governed under the
Modaraba principles;
Housing finance; and
Fixed assets financing.
Partnerships
In the perspective of general practices in vogue in Pakistan,
we can observe that the most common tool used as Permanent
Musharaka is partnership. However, it has been observed that certain
provisions of the relevant laws are not Shariah compliant. Having said
that, still, we may use the general partnership mechanism, duly
fulfilling the requirements of Shariah in the context, as our main
financing tool. It is worth noting that partnership practices in Pakistan
include the concept of dormant or sleeping partner which coincides
with the Modaraba concepts, instead of Musharaka concepts.
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Chapter Three
Profit and Loss Sharing Based Financing
Chapter Three
Profit and Loss Sharing Based Financing
such salary at all, whereas, a few of them allow such salary in case of
limited companies with a condition that such salaries should
commensurate the abilities of such partners and their responsibilities.
Another factor which, according to most of the jurists, is
necessary to be addressed the principle that the dormant partner can
not take a share of profit higher than his capital investment ratio.
The principles governing our law have basically been derived
from the British partnership practices and regulations that have been
inherited in Pakistan on an as is where is basis. We need to note
that although our Fiqh contains a rich and sizable set of regulations
available in respect the Partnership, Sale of Goods, and Contract laws,
we are following the same laws that had been enacted by the British
government before independence.
Limited Liability Companies
Limited liability companies are another common form of
business. These are generally used in larger businesses and their basic
benefit is that the liability of the members is limited to the extent of
their investment or in certain cases these are limited to the amount of
guarantee. Accordingly, the probabilities for loss over and above the
actual amount of investment are eliminated. The second important
factor is the institution of a judicial person.
Limited Liability Concept
According to the limited liability concept, an enterprise is
formed by one or more individuals for doing some business, with an
expressed and implied condition that the liability of the owners with
respect to that business shall be limited to a specific amount. Such
amount is either paid in advance in form of share capital or is
guaranteed to be paid in case of need. In case such enterprise suffers
losses, the owners are not obliged to make good that loss out of their
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Chapter Three
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Profit and Loss Sharing Based Financing
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Profit and Loss Sharing Based Financing
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Profit and Loss Sharing Based Financing
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Chapter Three
Profit and Loss Sharing Based Financing
Diminishing Musharaka
Diminishing Musharaka is a form of partnership in which one
of the partners promises to buy the equity share of the Musharaka
(which is divided in small units either as a legal document i.e. shares or
certificates of investment or units of a notional amount) from the
other partner gradually until the title to the equity is completely
transferred to him.
This transaction commences with the formation of a
partnership may be in form of Shirkat-ul-Milk (joint-ownership) or
Shirkat-ul-Amwal (commercial joint-venture), after which buying and
selling of the equity takes place between and amongst the two partners.
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Chapter Three
Profit and Loss Sharing Based Financing
FLOW OF TRANSACTION IN DIMINISHING MUSHARAKA
(PARTNERSHIP AND JOINT OWNERSHIP)
MUSHARIK 1
(FINANCIER)
INVESTMENT +
EFFORTS (If Required)
INVESTMENT
PROFIT OR
IJARA RENTALS
(In Agreed Ratio or
in the Ratio of JointOwnership)
MUSHARIK 2
(BORROWER)
MUSHARAKA OR SHIRKAT-UL-MILK
(PARTNERSHIP OR JOINT- OWNERSHIP)
LOSS
(To Be Borne In the
Ratio of Capital
Investment)
Chapter Three
Profit and Loss Sharing Based Financing
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Chapter Three
Profit and Loss Sharing Based Financing
Modaraba
Profits of a Modaraba have
two elements i.e. the capital
and the work.
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Chapter Three
Profit and Loss Sharing Based Financing
Musharaka
In Musharaka, all the partners
have the right to participate in
business either directly or
through agents.
Modaraba
In Modaraba, Rab-ul-Mal, has
no option to interfere in
business affairs, however, he
can monitor the affairs of
business
without
any
intervention.
Page - 54
Chapter Four
Trade-based Alternates to Financing
TRADE-BASED ALTERNATES TO
FINANCING
The modern Islamic banking includes a number of advanced
and complicated and intelligently engineered transactions, which are
although not financing in their very nature, but provide very good
alternatives for the same. These alternatives include trade-based
alternatives and lease based alternatives. The trade-based and lease
based alternatives have a good impact on the economy as a whole
because these ensure an economic activity underlying them i.e. sale,
purchase, usage and manufacture of a real asset, which in longer run is
beneficial for the whole economy.
The concept of trade-based alternates of financing has been
derived directly from the Holy Quran. In Verse 274 of Surah AlBaqarah, Allah SWT proclaims:
Those who take Riba will not stand but as stands the one
whom the demon has driven crazy by his touch. That is
because they have said: Trading is but like Riba. So, whoever
receives an advice from his Lord and stops, he is allowed what
has passed, and his matter is upto Allah. And the ones who
revert back, those are the people of Fire. There they remain
forever.
In this Verse, the alternative is directly provided by Allah
Almighty, based on which a number of trading options have been
devised by the experts in consultation with the Shariah scholars and
jurists. In this chapter we will consider the basic trade-based
alternatives available in Islamic financing available to businessmen in
Pakistan.
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Chapter Four
Trade-based Alternates to Financing
Bay Murabaha;
Bay Musawwama or Bay Muajjal or Bay BitThaman-al-Aajil;
Bay Istijrar;
Bay Salam; and
Bay Istisna.
Bay
Literally Bay ( )denotes a sale or a trading transaction in
which the ownership of an asset is transferred from one party to
another in exchange of a consideration. It has many types which are
allowable and even a few ones which are not allowable in Islamic
Shariah. The sale is the transaction of transfer of title and possession
along with all the risks and rewards of an asset (generally tangible)
from one person (the seller) to another (the buyer), whereas both the
seller and the buyer should be knowledgeable and willing to the
transaction.
All the trade-based modes of Islamic finance are based on
Bay i.e. a sale transaction. In these transactions, an Islamic bank or
financial institution involves in various sales and purchase transactions,
similar to the activities of a large trading house. The Islamic financial
institution, in this type of transactions, facilitate different parties in
their commercial transactions by working as an intermediary between
them while making them the payments and providing repayment
structures according to the need of the customers.
Basic Principles of Trade
Before discussion in detail with respect to various trade-based
alternates of finance being used by various Islamic financial
institutions, it would be worthwhile to discuss a few basic principles of
trade as laid down by Shariah.
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FLOW OF TRANSACTION IN MURABAHA
CUSTOME
R
SUPPLIER
Purchase
against
Cash (Say
Rs.
1,000)
through
Agent on
Spot
Basis
AGENT
(Generally
the
Customer)
GOODS /
ASSETS
Appointment of
Agent for Payment or
Delivery or Both
Sale
against
Deferred
Payment
on Cost
+ Profit
Basis
(Say Rs.
1,150)
BANK
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Trade-based Alternates to Financing
two parties. Accordingly, the buyer gets the goods he needs at the time
and gets relaxation in the terms of payment of the consideration as per
agreement, whereas the banks enjoy the profit in form of markup on
the same.
It is generally used by Islamic financial institutions in the
following transactions:
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Tawarruq
Tawarruq ( )is a transaction exactly opposite to a
Murabaha transaction and hence it is also called Reverse-Murabaha. In
this transaction, one purchases some liquid (immediately saleable)
commodity on the basis of Murabaha either from the source supplier
or from an intermediary (Islamic financial institution) and sell it in
market to get cash for his immediate needs.
FLOW OF TRANSACTION IN TAWARRUQ
SUPPLIER
COMMODITIES /
SECURITIES
(Must be Highly
Liquid in Nature)
CUSTOMER
IN OPEN
MARKET
BANK
Sale
against
Deferred
Payment
on Cost +
Profit
Basis (Say
Rs. 1,200)
CUSTOMER
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CUSTOMER
(Borrower)
COMMODITY
(Any Commodity
Permissible for
Salam)
EVENTUAL
CUSTOMER
BANK
Appointment of
Agent for
taking
Delivery
and Sale
in Open
Market
AGENT
(Generally
Customer)
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Parallel Salam
As discussed briefly above, that the Islamic financial
institutions often use an option to enter into another independent
Salam transaction to sell the commodity which they have purchased on
Salam basis. This transaction is generally called as parallel Salam
transaction.
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FLOW OF TRANSACTION IN SALAM WITH PARALLEL
SALAM
CUSTOMER
(Borrower)
COMMODITY
(Any Commodity
Permissible for Salam
Generally against an
Anticipated Purchase /
Export Order)
BANK
Sale against
Advance
Cash
Payment
(Say Rs.
1,100) and
Deferred
Delivery
(Same Date
as per Salam
Contract)
PARALLEL
SALAM
CUSTOMER
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Bay Istisna
Bay Istisna ( )is a sale transaction where a commodity
is transacted before it is manufactured. In other words it is the
contract for manufacture of some specific commodity for the buyer by
the seller himself or through some other manufacturer. In Istisna price
has to be fixed with consent of all parties involved. All necessary
specifications of the commodity must also be settled. However, the
price may be paid according to the agreed schedule of payment that
may even be in advance, at the time of possession or even after that in
lump sum or in agreed installments.
Practical Applicability of Istisna
The most practicable applicability of Istisna which is generally
observed in our society is the construction contracts. As an alternate
to traditional financial services, this tool is used by the Islamic financial
institution for financing arrangements of manufactures and in certain
cases, for brokers and dealers also.
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CUSTOMER
(Borrower)
COMMODITY
(Any Asset which is
Constructed or
Manufactured)
EVENTUAL
CUSTOMER
BANK
Appoint
-ment of
Agent
for
taking
Delivery
and Sale
in Open
Market
AGENT
(Generally
Customer)
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Parallel Istisna
As discussed above, similar to a Salam transaction, there is an
option for the Islamic financial institution to enter into another
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contract of Istisna with some other person and sell these goods in
advance. Such a contract is also called a Parallel Istisna contract.
FLOW OF TRANSACTION IN ISTISNA WITH PARALLEL
ISTISNA (FOR MAJOR PROJECTS)
SUPPLIER
(Willing to
Construct and
Sell an Asset)
COMMODITY
(Any Asset which is Constructed or
Manufactured with Exact Specifications)
BANK
Sale against
Installments over
a Longterm
(Say Rs.
