Lecture 1

• Aqa’id > Ibadaa’t > Muamalaat (75% of Islamic teachings)

• Islamic banking comes under Fiqhul Muamlaat.
• Muamlaa – involvement of two parties: Offer and acceptance usually takes place.
• If income=expenses then no need of finance. But it doesn’t happen:
○ SSU – Saving surplus units, usually households with Income > expenses
○ SDU – Saving Deficit units, usually companies with Income < expenses
 They offer securities like DFCs, TFCs, stocks and bonds
○ Financial system is one where IOU is created.
○ Zakat, fitra, wirasat are not part of financial system.
○ Murabaha, Shirkah, Ijarah, Salam etc are part of Islamic financial system.
○ In islam “You can’t sell what you don’t own” – exception is Istisna and Salam
• Banks balance sheet
○ Left side: Loans and advances (Borrowers)
○ Right side: Deposits (depositors)
• Forces that usually act on banks:
○ Customers
○ Competitors
○ SBP regulations
○ Financial markets
○ Top management
• Currencies:
○ Natural: Gold and silver
○ Fuloos: fiat money, copper coins
• Goal of Islamic banking is to bring things to permissible level in following scale:

• Islamic Economic System

○ Communism vs. capitalism
○ Public vs. private ownership
○ Profit motive
○ Definition of factors of production and distribution of money
 What to, how to and for whom to produce
○ Allocation of resources (free market vs. state decision)

• Islamic Economics
○ First tier resources: available for all, public property e.g. water, air
○ 2nd tier resources: human owned and used for production

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 ○ Concept of property in Islam
 Bestowed by Allah upon human beings
 Examples
• Qaroon and Moosa (AS)
• Date tree and Prophet (SAW)
• Hazrat Umer (RA) and extension of Masjid-e-Nabwi (SAW)
○ Distribution of money
 Socialism: according to the need of person in the form of wages
 Capitalism: according to the ability of person
 Islam: Primary and secondary rights
• Secondary rights of needy. Poor, orphans, in-debt, prisoners etc
• 2.5% Zakat is right of these people
○ Difference between Land and Capital of conventional and Islamic system
 Islamic land: derive utility from it without consuming it e.g. land or
equipment
 Islamic capital: it has to be completely converted before earning fixed
return on it

Islamic land Islamic capital

Can do profit/loss sharing in No intrinsic value, need to be
this, not prohibited converted first
Can earn fixed return on this Fixed returns will result in
Riba

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Lecture 2 – Mufti Kamal ud Din
• Secular vs. religious law
○ Secular law is derived: Constitution > interpretation > past proceedings >
expert opinion
○ Islamic law: Mujtahids follow the same 4 steps:
 Quran and Sunnah
 Interpretation
 Past cases
 Ijtihad
○ Secular law often undermines the constitution and makes amendments to it, but
Islamic legal theory never undermines the authority, legitimacy and binding of
Quran and Sunnah.
○ The authenticity and interpretation of secular law is highly debated, controversial
and questioned. Question of GRAND SAYS WHO?
○ In Islamic system JUSTICE is:
 Defined by Allah
 Allah defines rights and obligations and makes it binding
 Authority and legitimacy is given to this system by Allah
○ I Islamic legal theory Mufti is higher than Qazi.
○ Islamic law = Islamic ethics
 Ethics go beyond law in Islam, while in secular law ethics are lower than
law, rather taken out of law
• Concept of INTEREST
○ It is considered fair and legal in secular law. Same goes for Hindu and Christian
religion which never regulates financial matters and consider it mundane to
religious boundaries.
○ Only Islam takes care and puts binding on interest and finance.
• Categories of permissibility in:
○ Secular law:

○ Islamic lawIslamic law can’t be applied forcefully on those who don’t practice
Islam. Islamic legal system is for believers.
Usul ul Fiqh are about this
• Authenticity and interpretation
○ 4 categories
1) Certainly
2) Highly probable: Grades of probability e.g. Low Medium High
3) Mere possibility
4) Outright false
Concept of:
Hierarchy
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Multiplicity: choose the option which is best for that time and e
 • Prohibition of interest is Absolute (Qatai’). It is war with Allah. In Islam it is
criminalized and illegalized.
• Two legal tools that lead to Islamic Banking
1) Al waqiya / Dharura (in Urdu zaroorat = need)
2) Umoom e Balwa (Urdu: from ibtila, or mubtila)
 A lot of people are involved in it at massive scale
 Still no outrage for sin
 People are desensitized over this
 Taken as a symbol of pride
 Nobody thinks of it as wrong or illegal
• Islamic jurists want to do bare minimum at the moment to bring things from being
unlawfulness (haram) to permissibility level against Interest. At least bring it to grade
D from Fail.
• Problem: Meezan (Islamic banking presently) banking is focusing on grade D, not
beyond that. Currently doing life saving but are stuck with that. Their duty is to lead
to grade A, but they are satisfied with D.
• They are doing things which are Makrooh, but they are definitely RIBA free.
• Critiques criticize this status quo, but they compare it with level A, but they act as
layman as the present societal and governance system isn’t Islamic itself.

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Lecture 3 – Riba and Its Prohibitions
• Riba is different from interest or usury
• Gharar: uncertainty – Islam prohibits that
CATEGORIES OF TRANSACTION
Sale (Bai) Loan (Qard)
Dayn Aariya
Leasing/rental (Ijarat ul Ashiya) Safe custody (Amana’t)
Collateral (Rehen) Gift (Hibah)
Employment (Ijarat ul Ashkhaas) Agency (Wikala’t)
Settlement (Sulah) Inheritance (Wirasa’t)
AQD (Contract)
Aqood-e-Muawaza Aqood-e-Ghair Muawaza

Compensatory Non compensatory

Bilateral Unilateral

Mutually onerous Gratuitous

Binding Not Binding

• Try to place transaction in one of the above categories first.

• Types of Riba
Riba al Quran Riba al Sunnah/Hadees
Riba al Qard Riba al bai
Riba al Jahiliya Riba al Fadl
Riba al Nasia’ (Nasia means delay) Riba al Naqd
• Qard vs. Amana’t
1) Qard can be used by borrower
2) Amana’t can’t be used by Ameen.
3) E.g. Hazrat Zubair (RA) used to keep people’s money as Qard rather than as
Amana’t, so he can use it in trade and its binding on him to return that money.
4) If something happens to Amana’t due to reasons not under the control of men
(e.g. natural disaster, robbery etc), then he is not liable to pay that back, but in the
case of Qard, the borrower is bound to repay the amount.

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 5) Amana’t and Qard are to be returned in the same form as it was given to
custodian/borrower.
6) Qard is by its nature not binding, non compensatory contract. No time limits or
counter compensation.
• Aariya
Fungible Non fungible
Usually consumables Usually non consumables

One unit is as good as any other unit Every unit is unique e.g. Car
e.g. currency notes, wheat

1) Example: You give your generator to your neighbor for use.

 Aariya: Same generator is to be returned, it is non fungible and unique
 Qard: Fuel is used and you can refill the fuel. It is fungible and
consumable.
• Aariya vs. Ijarah
Aariya Ijarah

Non compensatory Compensatory

Non binding Binding

Define usage period and rental

payments

• Dayn
1) Loan with contract – only in the case of sale
2) A/R originate from sale of something unlike bonds which are issued out of need
for capital
3) All payables are Dayn
4) TVM in sale is allowed under Dayn. E.g. a person can sell on credit a Rs. 100
thing at Rs. 150 after 2 years.
5) BUT after 2 years if buyer comes and asks for extension and seller asks for more
money, then It is RIBA.
6) Fix the payment at the time of sale. No such clause is allowed which says that “if
buyer fails to pay after 2 years then he has to pay some more amount”------ no
credit plan allowed.
7) No extra compensation in Dayn and Qard. Loan where repayment period and
amount in excess of principal is predetermined is not allowed.
• Test Examples: Identify the transaction and its permissibility
1) B extends $500,000 to A. A agrees to pay yearly LIBOR.
2) B charges 25 bps on the advances he makes.