150 M
over Ten
Years)
Appointment of Agent
for Supervision and
taking Delivery
AGENT
(Generally
Customer or
Experts)
CUSTOMER
(Borrower)
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Chapter Five
Lease-based Alternates to Financing
LEASE-BASED ALTERNATES TO
FINANCING
Similar to the trade-based alternates, a number of lease based
alternates for Islamic financing have also been developed by the jurists.
Most of these options have remained common for the known history
of mankind. In addition to such common options, a number of
complex transactions have also been devised by the experts in Islamic
finance and Shariah jurists. We will study just a few basic modes of
Islamic finance developed under such principles.
Ijara
Ijara ( )literally means service charges or rent for any sort
of services or usufruct or benefit of some asset. It includes the salaries,
wages, rent, lease, service charges and charges by whatever name called
against some services by individuals or against benefiting the usufruct
of some assets. In case of services it is also called Ujrah (). In a
better defined term, Ijara is the transfer of ownership of a service for
an agreed upon consideration for agreed period of time. It also refers
to a contract of land leased at a fixed rent payable in cash.
In the theory and practice of Islamic finance, it is generally
used as an alternate to leasing or renting of assets and accordingly, we
have also used it as a synonym to leasing of assets.
Practical Applicability of Ijara
Ijara, along with its various variants, is a very useful and
practicable interest-free alternate to the traditional banking
transactions. Practically it is one of the most commonly used forms of
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CUSTOMER
(BORROWER)
PAYMENTS
(Deposit + Rentals)
INVESTMENT (Purchase
of Asset)
BANK
(FINANCIER)
IJARA RENTALS
ASSET
EXPENSES
INCIDENTAL TO
OWNERSHIP
EXPENSES
INCIDENTAL TO
USAGE
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CUSTOMER
(BORROWER)
PAYMENTS
(Deposit + Rentals)
INVESTMENT (Purchase
of Asset)
BANK
(FINANCIER)
IJARA RENTALS
ASSET
EXPENSES
INCIDENTAL TO
OWNERSHIP
EXPENSES
INCIDENTAL TO
USAGE
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Chapter Six
Agricultural Financing
AGRICULTURAL FINANCING
In Pakistan, agriculture is the sector that not only contributes
a very significant portion to the GDP but also provides the livelihood
to the maximum number of individuals and families either through self
employment or through employment in any form. Accordingly, it is
not possible for us to ignore such an important area.
The financing to the agriculture sector has much more
options as compared to any other industry because of its very nature.
Accordingly, in addition to the normal options available to every
businessman and every industry, there are a few options specific with
agriculture that are available only for agriculture financing.
Following are the basic agricultural based Islamic modes of
financing:
1.
2.
3.
4.
Salam;
Muzaraa;
Musaqa; and
Mugharasa.
Salam
Salam is a very common form of financing for agriculture
sector. Besides being available as a financing option with the Islamic
financial institutions, it is still in practice in various forms in the
country. In this case, generally the commodity brokers called
Arhtees purchase fixed quantities of expected produce in advance
from the farmers.
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2.
LANDOWNER
(LENDER /
FINANCIER)
FARMER
(BORROWER)
EFFORTS + SUPPLIES
(MAY BE)
INVESTMENT
LAND + SUPPLIES
PRODUCE
(In Agreed Ratio)
MUZARAA
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Musaqa
It is a transaction or agreement between the owner of a tree or
a cluster of trees and an agent (hereinafter referred to as the farmer for
ease of reference), against an agreed share from the yield of such trees
including fruits, flowers, leaves and other produce e.g. chemicals,
rubber, gum etc. as agreed. Nevertheless, non-yielding trees shall not
be the subject of Musaqa agreement and in such case the alternate
arrangement may be a service contract or employment.
Difference between Muzaraa and
Musaqa
The basic difference between the Muzaraa and Musaqa is
that in the former one is applicable on plants having smaller life cycle,
generally only one season, whereas in the latter one the trees and
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plants should be such as have gone into the ground as a fixed part of it
and are capable of staying in the ground for more than one year.
Dos and Donts for Musaqa
Following are the basic Dos and Donts in case of Musaqa
transactions and arrangements:
Mugharasa
Mugharasa is a transaction or agreement between the owner
of the land and those, in respect of agriculture, who assume the
agricultural or horticultural against a clear cut share in the land and the
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Murabaha;
Ijara and Ijara Muntahia Bittamleek; and
Diminishing Musharaka.
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Chapter Seven
Consumer Financing A Consumers Perspective
CONSUMER FINANCING A
CONSUMERS PERSPECTIVE
Now it would be better to have some discussion regarding the
retail banking system and the consumer financing. Consumer financing
denotes the loans that are directly disbursed to the general public for
personal purposes, including auto loans and loans for household
products (sometimes in form of leasing), house loans (mortgages),
credit cards financing, students loans and other personal loans. We all
who try to become practicing Muslims know that these financing are
based on the principles of interest and accordingly these are not
permissible from Shariah point of view. In this chapter, we will try to
discuss a few Shariah compliant models for consumer financing.
From the banking perspective these loans are assumed to be
more risky particularly with regard to the default by the party and
accordingly, risk premium is generally very high on these loans and
accordingly, the rate of return is extra-ordinary high as compared to
corporate and industrial loans and financing. On the contrary, it may
also be observed that the current banking system has developed a
stronghold in the economic sector and accordingly, its not that easy
for somebody to default his loan, whereas these banks also hedge their
risk through insurance and other techniques, besides having strong
securities. Consequently, this is generally the most profitable sector for
the Banks. In addition, generally the consumers are not in a position to
providing strong securities and as a consequence thereto, they agree to
pay comparatively higher returns.
Similarly, it can also be observed that particularly in the third
world countries, the major multinational banks invest a significant
portion of their portfolio in consumer banking particularly in credit
cards. Giving due consideration to the above facts, one can easily
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Murabaha;
Ijara Muntahia Bittamleek;
Istisna and Parallel Istisna; and
Diminishing Musharaka.
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as per the terms of the contract. As a result of such increased risk, the
Islamic financial institutions generally avoid such type of transaction.
In addition, because of fixed price, these contracts are subject
to the same risks as discussed earlier in case of Murabaha based model.
Diminishing Musharaka Based
Housing Finance Model
The most commonly used Islamic mode for housing finance
used by the Islamic financial institutions is Diminishing Musharaka.
This is also the most practicable and the one nearest to the basic
principles of Islamic Shariah. However, a new variant of Istisna cum
Diminishing Musharaka based model is nowadays being offered by
certain Islamic financial institutions.
According to this concept, the financier and the person willing
to buy the house participate in the joint ownership or Shirkat-ul-Milk
of a property. This joint ownership is commenced in any of the
following ways:
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Consumer Financing A Consumers Perspective
BANK
(FINANCIER)
INVESTMENT
(LAND OR 20%/30 %)
INVESTMENT
IJARA
RENTALS
CONSUMER
(BORROWER)
HOUSE
(JOINT- OWNERSHIP)
CAPITAL GAIN / LOSS /
EXPENSES INCIDENTAL TO
OWNERSHIP
(In the Ratio of Capital Investment
The Bank May Waive Capital Gain)
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Chapter Eight
Interest-Free Financial Management
INTEREST-FREE FINANCIAL
MANAGEMENT
Most of the basic concepts of financial management in a
purely secular business move around the concept of time value of
money. In the Islamic Shariah the concept of time value of money is
denied at all. However, the utility of money is not denied and it has
been advised to spend and invest money in all lawful means according
to the injunctions of Shariah. At the outset we should first discuss the
concept of time value of money and its impacts on society.
Time Value of Money
The fundamental concept of conventional financial
management is the time value of money. According to this concept,
capital or money is considered to be a prime factor of production
along with the labour, entrepreneurship and land. In this concept, is
assumed that every factor of production has its worth and time value
i.e. in order to acquire any of these factors for some time you need
some consideration to be paid in some manner, whatsoever, generally
in form of money. Being more practical, two most important factors
that are worked out are the entrepreneurship and money, as the
practical examples suggest that when these two factors are combined,
other factors may be easily borrowed or purchased, as desired.
In this concept, the results of every financial transaction are
calculated in form of time value of money. You can term this concept
as a barometer for computation the results of a financial transaction or
a series of financial transactions. As a base of this concept, it is
assumed that money in hand has more value than any amount
receivable because the former one may be invested and might get
return during the time, accordingly, any amount receivable after some
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with Islamic financial institutions, who will first buy your products on
cash payment and then sell these to your customer on extended credit
terms. However, for these financial products, it would be necessary for
all the concerned parties to ensure that the relevant Shariah
requirements are fulfilled. In case of Istisna and Salam you may also
obtain advance from the bank which will provide you further flexibility
in your working capital management, particularly in Salam whereby the
whole sum is required to be paid at spot, at the time of entering into
the contract.
It is also pertinent to discuss a common issue in our
traditional markets. Generally, while making purchases on credit basis,
particularly in retail and wholesale markets, the description of goods is
mentioned but the rates are not finalized and these are finalized at the
time of settlement. Generally, this is because of the sellers intention to
get the benefit of day by day increasing rates of commodities or to
ensure that lesser discount is offered if the actual payment is made
within a few days. In this respect it should be clear that once the title
and possession of goods is transferred, the sales transaction stands
consummated and accordingly, from Shariah perspective, it is
pertinent to finalize the rates at this very moment which shall never be
changed, failing which will make this transaction unlawful or even
Haram. However, as discussed earlier, most of the jurists allow that
the seller may later give any prompt payment discounts and rebates at
his own will without any mutual contract.
An alternate to the same is allowed in form of Bay Istijrar. In
this option, a seller and the customer agree that they will buy and sell
goods in routine according to some pre-agreed benchmark. As an
example they can agree for the market rate or a price with 10 percent
discount on the market rate. This option is allowed by most of the
jurists subject to the condition that there remains no ambiguity or
Gharar in the transaction. In the given example, if they have agreed at
a price equivalent to the prevailing market rate and the credit period as
one month from the date of taking delivery, such rate should be clearly
known and identifiable. Any negotiation after the sale is not allowed
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the date of transaction. The bank simultaneously enters in a promiseto-sell the foreign currency in the forward currency market at a rate
which is generally higher than the spot rate prevailing on that date.
The difference between these two rates is the profit earned by the
bank on such transaction. When the export proceeds are received the
bank may receive the same directly and adjust against the loan to the
customer, and then sell these at the pre-agreed promise-to-sell rate. As
an alternate, the bank may go for a risk and reward situation if it is
expected that the foreign currency rates are expected to rise in future
and in such case no promise-to-sell may be entered into and instead
such currency may be sold in the open market once the export
proceeds are realized.