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 3) C owes money for the goods he bought from A. C write a promissory note to A
(IOU) without any extra money. A who needs money now discount that note with
B.
4) Case of zero coupon bonds.
5) Factoring receivables.
6) B sells stocks for $990 to A on the condition that B will buy it back from A after
2 months at $1000.
7) Microfinance Company issues loans to poor people and charges a small amount
for the cost of administration.

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Lecture 4 – Riba Al Fadl
• Qard is more than charity.
• Urf (custom practice)and Ma’roof(something that has become practice) -----if giving
some extra money (as gift) while returning qard becomes a custom then it is RIBA
(haram) as it will become expected benefit with qard.
○ Concept of Mashroot (included as condition)o Ma’roof
(custom/practice) – If Tafazul (extra) become mashroot o ma’roof, it is
not allowed as it is RIBA.
• Riba Al Fadl
○ Case of exchange of date by Hazrat Bilal (RA)- he was advised by the Prophet
(SAW) to sell dates in market, get money, and buy other dates – no swap ratio
mentioned for exchange of different commodities.
○ Transaction is only possible when NEEDS of the parties are involved and it is
beneficial for both parties.
○ 6 commodities specifically mentioned:
Foodstuff Currency
• Wheat (al-birr) • Gold (zahab bil zahab)
• Barley (al sha’eer) • Silver (al fusna’h)
• Salt (malha’)
• Dates (tamar)

If these things are being exchanged then take care of two

things:
1. Missal ba missal – Same Quality
2. Yad ba’eed – Hand to hand or on spot

○ Zahiri School: literal meaning – Hadees applies to only these 6 things. Only those
things are allowed which are mentioned in Quran and Sunnah.
○ Hanbli school: all those things are permissible whish are not mentioned
impermissible in NUS (Quran and Sunnah)
○ Illa’t – efficient cause/attribute VS.
○ Hikma’t (rationale) – rationale changes, but Illa’t acts as a law.
1. E.g. not stopping at the red signal in late night when there is no traffic.
Still comes into law breaking.
2. Pork can’t become halal no matter how hygienic conditions you maintain
to breed pigs.
○ Classification of commodities under different schools of thought:

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 ○ Concept of delay – Mua’jjal (from Ta’ajeel, means immediate) vs. Muajjal (from
Tajeel means delay/deferment or appointed time)
○ Laws of Riba al Fadl – consider two main factors deferment and inequality (3
laws)
1. Law of mathematical equivalence
• When a ribawi good is exchanged against its like, then shari’ah
requires strict mathematical equivalence.
• E.g. e.g. wheat to be exchanged with wheat
2. Law of prohibition of deferment
• If the exchange involves different ribawi goods, the requirement of
mathematical equivalence is dropped; however, deferment is still
prohibited in cases where ribawi goods are involved in a
transaction belong to same genre/genus.
• 2 genus are defined under Shafi’I and Maliki.
• 3 genus are defined under Hanbli and Hanfi.
• Commodities can be sold on ON-DEMAND (I’nd ut talab)
• Why different genus is created under each school?
○ If no difference between genres than concept of these 2
laws would not be required.
○ At that time all trade would be seized because of no
deferment.
• Examples:
○ Wheat and wheat exchange – same genus, same commodity
– apply law 1 and 2
○ Wheat and rice exchange – same genus but different
commodities, drop law 1, apply law 2
○ Cooking oil and wheat exchange
○ Shafi’I and Maliki school – same genus, different
commodity, drop law 1, apply law 2.
○ Hanbli and hanfi School– different genus, different
commodities, drop law 1 and 2.
• To avoid hassle (haraj, inconvenience) Islam softens its rulings.
3. Settlement in the same session
• High level of strictness for deferment in case of currency (gold &
silver) and they should be settled in the same session.
• Rationale/Hikmat: Eye Watched – A’in or Ta’iyun, means
specification of goods.
• In case of non currency, one can defer the delivery for a while to
deliver the goods to the other party. But the seller can’t put a
condition of delay in case of same genus/genre, though he can ask
the buyer to pick the sold commodity ON DEMAND (whenever
buyer wants delivery).
○ TEST Examples:
1. Bilal sold 5000gms of gold to Ahmed for 3500gms of silver, which
Ahmed promised to deliver on demand. Non permissible transaction, to
be settled in same session.
2. Umer sold 50kgs of wheat to Ali for 50kgs of flour to be delivered in 30
days from now. Violation of law 1 & 2.
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 3. Hussain sold 1000 tons of rice to Ahmed, to be delivered in 30 days in
exchange for spot payment of gold coins, which weight 100gms.
Permissible transaction under both schools.
4. Ahsan bought 30kgs of raisins for exchange of 25Kgs of dates. Naeem
delivered raisins at the time of sale, while Ahmed promised to deliver on
demand. Permissible transaction under both schools.
5. A borrows from B some wheat, and return after 2 days condition. Is it
allowed? If Qard, then allowed, but 2 days clause is not allowed.

Lecture 5 – Bai
• Bai – Sale: the exchange of a thing of value by another thing of value with
mutual consent.
○ 4 types of sale
• Bai Fasid
• Defective, voidable (not void)
• Inherently it is fine/permissible, but has some problem
e.g. 100 is mentioned, but currency isn’t mentioned
whether it is PKR or USD.
• Bai Batil
• Inherently VOID, void at the outset.
• Wrongful, bai never occurs.
• Bai Sahih
• No sale is allowed to one’s own self
○ e.g. two companies owned by same person, the
transfer pricing between the two isn’t a valid sale.
○ Sale between Aaqa and Ghulam (master and slave)
○ Sale between principal and wakeel (agency)
• Bai Makrooh
• Disliked sale
○ 4 elements of sale
• Aqd (contract)
• Contract of sale should be in past tense. Future tense isn’t
allowed, there is no valid sale contract in future.
• Sale must be non contingent. Can’t be based on future
event.
• Mubee
• Existable
• Ownership of seller: “Don’t sell what is not with you.
Hadees”. , except Salam (on fungible things, no verdict
yet on non-fungibles) and Istisna. Transaction.

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 ○ E.g. Short selling (not allowed)
 Borrow the goods
 Sell it to buyer
 Buy it later
 Settle the transaction
○ Things borrowed under Qard can be used, but to
sell it to some other party isn’t allowed.
○ Non-fungible items taken on Aariya can’t be sold at
all.
• Specific and quantified: Can’t sell a runaway camel.
• Maal e mutaqawwam – illegal, non usable e.g. Alcohol,
pork
• Thaman
• Thaman (negotiated price) vs. Qeema’t (market price)
• Qabza/possession
• Physical or constructive (hukmi)
• Qabza can be urfi, defined by custom e.g. transfer of
papers and keys of car to buyer.
○ Valid contract
• Not explicitly haram.
• Reiterates/reinforces the basic substance of contract i.e. transfer
of ownership
○ Two types of contract
• Aqood e Muawaza
• Aqood e Ghair Muawaza
○ Can price be negotiated against terms and conditions?
• In uqood e ghair muawaza, condition is not allowed, not a valid
contract.
• In uqood e muawaza, it is allowed to negotiate condition with
price.

• Credit Sale – Bai e Muajjal (not Mua’jjal which means immediate)

○ Also called – Bai bis Thaman Ajal: Sale with delayed payment
○ Two things are to be defined:
• Price
• Period (delay period)
○ Bai al kali bil kali: you can’t have both thaman and mubee’
outstanding at the same time, one has to be delivered at the time of
sale.
• Mubee’ outstanding: Salam
• Thaman/money outstanding: Bai Muajjal

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Lecture 6 – Ijarah
• A contract whereby the owner transfers the usufruct of a specific property to
another party for a specific period at agreed upon rentals.
○ Delayed ijarah is permissible – i.e. can be done for future date unlike
sale.
○ Specific property – not consumable
○ Usufruct – not ownership
• Duties/liabilities of Lessee
○ Day to day maintenance is lessee’s responsibility
○ He is also an Ameen (custodian)
○ Damages due to deliberate actions of lessee are to be paid by him
• Using CAPM to identify rentals
○ How can Jahalah be solved?
 Ceilings and floors keeping in view both lessor and lessee
• Worst fear of the bank:
○ Asset liability mismatch
○ Re pricing risk
○ Interest rate risk
• Conventional Bank. Once property is delivered to client, bank can charge
rentals from him even if user isn’t using it because usage is in his consent.
However, Islamic banks start charging rentals after installation of the leased
property when it comes in working condition.
• Joint property can be leased. But is only one person wants to lease it then he
can only lease it to the other partner.