It is also pertinent to note that certain Islamic financial
institutions are using the option of Salam of currency in a similar form
of transaction, which is not permissible in view of the most of the
jurists whereas, only a few jurists in the sub-continent have allowed
this on the premise that the paper currency is considered to be
Thaman Istilahi and not the Thaman Haqiqi.
Second option in this respect which is rarely used by the
Islamic financial institutions is to transfer such debt at an equal
amount and obtain nominal service charges, which are fairly equivalent
to the actual amount of expenses incurred or estimated to be incurred
on such transaction.
General Bills Discounting
Two options are generally available in Islamic finance against
bills discounting. In the first option, the amount of debt needs to be
transferred to the financial institution in exactly equal amount. It
means that a debt of Rs. 100 receivable after 1 month should be
transferred against an equal amount irrespective of the time of
payment by the bank to the customer in accordance with the Shariah
principles of Hawala (). In Hawala, the bank has recourse
available to the customer in case the eventual debtors do not make the
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Short-Term Financing
Conversion of short-term financing on Islamic principles has
proved to be the most crucial and complex for the purpose of
conversion of businesses on Islamic principles. It is because, generally
the options of short-term finances and overdrafts (running finances)
are very easy and practicable in the conventional banking, whereas in
case of Islamic banking, although a number of alternates have been
developed, these are not considered to be an easy alternate to the
conventional options.
Conventionally, the matter of running finances is dealt with by
determining a credit limit and an interest rate. Once these are mutually
agreed, the bank provides on open opportunity to the customer for
operating such an account just similar to a current account and the
financial charges are calculated on the basis of daily product balances.
Similarly, once the customer determines that his working capital needs
are somehow fixed to a minimum limit, he has an easy option available
to interchange these running finances with short-term loans and bridge
finances with comparatively lower rates of interest.
In contrast thereto, in Islamic modes of financing, the
alternates available for the purpose are not easy to operate. Generally
the first and the foremost used option in this respect is considered to
be the Murabaha. However, the term for Murabaha is always fixed and
accordingly it is not a real alternate to the running finances. Similarly,
its rate once fixed, cannot be changed and accordingly, it is not
comparable with the benefits of the running finance from business
perspective.
The only option which is available for running finances is
Musharaka based on daily product balance. In this model, the bank
and the customer become partner in the business pool of the customer
and profit thereon is distributed on the basis of computation of the
daily product balance of the contribution of the bank, as well as, the
customer in the respective pool. Nonetheless, this option is not very
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Would it be Halal?
Would it be Risk-Free?
What would be the return? and
Should I suspect a loss also?
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assets. In addition, they generally suggest that the investor should raise
his voice with the management to eliminate such interest-based
investments.
Purification
In view of a lack of concepts of Halal and Haram in the
business circles, it is often noted that the companies involved in purely
Halal activities have certain income from certain Haram sources
particularly, interest income on cash and short-term investments.
Based on the practical impediments, the respectable jurists have
allowed investment in such companies subject to three conditions.
The first condition, as discussed above, is that being a
stakeholder, and in case of shares, being a member of the company,
the investor should raise his voice against investment on the basis of
interest and involvement in other Haram activities.
Second condition is that the proportion of such activities in
contrast to the core activities (that must be Halal) should be minimal
and immaterial and for this purpose a benchmark of 5 percent has
been defined. Accordingly, no amount should be invested in the
companies having income from Haram sources, more than five
percent of their total income.
The third condition is purification of profits earned from such
companies. According to this concept, any amount, although
immaterial in nature, earned from such investments should be paid in
charity and should not be included in the income of the investor in
order to purify his income.
Purification of Indirect Income and
Capital Gains
Jurists have consensus that any direct income from such
investments including dividends, bonus shares and discounts on shares
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However, for those who are well aware the operations, practices (and
even malpractices) of these institutions, it is not something new.
Practically, what one can observe from whatever most of these
Modarabas (except a handful of them) have performed in past, is a
history of white-collar burglary coupled with a practical joke in the
name of Shariah. Most of these institutions were formed by various
groups of companies in order to finance their own companies through
siphoning money from the pockets of general public. This fact may
easily be evidenced from the past performance of the Modaraba sector
and the net asset values and market values of their certificates on the
ready board quotations.
On the other hand, most of these Modarabas have not
complied in principle with the injunctions of Islamic Shariah and
instead these have been involved in financing with Shariahcompliance-on-paper. However, there are still a few Modarabas that
have well-performed as Islamic financial institutions and have given
reasonable returns to their certificate-holders, as well.
Accordingly, for the purpose of investment in a Modaraba, it
should be ensured that all the conditions applicable to the investment
in companies as discussed earlier, are duly complied with and in case
of any doubtful income, purification procedure is also complied with.
Investments in Government Securities
Investment in interest-bearing government securities, like any
other interest-bearing security, is not permissible from Shariah
perspective. Up till recent past, no alternate to such securities were
available. As a part of efforts for developing alternates for Islamization
of economy, as well as to attract leading international Islamic financial
institutions for investment in Pakistani government securities, the
Pakistan government has, in recent past issued two Sukuks for the first
time while more are in the pipeline.
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and not used substantially for own business. In this case the owner has
the option to value it at its fair market value.
On the contrary, real estate property qualifies for recognition
as fixed assets (property, plant and equipment), if it is owner occupied
and used substantially for business purposes. Investors can purchase
property and use for their own purposes or let it out to others and
generate economic benefits. In this case the property should preferably
be recorded at cost and depreciation should be charged thereon.
However, such assets may be revalued subject to the condition that
any unrealized gain should not be distributed as dividend. Any
agricultural land and properties should also be accounted for under the
latter category.
Similar to most parts of the world, since the gains on sale of
immovable property are considered capital gains these actually become
exempt from tax unless the person has a practice of continuous
dealings in sale and purchase of property in which case, the same is
considered his business and his income from such source is taxed.
Shariah Compliant Solutions for
Raising Finances
A number of general products of interest-free financing as
being offered in Pakistan by Islamic commercial banks and financial
institutions, as well as, a few other financial institutions and the Islamic
banking branches of conventional commercial banks. These products
are based on the Islamic financing modes as discussed in detail in the
previous chapters and particularly include Murabaha, Ijara, Ijara
Muntahia Bittamleek, Istijrar, Diminishing Musharaka and Salam based
products.
There is only one setback with such products that since these
are being offered by the Islamic banks and other financial institutions,
these are controlled by such financial institution. In other words, the
pricing for such financial products, securities there against and other
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Modarabas, which in fact, are not in compliance with the Shariah rules
in substance. No rules have been devised by the Government for
issuance of such certificates, although a provision for issuance of the
same is available under the Companies Ordinance, 1984.
In previous years, TFCs which were being issued on the basis
of a buy back arrangement were also considered to be a Shariah
compliant mode of financing. Nevertheless, in view of impermissibility
of such arrangement from Shariah perspective, most of the jurists did
not agree with such conclusion. After a decision by the Federal Shariat
Court in this respect, these are no more considered to be a Shariah
compliant mode of financing. TFCs are the most common type of
redeemable capital prevalent in the country and as an alternate thereto,
in the recent past, the TFCs under Musharaka mode have been
experienced which were listed on the stock exchange. This option has
proved to be a successful effort for development of interest-free
modes of financing.
In issuing redeemable capital, particularly the listed securities,
the companies generally enjoy three benefits. The first benefit is
regarding pricing i.e. generally the pricing for redeemable capital is in
the benefit of both the company and the financier because this is
generally the mid rate between the commercial banks borrowing and
lending rates. Even at times, it is higher than the market rates in order
to tempt the investors.
Second benefit is that the terms and conditions are not
dictated by the lenders and instead, they invest on the basis of the
terms and conditions of the issuer of the securities.
The third benefit is that other financial institutions e.g.
insurance companies, mutual funds and investment finance companies
generally invest in such securities and accordingly, the dependence on
the commercial banks is reduced. However, redeemable capital has
one setback i.e. like general financing arrangements, it disturbs the
gearing ratios and consequently the limits for prudential regulations
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Even for defined benefit plans, the tax benefits for the
employer and the employee are increased if these are approved by the
taxation authorities and these are further increased, if the same are
funded. For a funded defined benefit plan, the provisions regarding
investment of funds as prescribed by the company law and taxation
law are similar to those applicable to a provident fund scheme.
Accordingly, same options shall remain available for these funds, as
discussed above in the case of provident fund.
Insurance
Insurance, as prevalent in the modern commercial culture, is
considered to be against the principles of Shariah by the consensus of
the majority of jurists. A conscious Muslim should always avoid
entering into insurance contracts, unless either a government
regulation or a situation of compulsion or Iztirar requires entering into
such contract. Even in such case, our attitude should be in line with
the condition laid down by Allah Almighty for any Iztirar i.e. eating
Haram in case of Iztirar should not be done by disobeying or desiring.
Alhamdolillah, now the concept of Islamic alternate to
insurance i.e. Takaful is very much in operation throughout the world
and even in Pakistan, the first company is commencing operations on
the principles of Takaful.
Since Insurance and its alternate require our further attention,
we will discuss them in detail at a later stage in this study.
Bank Guarantees
Different forms of guarantees are a necessity for running
businesses in the modern world. By definition, a guarantee is an
agreement whereby the guarantor assumes responsibility for the
discharge of the other persons obligation in the event of failure by
other person in discharging his obligation. The general guarantees
issued by the conventional commercial banks are considered to be
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that an honest and fair Muslim cannot tolerate distorting his faith just
to evade taxes and getting some benefits in this worldly life.
The fifth element, which also has similar significance, is the
involvement of corruption in case of evasion of taxation. You would
agree that in order to evade taxes, one has to incur some additional
cost which is a type of bribe or Rishwat (), by whatever name
called. Here we are not discussing the costs that, in our culture, are still
to be incurred to get the assessments finalized and to get the refunds
assessed. Such cost might not be termed as harsh from the payers
perspective, if the same has to be incurred to get someones right,
irrespective of all the truth and fairness in the disclosure of facts and
presentation of accounts and returns. It would be worthwhile to recall
that the Messenger of Allah SAAWS has cautioned in a well known
Hadith that the person paying the bribe and the one receiving the
bribe, both are destined to the Hell.
In view of the above, it may be concluded that a Muslim
businessman should be fair and honest enough to disclose his
accounts to taxation authorities. If this approach is developed, this will
also contribute towards improvement in the Islamic banking system,
particularly in the product being offered under Musharaka and
Modaraba modes, because at present, the bankers generally hesitate in
investing under these modes because of a general phenomenon of
untruthful presentation of accounts, mainly with an objective of
evasion of taxation.
Dealings in Foreign Currency
Dealings in currencies are allowed by Shariah with certain
conditions. According to majority of jurists, sale of currency against
other currency is a Sarf transaction i.e. similar to a transaction of sale
of gold against gold and silver against silver or gold against silver. In
such transactions, it is a clear Shariah ruling that the transaction should
be done on a spot basis and same commodity can not be sold against a
different quantity. Based on the same principle, dealing in currencies
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should not be done on deferred delivery basis and the same should be
made on a hand to hand basis.
It would also be interesting to note that a relatively small
school of thought contends that the currencies prevailing in the
modern day market are not real Thaman and accordingly, the
principles applicable to Thaman should not be applied thereto. In view
of such jurists, a sale of currency against other currency can be made
on deferred delivery basis and at any price that may be mutually agreed.
Such jurists also allow a Salam transaction for foreign currencies. Any
person having commonsense can easily understand that such practice
can open doors for earning interest under the shelter of foreign
currency transactions, and accordingly, most of the jurists have
strongly opposed such treatment. This debate is a bit tricky and
complex in nature. However, being prudent, it is advised that all the
foreign currency transactions should be carried out on a spot basis.
In view of practical difficulties, jurists have allowed that the
time lag in clearing of cheques, shall not be considered a deferred
payment for this case and instead, the same shall be considered a spot
payment. Similarly, it has also been consented that a debit or credit
note issued by a commercial bank or financial institution, evidencing a
money transfer or conversion shall also be considered to be a sport
payment for this purpose.
Investment in foreign currencies, for hedging of risks or with
a motive to earn profits from increasing currency rates, is also allowed
in Shariah without any further conditions. However, the marginal
trading of currencies as generally prevalent in the forex market, as well
as, short-selling or selling without possession of the same are also
prohibited because of the general principles applicable to sale
purchase transaction. Similarly, forward sale and purchase of foreign
currencies are not allowed, although a unilateral promise to buy and
sell currency at an agreed rate on a future date is considered
permissible by majority of jurists.
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Forward Contracts
As we have already discussed in the previous chapters,
forward sales and purchases, as in vogue in the business culture are not
permissible from Shariah perspective. Nevertheless, Allah Almighty
has been kind enough to provide us alternates to such transactions in
different forms. The first form of forward contracts which are
allowable under Shariah perspective is Bay Salam. However, in order
to avoid the element of uncertainties in a conventional forward
contract which makes it a sort of gambling, Shariah has prescribed a
number of conditions that need to be followed in case of a Salam
transaction. Such rules and provisions have been discussed in detail in
the previous chapters.
The second form of forward sales which is allowed by jurists,
is an Istisna contract i.e. a manufacturing or construction contract.
Like Salam, in case of Istisna also, there are a number of conditions
specified in Fiqh in order to ensure elimination of the uncertainty
factor from such transactions.
In addition to the above mentioned forms of forward sale
transactions, most of the jurists have considered allowable to enter
into a unilateral promise to buy or sell a commodity in future and such
promise may or may not be binding on the promising party.
Nevertheless, the same shall be considered merely as a promise and
can not be accepted by the counter party at the stage of promise.
There are a few other conditions also applicable to such transactions,
particularly, that the promising party should be in position to provide
the commodity or make the payment as of the promised date, as the
case may be. Similarly, the matter transfer of risk and reward of the
commodity shall be finalized once the actual transaction will be
consummated as of the future agreed date.
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Marketing
Marketing is the art to sell. In the commercial world,
marketing has emerged as the most important and dependable
segment of a business and has even surpassed the production segment.
It can be rightly said that the production of good quality, generally can
not and do not generate as good results for a business as marketing of
good quality can.
While not denying the benefits of good marketing, we wish to
draw attention of the entrepreneurs to the fact that sometimes the
basic marketing techniques being used by various businesses globally,
as well as, in the local market are clearly contravening the basic
principles laid down by Islamic Shariah in this respect. Under Shariah
principles, the marketing should be based on truth and honesty,
without any false claims. There are a number of Ahadith in which it is
prohibited to show better quality of commodity and to hide the
negative side and to make untruthful claims regarding quality of
commodity.
Similarly, for marketing and particularly advertising which is a
significant aspect of marketing, it is a general phenomenon that
women, sex and music are utilized at their maximum to attract the
buyer. Those who do not believe in the life hereafter, may not agree,
but for a Muslim it should be enough to understand that utilization of
such prohibited tools to attract customers may result in ruining our
Halal income from Halal activities. In this respect, we feel that it is the
duty of the Muslim marketing experts to develop a code of conduct
for marketing and advertisement strictly in compliance with the
Shariah requirements.
Adherence to the law of the land
Adherence to the law of the land is one of the basic principles
of Islamic Shariah. The only principle laid down in this respect is to
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Gharar Uncertainty
Gharar literally means uncertainty. In Islamic contract law,
this term is used whereby any of the terms of the contract are not
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jurists, there are a few scholars who do not consider it to be Riba from
this perspective.
The second factor is that the insurance companies generally
invest their savings in various securities and investments which bear
interest either directly or indirectly. These investments also might
include certain investments, whereby although the interest is not
involved but the core activities of the investee are not in compliance
with the injunctions of Shariah.
The third factor is specific to certain types of insurance
contracts, particularly life insurance contracts, which include the
concept of annuity. According to such schemes, in case the insured
person does not make any claim upto the date of expiry of policy or
another pre-agreed date, he is paid an amount equivalent to the
annuity of his premium payments worked out on the basis of a preagreed rate. The relevant details of such computation depend upon the
scheme of such pooling.
All of these forms of involvement of interest are not
permissible from the Shariah perspective and accordingly render the
insurance contracts void and impermissible.
Lack of Reliance on Taqdeer
Besides, the foregoing three legal issues involved in
insurance, another issue is raised by a number of Shariah scholars on
spiritual and religious grounds that relates to the faith ( )of a
Muslim on Taqdeer (). Needless to mention, faith on Taqdeer is
considered to be a prime facet of faith in Allah SWT. According to
these scholars, insurance lead to lack of a persons reliance on Taqdeer
and accordingly, it is an indication of weakness in ones faith.
Based on this concept, coupled with an assumption that
Gharar and Maisar can never be completely eliminated from an
insurance contract or any alternate thereto, there is a relatively small
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CUSTOMER
(PARTICIPANT)
Payment of Contributions
TAKAFUL
COMPANY
(OPERATOR)
Qard-e-Hasana
in Case of
Excessive
Losses
Cede Money +
Contributions less Wakala
Fee
CLAIMS LOSSES
TAKAFUL FUND - WAQF
Funds Invested in Shariah Compliant
Opportunities Adequate Reserves and
Provisions Created
SURPLUS
(After Payment of
Qard-e-Hasana)
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Chapter Eleven
Financial Reporting Principles
FINANCIAL REPORTING
PRINCIPLES
Most of the experts in Islamic finance conclude that the real
Islamic banking and finance system, which should be ideally based on
profit and loss sharing, can not be implemented till the society, as a
whole, does not change its behavior through implementing a just and
fair financial reporting system. Particularly, complex models of profit
and loss sharing can not work if an accurate, honest, fair and timely
financial reporting system is not in place. Keeping in view the
significance of the same, in this chapter, we will discuss a few issues in
respect of financial reporting.
It is a prerequisite for a Shariah-compliant business that its
accounting and financial reporting is properly performed on the
principles of honesty, truth and fairness. Honesty, truth and fairness
are the basic principles taught to us by Islam and these are required to
be followed in all facets of our lives.
Honesty and Truthful Presentation
Telling and insisting on truth is one of the basic principles of
Islamic Shariah. This becomes more significant in view of the basic
principle of honesty that also requires a businessman to be truthful in
his representations relating to business.
In Islam, honesty is not a policy, but an integral and
fundamental principle on which the structure of Islamic way of living
has its foundations. In perspective of financial reporting honesty
becomes more and more important in contrast to the general business
reporting framework which has a great number of loopholes. These
loopholes are of such significance and impact that these can even
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cause disasters like Enron which not only affected its employees and
stakeholders along with their families but also resulted in fall of the
giant accounting firm Arthur Andersen. The prime cause of such
disaster was window dressing of Enrons financial statements in case
of special purpose entities.
Accordingly, in order to ensure compliance of Shariah with
respect to the matters of financial reporting of a business, it is
imperative to report everything honestly. In other words, the
loopholes available in customs, laws and practices, should not be
utilized to show incorrect picture of business to the outside world.
Such outside world includes shareholders, creditors, regulators and
others concerned.
The only exception in this area that may be given on business
grounds is to hide information where it may be harmful either for the
business or its owners. Such exemption does not entail hiding anything
that misleads any outsider. Moreover, whereby any information is
necessary to be disclosed for understanding of the financial reporting,
the same should be clearly disclosed.
The first and the foremost aspect of accounting in accordance
with the Shariah injunctions is truthful presentation of the state of
affairs and results of operations. Saying, writing and striving for the
truth is a motto for a Muslim whereas a lie is rightly said to be against
the basic principles of Islamic way of living.
Truthful presentation of the accounts is not only a basic
principle which an individual should follow, but is also serves as a
basis for the interest-free economy. This situation is defined by the
economists and bankers that the most stringent hurdle in the
transforming of economy on an interest-free basis is the matter of
unfair preparation of accounts.
This situation is very much apparent from the current position
of doubtful portfolio of Pakistani banks. According to an estimate an
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should keep in mind another factor that the intent is always known to
Allah SWT, hence just trying to make a fool of others by making a
paper arrangement without changing the substance of transaction
might transform his business to be Shariah compliant in the eyes of
people, but this could not suffice to prevent him from grapple of Allah
SWT in the life hereafter.
This situation, in case of Murabaha, has improved after
implementation of the Islamic Financial Accounting Standard
(IFAS) 1 Murabaha which has now been adopted by a majority of
Islamic financial institutions. It is, anyway, an unfortunate fact that a
few Islamic financial institutions have not yet adopted this standard
and instead they are debating against its implementation. IFAS 2, on
Ijara is also expected to be applicable in the near future.
Audit
In an Islamic society, audit has dual significance when
compared to a conventional society. In a conventional society, if the
investor does not rely on the truthful presentation of financial
statements and other financial data by the investee, he has the option
to make investment based on fixed rate of return i.e. interest. However,
in Islamic financing, although certain products are available with fixed
rate of return including trade-based and lease based modes of
financing, the prime modes are based on profit and loss sharing which
require more realistic and truthful financial reporting culture. Even in
case of fixed return based financing, it is an obligation of Muslim
investors to waive any debt in case the debtor is really bankrupt, which
cannot be ensured unless the financial reporting system ensures
credible financial reporting.
The profit and loss based instruments of Islamic financing
always underlie a presumption of truth, honesty and faithfulness that
creates one partners reliance on other partners. This necessity arises
particularly where the profit and loss based financing options are used.
According to the very basic principles of Shirkah and Modaraba, it is
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eminent that each time a partnership is entered into all the partners
should invest in form of cash or cash equivalents (particularly, gold
and silver) and whenever the partnerships reach to an end it should be
fully dissolved and all the assets should be sold and the respective
shares and principal should be repaid to the respective partners.
Mostly, the jurists have allowed that in case an audit of accounts has
been performed, the partnership may be dissolved by transferring its
assets to the partners against their capital, as agreed and the profit and
loss be allocated accordingly.
Nonetheless, in view of the present economic scenario, it is
apparently not possible in case of most of the enterprises that the
Islamic financial institutions may opt for profit and loss based options
because of lack of reliance on the financial reporting. Consequently,
this matter is causing an impediment in the transition of financial and
economic system on Islamic principles.
Selection of auditor
Generally the matter of selection of auditor is not awarded
with the significance that it deserves, particularly, in an Islamic society.
It is generally observed that audit is considered to be something
forcefully levied on an enterprise and accordingly, it is the effort of
most of the entrepreneurs to get rid of this thing by going for the
cheapest and the most easy or rather cozy auditors.
While reserving our comments on the integrity, independence,
professionalism and honesty of a number of auditors working in this
country, we shall recall that the auditor serves the purpose of an
independent check on the financial affairs and besides this, a
competent auditor also assists the management in improvement of
financial reporting and financial affairs. Accordingly, the appointment
of an independent and competent auditor is generally in the benefit of
the organization.
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Internal Audit
Internal audit is also a very important function for a living
organization. While the external auditor performs a check on the
financial reporting and the financial affairs of the organization on a
test basis, an effective internal audit function maintains a check and
balance system within the organization particularly in operational and
financial areas.
Internal audit becomes more significant in the organizations
whereby the minority shareholders or the external financial institutions
have significant stake. In case of listed companies, the internal audit is
now a statutory requirement by virtue of the Code of Corporate
Governance. Nevertheless, other organizations are generally not
enjoying the benefits of internal audit function.
In order to safeguard the benefits of the minority shareholders,
financiers and other stakeholders, the internal audit function should be
reporting directly to the Board or the Audit Committee and its
functions and responsibilities should remain independent of general
management functions.
Codes of Ethics issued by AAOIFI
In respect of the responsibilities of the employees of Islamic
financial institutions and the professional accountants involved in
accounting, financial management and auditing of Islamic financial
institutions the Accounting, Auditing and Governance Standards
Board of AAOIFI has issued code of ethics for such professionals.
Such codes of ethics define the basic principles for the conduct of the
professional duties by such professionals and are considered to be a
recommended reading for every professional.
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Chapter Twelve
Problems of A Muslim Employee
PROBLEMS OF A MUSLIM
EMPLOYEE
Having discussed the problems with the entrepreneurs, now
we wish to discuss a few problems with the employees. You will,
however, observe that a number of these problems are also the matters
of concern for the entrepreneurs themselves.
Seeking the right job
Generally the interviewers allow the prospective employees to
ask a few questions at the end of a successful interview regarding the
job and the organization. The most common questions asked by the
employees include the following:
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well, the next question arises of making the earnings Halal by keeping
regard to the time and duty.
A school of thought has the vision of employment as a part
time slavery. On the contrary, another school is of the view that it is
just a transaction of selling your services. Supporters of the former
view are generally from those who are more lucky ones, i.e. from the
employers side. They view such an arrangement just as a gesture of
their kindheartedness that they have given an opportunity to such
person to serve them. They have various grounds that bring similarity
in the slavery and employment.
Viewing the matter in a purely secular perspective, one may
agree or disagree with any or both the perspective, nonetheless, in
Islamic Shariah the matter of employment is something different from
both the viewpoints. Although the latter standpoint is nearer to the
Islamic perspective, it also has a few weaknesses that should not be
tolerated.
Anyway, the matter of timing and duty are a main concern
regarding the honesty of an employee. This is not only considered to
be ethical but also a religious duty to ensure that a Muslim employee
abide by the terms of employment, including but not limited to, the
timing of duty and the responsibilities assigned as the duty.
Fulfilling all the duties in most effective and efficient manner,
at best of your capabilities and using the official timing for official
purposes ensures that as a Muslim employee you are making your
livelihood Halal.
Retirement benefits
Another basic problem, which generally a Muslim employee
faces, relates to the retirement benefits which also include the benefits
in case of death in service and injury compensations. These benefits
are generally paid through specially created funds and most of these
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Provident Fund;
Pension;
Gratuity;
Benevolent Fund;
Death / Injury compensation;
Group Life Insurance.
Provident Fund
Provident funds are very common category of retirement
benefits in Pakistan. Being generally applicable in the government
institutions make these further common. In a traditional provident
fund, each employee contributes a specific sum per month, which is
directly deducted by the employer from his salary. Such sum along
with an additional promised sum contributed by the employer, which
is generally equal in amount, is paid to a fund being administered by
trustees appointed by the employer including nominees from the
employees. The trustees invest such sum in various schemes that are
generally interest-based. Any return on such investment is also
credited to the employees account maintained by the trustees in
proportion of employees balances at the end of the year.
In a few arrangements, a minimum interest is also guaranteed
by the employer on the employees balances. In certain circumstances,
particularly in the government institutions, no separate fund is
established and the employer itself manages the fund in the similar
fashion and pays a fixed interest on such balances. .
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Haram may turn Halal. Accordingly, without going into further detail
it may be concluded that such loans are impermissible for a Muslim
employee. Similar is the situation for interest-bearing loans from
provident fund or loans arranged by the employer through financial
institutions.
Loans from benevolent funds and welfare funds are sometime
interest-free and these may carry interest also, although on a lower rate.
These may be availed as long as these do not carry any interest.
However, the basic principle of truthful representation at the time of
application of loan is a prerequisite.
Owning ones own house is not only a dream for a person
from lower class to the middle class, but is also a necessity of life.
Accordingly, a house building loan generally tempts an employee more
than any other benefit that is offered by various employers. House
building loans are not very common in private organizations except
for banks and financial institutions. On the other hand these are very
much common in case of government organizations. Generally these
are provided by the employers to the employees at discounted interest
rates with an intention of retaining their employees on long-term basis.
These are repayable in long-periods of time generally not less than five
years.
Since these are mostly interest-bearing, accordingly these may
not be termed Halal irrespective of how low interest rate is offered by
the employer as a symbol of his generosity. Even in certain cases,
house building loans at rates as low as 3 percent have been observed
to be offered by the employers as a benefit to their employees whereas,
in most of the cases these are well below the market interest rates. In
this respect this principal needs to be recalled that interest-bearing
transactions are categorically impermissible irrespective of the rate of
interest implicit therein.
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Transport Facilities
Transport facilities are provided by employers with two
different motives. The first one is as a facility in performing the duties
of an employee while the second one is to award perquisite for the
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Same principle applies to all other assets owned by the employer, held
in the custody of the employee.
Giving due regard to the significance of the matter, we have
to consider the basic agreement between the employee and the
employer. This agreement which is generally in form of appointment
or appraisal letters and service rules issued by the employer and their
expressed and implied acceptance by the employee. The matter that
concerns the employee is the one that is basically relating to his own
terms of employment. As discussed above, we have two motives for
providing vehicles to the employees i.e. official use and as a perquisite.
As far as vehicles provided for official use only, these matters become
totally irrelevant for the employee as to whether the vehicle has been
obtained on lease or through interest-based financing or has been
insured under traditional insurance schemes, as all these matters
concern the employer only.
On the other hand if the vehicle is provided to the employee
for both official cum personal use, basically as a part of his perquisites,
it becomes a matter of his concern also. At this stage we should refer
to the terms of employment. In most of these terms it is agreed that
the employer will provide a vehicle to the employee for use during the
period of his employment and the ownership, risk and rewards of the
asset will rest with the employer including the matters of purchasing
(either directly or on lease), payment of taxes, assuming risks of theft
and accidents (either directly or through insurance) and getting the
gain at the end of the term when the vehicle is disposed off. This
matter is very much similar to an operating Ijara contract whereby the
employee provides services and against such services the employer
provides a vehicle to the employee in addition to the agreed pay and
other benefits and the employee has absorbed no risk or reward with
regard to such vehicle except for the usufruct of the vehicle during the
tenure of his employment.
On the contrary, if it is agreed that the employer will provide a
vehicle to the employee and at the end of the agreed term, the vehicle
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Chapter Thirteen
Zakat
ZAKAT
Zakat ( )'is the mandatory monetary Ibadat that is Fard
( )on an annual basis on every Sahib-e-Nisab (
). It is a
basic and fundamental step towards development of an Islamic
economic system. Like Sadaqat and principles of heritage, it is one of
the basic instruments, and perhaps the most important one, that aims
for avoiding concentration of wealth in several hands.
Sahib-e-Nisab
Sahib-e-Nisab is the term defining a Muslim person who owns
at least sufficient wealth i.e. Nisab, in addition to his basic necessities.
In other words, if somebody owns some wealth over and above a
minimum exempt limit of wealth, he is Sahib-e-Nisab and accordingly,
Zakat becomes due on the wealth that he owns.
Women who have some assets particularly, jewellery are
required to pay Zakat by themselves being Sahib-e-Nisab. However, if
these ladies do not have enough money in form of cash to pay the
same, the family members may pay them some money to pay the
applicable Zakat. Otherwise, these ladies should pay Zakat by selling a
few of their assets.
Nisab
Different Nisab has been set by the Shariah for different kind
of wealth. The basic Nisab is calculated in terms of Gold and Silver.
For Gold, Nisab is seven and a half Toulay whereas for silver, it is 52
and a half Toulay. For money and other assets Nisab is calculated for
either of these two Nisab, whichever is lower.
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Zakat
Nisab for animals etc. and its rate is defined separately for
most types of animals whereby in case of agricultural produce, no
Nisab is set for Ushr.
This Nisab is also important for determination of applicability
of Qurbani at Eid-ul-Azha (Baqar Eid). However, Qurbani is Wajib
( )on every Sahib-e-Nisab irrespective of whether a complete year
has passed on ownership of such Nisab or not. Even, if the wealth
equivalent to Nisab comes to ones ownership during the Eid days,
Qurbani becomes Wajib.
Basic Exemptions
The basic exemptions from Zakat may be described as a
matter of principle to be all the items of personal usage except those
intended to be sold. Personal furniture, house, vehicles, attire, and
other assets are considered exempt from Zakat. Business assets, e.g.
shops, showrooms, factories, machinery etc. are also considered to be
exempt from Zakat.
A few jurists are of the view that a number of modern days
inventions particularly including television, VCR etc. are not a personal
need hence should not be considered exempt for the purpose of
computation of Zakat. Accordingly, it is better to include all such
assets in computation of wealth for the purpose of computation of
Zakat.
Rate of Zakat
Except for agricultural produce and livestock, Zakat is payable
at the straight rate of one fortieth or 2.5% per annum (lunar year) on
ones wealth. It is always preferable that Zakat should be paid based
on lunar calendar year.
In order to avoid practical difficulties, a number of jurists
have allowed working out Zakat on the basis of Gregorian calendar. In
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Zakat
such case the rate of Zakat needs to be adjusted for the difference of
number of days between both the calendars. Accordingly, such rate is
worked out to be slightly higher than the rate applicable for lunar
calendar.
Zakat Year
Zakat year is generally different for each and every individual
and commences from the very first day (of Hijrah / Lunar Calendar)
when he or she becomes a Sahib-e-Nisab and when one Hijrah year
passes on such balance still in ownership of the person, Zakat
becomes due.
Generally, it is difficult or rather impracticable to calculate the
completion of one year on each item of wealth, because purchase dates
may vary. Similarly, at times the balances of wealth may increase and
decrease on day to day or in some cases, on a minute to minute basis
(e.g. gold and stock market rates). To overcome this difficulty, a
practical method is to fix a date, generally 1st of Ramadan (), to
compute your total wealth on that date and calculate Zakat, thereon.
Rationale for selecting 1st of Ramadan
1st of Ramadan is selected by most of the individuals as the
day of commencement of Zakat year because in Ramadan, the Sawab
for every Fard is 70 times more than normal days. That is why most of
the scholars advise people to fix it as their Zakat computation day.
Since most of the people fix their Zakat year on this day,
generally the governments also fix it as the day of commencement of
the Zakat year for the government. Similarly, for mandatory Zakat
deductions and payments, 1st of Ramadan is considered to be the
assessment date.
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Zakat
be each of the partners. It is always preferred that the business pay the
Zakat in order to ensure appropriate computation. Zakat is to be
calculated in a similar manner, as of an individual businessman, as
discussed earlier.
If the venture is not paying, and the partner wants to calculate
his share, he has two options to calculate his wealth in such venture
which is subject to Zakat. In the first option he may take the amount
standing to his capital, current and loan accounts as of the last
available balance sheet. Then the estimated proportionate profit
attributable to him should be added for the period between that date
and the date of computation of Zakat, and then Zakat should be
calculated in this account.
Since the above-mentioned method just provides an estimate
and does not adjust for assets and loans that are not adjustable for the
purpose of computation of Zakat, this is not the preferred method and
should be used only if accurate amounts are not available.
In the second i.e. the preferred method, the net assets subject
to Zakat as of the Zakat computation date should be computed and
then the amount attributable to the respective partners should be
allocated. In case an approximation of market value of inventories is
not possible, an estimated mark-up based on gross profit margins may
be used to arrive at an estimate value.
Zakat on Shares in Limited
Companies
Legally the Zakat on shares of companies is deductible by the
companies paying dividend at the rate of 2.5 percent of the paid up
amount of shares (at par value). This deduction is made once in each
Zakat year (commencing from 1st Ramadan each year. No Zakat is
paid during the years whereby no dividend is paid.
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Zakat
then Ushr has to be paid as many times on the crop, irrespective of the
time.
On crops dependent purely on rain water Ushr, is calculated
at the rate of 10% of produce whereby on crops not irrigated through
rain water but use river water, canal water, tank water, water from any
lake, bore well, tube well and open wells, the Ushr is applicable at the
rate of 5% of the produce. For crops dependent partially on Rain
Water and partly on other water, the Zakat applicable would be 7.5%
of produce.
Zakat on Livestock
On all grazing animals and birds like goats, sheep, camel, cows,
broiler chickens the Zakat is payable at the rate of one animal / bird
for every 40 animals owned. One may decide to give cash in lieu of the
animal / bird itself which should be based on the estimated selling
price (not the cost) of the respective animals.
Notwithstanding the general rule as described above, a
number of specific rulings are made by jurists in case of various
animals particularly where the numbers are not in multiples of 40 and
their ages are different which results in difference in value. Owing to
this reason, no specific rule can be made in this respect and
accordingly, we advise you to consult any respectable scholar who can
guide you to the right direction, or refer to books of Fiqh if you would
like to have first hand confirmation of the Shariah requirements in this
respect.
Zakat on House, Household Items,
Vehicles and Necessities
It is Allah Almightys blessing to the mankind that the basic
necessities of life including houses, vehicles, household items and
other basic necessities of life have been exempted from Zakat. Such
exemption is applicable irrespective of the value of such items and
even quantity of such items. As an example, if someone owns more
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Zakat
than one residential houses, if these are meant for personal or family
use, these are exempt from the applicability of Zakat. Similarly, if
someone owns a fleet of vehicles or even an aircraft, which is meant
for personal or family use, the same is exempt from the levy of Zakat.
Household items and other basic necessities are also exempt
from Zakat which include furniture, carpets, kitchen instruments and
utensils, electric equipment etc.. Nevertheless, as discussed earlier, a
number of jurists are of the view that certain household items like
television, VCR etc. are not a basic necessity of life and accordingly,
Zakat should be paid on their market value.
Liabilities Deductions
As discussed above, any loans from any person or institution
against purchase of assets subject to Zakat may be deducted from the
wealth. Any other genuine liabilities and commitments may also be
deducted. Particularly, any tax payable to the government or any other
levies payable, as of the date of Zakat calculation, may also be
deducted while computing the total wealth.
In this respect one issue needs to be considered i.e. the loans
against assets which are exempt from Zakat. As an example, if a Sahibe-Nisab owns wealth amounting to Rs. 1 million which is subject to
Zakat. Then he obtains a loan of Rs. 4.5 million for purchase of a
residential house having worth Rs. 5 million. Now the residential
house is exempt from Zakat and accordingly, the liabilities exceed the
amount of assets subject to Zakat and apparently there is no Zakat
payable. In these situations, only such liabilities should be deductible
from the wealth subject to Zakat which are obtained against assets
subject to Zakat. Otherwise it will always remain a Heela ( )to
avoid Zakat, and Allah Almighty knows all our intentions and illintentions.
It should also be noted that housing finance under Shariah
principles is generally based on diminishing Musharaka concept and
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Zakat
Estimated
Value
(Rs.)
Zakat on Gold
24 Carat
Gold/Jewellery
22 Carat
Gold/Jewellery
18 Carat
Gold/Jewellery
Other Gold
Valuables
Zakat
Payable
(Rs.)
Remarks
Exclude cost of
precious stones etc. if
attached to be dealt
separately
Exclude cost of
precious stones etc. if
attached to be dealt
separately
Exclude cost of
precious stones etc. if
attached to be dealt
separately
Exclude cost of
precious stones etc. if
attached to be dealt
separately
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Estimated
Value
(Rs.)
Zakat on
Precious Stones
Net Market Value
of Precious
Stones either
attached with
Jewellery or held
separately
Zakat on Silver
Jewellery
Household Silver
Utensils and
Artifacts
Zakat in Cash in
Hand /Bank
Cash in Hand
Cash in Bank in
Savings Accounts
Zakat
Payable
(Rs.)
Remarks
According to a
majority of jurists
there is no Zakat on
such stones. If you
follow them, do not
include any amount.
Include their realizable
value, if these are held
for sale and not for
personal use or you
follow the prudent
way to pay Zakat on
the same.
Exclude cost of
precious stones etc. if
attached to be dealt
separately
For Utensils, unless
specifically known,
usually the silver is
90% pure so you
should take 90% of
the total weight for
valuation purpose.
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Zakat
Estimated
Value
(Rs.)
Cash in Bank in
Current Accounts
Cash held in
Fixed Deposits
Zakat on
Receivables and
Investments
Loans Receivable
from Friends,
Relatives and
others
Investment in
Government
Bonds
Provident Fund
Balance
Zakat
Payable
(Rs.)
Remarks
Chapter Thirteen
Zakat
Estimated
Value
(Rs.)
Insurance
Premiums
including bonus
up to date and
Balance of
Takaful
Participants
Investment Fund
Value of Shares
(stocks), Units of
Unit Funds,
TFCs, Musharaka
Certificates,
Modaraba
Certificates etc.
(Listed meant
for trading)
Value of Shares
in Companies
(meant for longterm investment)
Zakat
Payable
(Rs.)
Remarks
Investment in
Private Chits,
Funds, etc
Deposits,
advances and
other receivables
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Zakat
Estimated
Value
(Rs.)
Zakat on Real
Estate
Property held as
an Investment /
Business (meant
for sale in future)
Zakat on
Business
Value of Saleable
Stock
Cash Equivalent
Value of Trade
and Other debts
Less: Liabilities
against purchases
and services
Net Value of
Assets
Less: Value of
Assets
attributable to
other partners /
shareholders
Net value of
assets subject to
Zakat
Zakat
Payable
(Rs.)
Remarks
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Zakat
Estimated
Value
(Rs.)
Zakat on
Investment
made in
Partnership
Firms
Alternate
Method
Capital / Loan /
Current Balance
as per Last
balance Sheet
Capital
contributed /
loans Advanced
by you to the
Firm from the
date of balance
sheet to date
Less:
Withdrawals
made by you
during the
current Year or
repayment of
loan by the firm
Accumulated
Profit from the
date of Balance
Sheet to this Date
Zakat
Payable
(Rs.)
Remarks
This method should
be applied only if the
details regarding assets
subject to Zakat and
other assets and the
liabilities are not
available as of the
Zakat assessment date
or a date close thereto.
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Zakat
Estimated
Value
(Rs.)
Ushr On
Agricultural
Produce
Produce
Dependent on
Rain Water
Produce totally
dependent on
Artificial
Irrigation like
Canal, Tank, Bore
well, etc.
Produce
dependent
Partially on Rain
Water and
Partially on
Artificial
Irrigation
Zakat On
Animals,
Poultry and
Fish Farming
Animals/ Birds
more than 6
months Old
Zakat
Payable
(Rs.)
Remarks
Chapter Thirteen
Zakat
Estimated
Value
(Rs.)
General
Liabilities
Loans taken from
Friends /
Relatives
Loans Taken
from Banks /
Institutions
Taxes payable
Other liabilities
payable
Zakat
Payable
(Rs.)
Remarks
Preferably excluding
liabilities against assets
not subject to Zakat.
Preferably excluding
liabilities against assets
not subject to Zakat.
Preferably excluding
liabilities against assets
not subject to Zakat.
Total Liabilities
Total Zakat /
Ushr Payable
Less: Zakat /
Ushr already paid
or deducted
Net Zakat /
Ushr Payable
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Chapter Fourteen
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Legal And Taxation Issues In Pakistan
Page - 250
Chapter Fifteen
Glossary of Terms
GLOSSARY OF TERMS
It is considered worthwhile to include a glossary of general
terms that have been used in this study along with certain other
important terms which are generally used in theory and practice of
Islamic finance. This glossary, although cannot be termed as a
complete dictionary of terms, but might be found helpful to the
readers.
TERM
Ahadith ()
Amana ()
Bay Bi-thaman Al
Ajil ()
Bay Muajjal
Bay Musawwama
/ Musawwama
Bait-ul-mal )
(
Cash
DEFINITION
Plural of Hadith.
Something held in trust.
Sale of goods on a deferred payment
basis.
The sale of goods on a deferred
payment basis or a credit sale.
A bargaining sale without disclosing or
referring to what the cost price is. Also
called simple sale in Arabic. May be
made on deferred payment basis.
Islamic governments treasury.
Cash comprises gold, silver, any form
of cash on hand in any currency, as well
as, include current accounts and
demand deposits with banks and
financial institutions.
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Glossary of Terms
TERM
Commitment fee
Completedcontract method
Constant /
Permanent
Musharaka
Credit facility
Debt / Loan
DEFINITION
The percentage or amount which the
institution takes from the customer to
commence the proceedings for a
transaction. This amount is generally
not refundable.
An accounting method that recognizes
Istisna costs and revenues only in the
financial period in which the contract is
completed.
Type of Musharaka in which the
partners shares in the capital remain
constant throughout the period as
specified in the contract or until the
dissolution of Musharaka.
The upper limit for a customers
financial transactions or class of
financial transactions with a financial
institution. This is generally provided in
form of an Istijrar contract or a circular
Murabaha contract. This credit facility
may be restricted to a specified type of
item, or to a specified time period.
An amount receivable or payable, in
terms of monetary units or cash.
Deferred Debt
Derivative
Chapter Fifteen
Glossary of Terms
TERM
Diminishing
Musharaka
Documentary
credit / Letter of
Credit (L/C)
Exchange
difference
Exchange rate
Face value
DEFINITION
response to change in a specified
variable e.g. interest rate, security price,
commodity price, foreign exchange rate,
index of prices or rates, a credit rating
or credit index.
Musharaka in which one partner agrees
to transfer gradually to the other
partner its share in the Musharaka
(whether joint-ownership of assets or a
project), so that the first partners share
declines and the other partners share
increases until the second partner
becomes the sole owner of the asset(s)
/ project.
A written commitment to make
payment of specific amount in cash by a
financial institution (the issuer) given to
the seller (the beneficiary) as per the
buyers (the applicant or the orderer)
request.
A difference arising due to change in
the foreign exchange rates between two
dates. This may be positive or negative
and may also be called exchange gain /
loss.
The rate at which different currencies
(on spot basis) are exchanged at a
particular point in time.
The cash amount of receivable against a
Murabaha or any other trade-based
transaction equivalent to the price
agreed between the client and an
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Chapter Fifteen
Glossary of Terms
TERM
Fair Value
Fatawa
Fatwa ()
Financial Asset /
Monetary asset
Financial
Instruments
Financial Liability
/ Monetary
liability
Fiqh ()
Foreign currency
Forward exchange
rate
Fuqahaa ()
Gharar ()
DEFINITION
Islamic financial institution including
the profit / mark-up.
Fair value is the amount for which an
asset could be exchanged or liability can
be settled, between knowledgeable,
willing parties in an arms length
transaction.
Plural of Fatwa.
A religious decree or judicial ruling.
This is the money held and assets to be
received in fixed amounts of money.
Contractual instruments to be settled in
agreed monetary values. Includes,
financial assets, financial liabilities and
derivatives.
This is the money held and liability to
be paid in determinable amounts of
money.
Islamic jurisprudence. Compiled form
of Islamic law and regulations.
Any currency other than the official
currency of the country.
The exchange rate for settlement of two
currencies on a future date, agreed now.
Islamic jurists. Shariah scholars.
The Shariah determined that in the
interests of fair, ethical dealing in
commutative contracts, unjustified
enrichment should be prohibited. This
policy precludes any element of
uncertainty or more speculative risk.
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Chapter Fifteen
Glossary of Terms
TERM
Hadith ()
Halal ()
Hamish geddiyyah
/ Jeddeyyah
DEFINITION
The sayings of the Prophet Muhammad
SAAWS, which is the second important
pillar of Islamic Jurisprudence, after the
Holy Quran. Also termed as Sunnah.
Anything permitted by the Shariah.
Security deposit or retention money.
Haram ()
Hawala ()
Historical cost
Ijara ()
Ijma ()
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Chapter Fifteen
Glossary of Terms
TERM
Ijtihad ()
Insolvency /
bankruptcy
Iqaala
Islamic Insurance
/ Takaful
Israf
DEFINITION
Islamic jurisprudence.
Effort, exertion, diligence, endeavors.
In Islamic jurisprudence, it is endeavor
of a jurist to derive or formulate a
ruling or legal decree on the basis of the
principles found in the basic sources of
Islamic jurisprudence.
Inability of the debtor to settle the debt
due because of an insufficiency or a
total lack of fund. Such a relative
condition of a persons or entitys assets
and liabilities that the former, if all
made immediately available, would not
be sufficient to discharge the later.
Iqaala or cancellation of a contract is a
bilateral agreement of the contracting
parties to abate and remove the legal
effect of a contract.
A system through which the
participants pay contributions to a
Takaful fund which is used to pay
claims for damages suffered by any of
the participants. It is based on mutual
cooperation and the Takaful companys
role is restricted to managing the
operations and investing the fund.
Immoderateness, exaggeration, waste.
Covers spending on lawful objects but
exceeding moderation in quantity or
quality; spending on superfluous objects
while necessities are unmet; spending
on objects which are incompatible with
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Chapter Fifteen
Glossary of Terms
TERM
Istijrar ()
Istisna ()
Mahall
Maisar ()
Mal
Mithli ()
DEFINITION
the economic standard of the majority
of the population.
Istijrar means purchasing goods time to
time in different quantities. Istijrar is an
agreement where a buyer purchases
something from time to time; each time
there is no offer or acceptance or
bargain. There is one master agreement
where all terms and conditions are
finalized. There are two types:
The price is determined after all
transactions of purchase are
complete; or
The price is determined in
advance but the purchase is
executed from time to time.
Basically a contractual agreement for
processed goods and commodities,
allowing cash payment at spot, deferred
or in advance (in lump sum or as per
agreed schedule) and future delivery.
Subject-matter of Hawala contract.
An ancient Arabian game of chance
played with arrows without heads and
feathering, for stakes of slaughtered and
quartered camels. A form of gambling.
Wealth and property. Something which
can be hoarded or secured for use at the
time of need.
Goods returned in kind, i.e. gold for
gold, silver for silver, wheat for wheat.
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Chapter Fifteen
Glossary of Terms
TERM
Modaraba ()
Modarib
Mubah ()
Muhal Alaihi
Muheel (the
transferor)
Murabaha
Murabaha Muajjal
Murabaha to the
purchase-orderer
DEFINITION
A form of partnership where one party
provides the funds while the other
provides the expertise and management.
Any profits accrued are shared between
the two parties on a pre-agreed basis,
while loss is borne by the partner
providing the capital.
In a Modaraba contract, the person
who acts an entrepreneur. Working
partner of a Modaraba.
Object must be lawful (i.e. something
which it is permissible to trade in)
The transferee or the Payer in Hawala
contract.
The transferor of debt in Hawala
contract.
Sale on profit. In Shariah terms, it is a
sale at stated cost price and profit. A
sale agreement whereby the seller sells
the goods at an agreed marked-up price,
the payment being settled at spot or
deferred either in installments or lump
sum.
Murabaha Muajjal is the Murabaha
whereby the payment is deferred and is
paid on a future date in lump sum or in
installments, as agreed.
Form of Murabaha used by Islamic
financial institutions. There are three
parties to it. The seller (supplier), the
buyer (the purchase-orderer) and the
Islamic financial institution as an
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Chapter Fifteen
Glossary of Terms
TERM
Musaqa ()
Musharaka ()
Muzaraa ()
(Crop sharing)
Nisab
Operating Ijara
Parallel Istisna
DEFINITION
intermediary trader. The Islamic
financial institution purchases the goods
from the supplier on spot basis after
obtaining a purchase order from the
buyer and then sells them to him on
Murabaha basis.
A contract in which the owner of the
garden shares its produce with another
person in return for his services in
irrigating the garden.
A type of Shirkat-ul-Amwal (or more
precisely Shirkat-ul-Ainan), generally
used by Islamic banks and financial
institutions. The partnership whereby
two or more parties draw a contract to
work together by the capital they
contribute in condition of dividing the
accruing profit between them in a pre
agreed ratio. Loss is shared in the ratio
of their capital.
To give the agricultural land to whoever
can cultivate it or work in it in exchange
of a share in the crop.
Exemption limit for the payment of
Zakat. It is different for different types
/ categories of wealth.
Ijara contracts that do not end up with
the transfer of ownership of leased
assets to the lessee.
If the ultimate purchaser does not
stipulate in the contract that seller
should manufacture the asset / goods
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Chapter Fifteen
Glossary of Terms
TERM
Parallel Salam
Procrastination by
a solvent debtor
Provision
Provision
Qard ()
Qard-e-Hasana
(
)
DEFINITION
by himself, then the seller /
manufacturer may enter into a second
Istisna contract in order to fulfill his
contractual obligations in the first
contract. The second contract is called
Parallel Istisna.
A Salam contract whereby the seller
depends, for executing his obligation,
on receiving what is due to him in his
capacity as purchaser from a sale in a
previous Salam contract, without
making the execution of the second
Salam contract dependent on the
execution of the first one.
Procrastination is the delay in fulfilling
an obligation, and procrastination of the
solvent is the delay on the part of a
solvent person and his evasion of
paying the debt without having an
excuse or being insolvent.
A provision is an obligation of
uncertain timing or amount. It is also
used as a reserve against impairment,
losses and doubts on realisability of
assets.
A provision is a contra-asset, and is
constituted by charges made as
expenses against income.
An interest-free loan paid to the
borrower for a specific period.
A Qard in which lender agrees for a
waiver if the borrower cannot pay it
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Chapter Fifteen
Glossary of Terms
TERM
Qimar ()
Qirad /
Muqaradah
Qiyas
Quran ()
Rab-ul-Mal
Rahn ()
Receivables
Reinsurance
DEFINITION
back. This is the form of loan which is
encouraged in an Islamic society.
Gambling. From Shariah perspective
any agreement which is dependent on
some uncertain or contingent event.
A type of Modaraba.
Estimate, measure, example,
comparison, analogy. In Fiqh terms, it
means derivation of the law on the
analogy of another resembling law. It is
a primary source of Islamic
jurisprudence.
The book of Allah revealed to the
Prophet Muhammad SAAWS.
The financier in the Modaraba.
Mortgage, lien or charge with physical
possession. The collateral may be
disposed off in the event of a default.
Receivables are the amounts due from
other parties as a result of sale or any
other contractual transaction.
Reinsurance is a contractual
arrangement under which the reinsurer
is liable for part of or all of the risks
which the insurer has insured. In return,
the insurer pays a specific amount of
the contributions to the reinsurer. The
insured legal right are affected by the
reinsurance arrangement and the insurer
is liable to the insured for paying claims
Page - 261
Chapter Fifteen
Glossary of Terms
TERM
Riba ()
Riba-al-Fadl /
Riba-al-Hadith
Riba-al-Nasiah
Right of option /
Khiyar-al-Shart
()
Ruqa ()
Sadaqah ()
Sahib-e-Nisab
(
)
Sal Allah u Alaihi
Wa Sallam
DEFINITION
as per the insurance policy terms and
conditions.
An excess or increase. From Shariah
perspective, it is an increase on a debt
in any form or manner.
A sale or exchange or barter transaction
of certain commodities (in which the
injunction of Riba is applicable
according to Ahadith) whereby a
commodity is exchanged for the same
commodity in unequal quantity or
against deferred delivery of one or both
commodities. To avoid Riba al-Fadl, it
is a must that the exchange of such
commodities should equal and instant.
Increment on the principal of a loan
payable by the borrower.
It is the right of the parties in a contract
to proceed in the execution of the sale
on the basis of mutual promising, or to
decline. This may even be valid after
some time the sale is consummated or
the contract finalized.
Banking instrument of the early Muslim
period. It was a payment order to draw
money from the bank.
Charity. Donation.
One who owns enough wealth that
Zakat become obligatory.
Whenever the name of prophet
Mohammad is mentioned, a Muslim
Page - 262
Chapter Fifteen
Glossary of Terms
TERM
(SAAWS)
Salam / Bay
Salam ()
Sales
Sarf
Shariah ()
Shirkah ( )/
Shirkat
Shirkat-AlMufawada
Shirkat-ul-Aamal
DEFINITION
must repeat this saying, which means
may the peace and blessings of Allah be
upon him.
Sale of commodities through full
advance payment against deferred
delivery.
A sale is an exchange transaction using
any of the Islamic instruments such as
Murabaha, Salam or Istisna.
Sale of monetary value for monetary
value. Generally used for exchange of
Gold and Silver, however, in view of
most jurists, also include the exchange
of currencies.
Refers to divine guidance as given by
the Quran and the Sunnah of the
Prophet Muhammad (PBUH) and
embodies all aspects of the Islamic
faith, including believes and practices.
A contract between two or more
persons who launch a business or
financial enterprise to make profits.
Equal partnership. Type of Shirkah
whereby all partners equally share the
capital, management, profit and the risk.
Partnership in services. Type of Shirkah
whereby all partners jointly undertake
to render some services for their
customers, and the fee charged from
them is distributed among them
according to an agreed ratio.
Page - 263
Chapter Fifteen
Glossary of Terms
TERM
Shirkat-ul-Ainan
Shirkat-ul-Amwal
Shirkat-ul-Wujooh
Sunnah ()
Syndicated
financing
Takaful
DEFINITION
A type of Shirkat-ul-Aqd whereby
equality in capital, management or
liability is not a must. Musharaka is also
derived from this type of Shirkah.
Partnership in capital or ownership.
Type of Shirkah in which all the
partners invest some capital into a
commercial enterprise or in purchase of
an asset.
Partnership in goodwill. In this type of
Shirkah, the partners do not make any
investment and instead they purchase
commodities on deferred price, by
getting capital on loan and sell them at
spot. The profit and loss are distributed
between them at an agreed ratio.
Literally it is Custom, habit, way of life.
In Shariah terms it represents the
utterances of the Prophet Muhammad
SAAWS other than Quran known as
Ahadith, or his personal acts or saying
of others tacitly approved by him.
A syndicated financing is a partnership
relationship for financing a particular
project which two or more parties has
interest to finance.
Islamic alternate to Insurance. A
scheme of mutual support and
benevolence that provides insurance to
individuals against hazards of falling
into unexpected and dire need.
Page - 264
Chapter Fifteen
Glossary of Terms
TERM
Ummah
Urboun
Ushr ()
Ushur
Wadiya ()
Wakala ()
Zakat ()
DEFINITION
Muslim nation.
It is the advance amount paid by the
customer to the seller against purchase
of an asset. If the customer proceeds
with the sale and takes the asset, and
then the Urboun will be part of the
price, otherwise, the same will be
forfeited by the seller. However, there
are certain Shariah issues in this
treatment.
The meaning of Ushr (pl. Ushur) is a
tenth. As a technical term, Ushr refers
to the Zakat levied on agricultural
produce of land owned by Muslim at
the rate of ten per cent if the land is
irrigated by rainfall and at the rate of
five per cent on artificially irrigated
lands. Ushr is not levied if there is no
produce.
Means one-tenth, plural of Ushr. Ushur
were imposed in Muslim history on
merchants as a customs duty.
Deposit, trust. Technically a contract
whereby a person leaves valuables as a
trust for safe-keeping.
Agency.
Blessing, purification, increase and
cultivation of good deeds. In Shariah,
Zakat is an annual obligation in respect
of wealth held by somebody according
to the terms and conditions laid down
in Shariah.
Page - 265
Chapter Fifteen
Glossary of Terms
Page - 266
Bibliography
BIBLIOGRAPHY
I wish to express my regrets that I cannot pay my gratitude to
all those, whose commendable works not only encouraged me but also
enabled me to do this job, (irrespective of how humble is it).
Particularly, during my studies and research, I came across a number
of articles, research-papers, presentations, training materials and online
data which was consulted but could not be preserved in a manner that
I would be able to refer to them all. Similarly, I was fortunate enough
to attend a number of Seminars, training courses, meetings and
discussion forums in which I personally feel that I have learnt a lot,
but I have to apologize that I can not list down the names of learned
scholars, experts and officials who contributed a lot to my learning and
eventually in enabling me to complete this study.
Following is a summary of the books and works that were
mostly consulted for the purpose of my study:
NAME OF BOOK
Tafheem ul Quran (Tafseer of
Relevant Verses)
Sahih Bukhari (Relevant chapters)
Sahih Muslim (Relevant chapters)
Mishkwat ul Masabeeh (Relevant
chapters)
Muarif ul Hadith (Relevant
chapters)
Muatta Imam Malik (Relevant
chapters)
AUTHORS /
PUBLISHERS NAME
Maulana Syed Abul Ala
Maududi
Page - 267
Bibliography
NAME OF BOOK
Sood
Tafheem ul Masail
Muashiat e Islam
Shirkat o Muzarbat kay Sharai
Usool
Islam Ka Nizam e Muhasil (Kitab
ul Khiraj)
Islami Bankari
Maulana Maududi Kay Muashi
Nazariat
A Compendium of Legal Opinions
on the Operations of Islamic
Banks
Accounting and Auditing
Standards for Islamic Financial
Institutions
Anthology of Islamic Banking
Encyclopedia of Islamic Banking
and Insurance
Financing In Islam
Instruments of Islamic Investment
Islamic Banking and Finance
Theory and Practice
Islamic Banking and Its Operation
Islamic Finance
AUTHORS /
PUBLISHERS NAME
Maulana Syed Abul Ala
Maududi
Maulana Gohar Rehman
Maulana Syed Abul Ala
Maududi
Dr. M. Nijatullah Siddiqi
Qazi Abu Yousuf
Translated by Dr. Nijatullah
Siddiqi
Dr. M. Nijatullah Siddiqi
Compiled and Translated by
Yusuf Talal De Lorenzo
Accounting and Auditing
Organization For Islamic
Financial Institutions
(AAOIFI).
Edited by Asma Siddiqui
Published by Institute of
Islamic Banking and
Insurance
Mohammad Hafeez Arshad
Malik
Ezzedine Mohammad Khoja
/ Dallah Albaraka Group
Muhammad Ayub / State
Bank of Pakistan
Zafar Ahmed Khan
Justice(Retd) Moulana Mufti
Mohammad Taqi Usmani
Page - 268
Bibliography
NAME OF BOOK
Islamic Finance Innovation and
Guide
Meezan Banks Guide to Islamic
Banking
Sharia Standards
AUTHORS /
PUBLISHERS NAME
Rifaat Abdul Karim and
Simon Archor
Dr. Imran Ashraf Usmani /
Meezan Bank Limited
Accounting and Auditing
Organization For Islamic
Financial Institution
(AAOIFI).
Supreme Court of Pakistan
Shariat Appellate Bench
Dr. M. Nijat ullah Siddiqi
Maulana M. Taseen
Dr. Imran Ashraf Usmani
State Bank of Pakistan
Islamic Development Bank
Issued by the Institute of
Chartered Accountants of
Pakistan
Eugene F. Brigham
Page - 269
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