Steps of Ijarah
1. Contract of ijarah. Relation of principal and agent
2. Separate agreement of lessor and lessee
a. No need of fresh offer and acceptance
b. No penalty on delay of payment is allowed – penalty can be paid in
charity
c. Pre-payment risk
i. Lease agreement can be cancelled with Iqa’la (urdu: sulah)
means mutual consent
ii.In case of an damage which renders the property useless, the
lessor can’t charge rentals on it.
3. Termination of contract
a. Safqatein bil safaqa (ijarah o iqtina) – 2 deals in 1 deal
i. Two deals in one deal is not allowed– Case of capital lease i.e.
transfer of ownership to lessee isn’t allowed in Ijarah contract.
These are two different contracts (Ijarah & Sale).
ii.Solution – Unilateral promise (not a contract)
1. Give it as a gift

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 2. Promise to sell it to lessee
a. Promise isn’t enforceable by law unless it involves
some financial liability e.g. promissory note.
iii.Litmus test – one contract contingent on another or not.

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Lecture 7 & 8 – Murabaha (Mufti Najeeb)
• Murabaha
○ Sell above cost
○ Mention cost and profit margin on cost
○ Murabaha e muajjala (Sale with deferred payment with cost and profit
mentioned), usually comes on the LHS of the bank’s balance sheet.
○ It is sale (transfer of ownership) not leasing (transfer of usufruct)
• Partnership based modes
○ Musharakah – asset side
○ Mudarabah – usually liability side, depositors act as Rab ul Mal and
bank acts as a Mudarib
• Sale based modes
○ Murabaha, musawamah, salam, istisna, istijrar
• Story of TONY 
• By concept bank deals in documents not in assets, so Murabaha is a delicate
transaction (border line transaction) because of operational use.
• Bai Amanaat
○ Buyer demands from seller about cost information. If cost is disclosed
by seller then there are 3 possibilities of sale
 Cost to Cost: Bai Tauwlia
 Higher than cost: Murabaha
 Lower than cost: Wadiya
○ If cost isn’t disclosed then it is Bai Musawamah
• Bai Muajjal
○ Price should be fixed
○ Date of maturity should be fixed
• Banking Murabaha – also known as Murabaha lil aamir bil shari’ah
○ Different from normal trade Murabaha. Banks doesn’t have anything in
shelf or inventory. Buy as per customer requisition.
○ Prudential don’t allow bank to buy or trade unless a requisition of
customer is there.
○ Different contractual relations between bank and client exist during
course of Murabaha.
○ Sequence of execution of Murabaha is important; banks can’t get all
documents signed at same time from customer.
○ Murabaha can’t be used as substitute for a running finance.
○ It is usually short term as process remains fixed for short term.
• Concept of Tawarruq – generate cash by selling the commodity bought under
Murabaha. e.g. metal imported on Murabaha and sold in local market. It is commodity
Murabaha or reverse Murabaha.

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 • Stages of Banking Murabaha – check the slides
○ Promise
○ Agency
 Mention the commodity which client is allowed to buy as agent
○ Goods acquisition
○ Execution of Murabaha
• Credit approval
○ Assignment of contract is not permitted within Shariah. It is
revoked/terminated and re-created for the specific purpose.
○ Murabaha isn’t allowed between sister concerns or group companies
unless the ownership in each other is less than 50%, else it is Bai
Inah, which is haram.
○ Use transaction flow chart to educate the customer – Compliance issue
○ Check payment procedure and timelines especially in L/C case.
○ Good performance of supplier guarantee is required if it is
nominated by buyer.
○ Guarantor is know as Kafeel.
○ Security payment – Hamish (margin) Jiddiyah (sincerity) e.g.
earnest money
 Margin taken for the sincerity of client.
 After offer and acceptance, one can make advance payment,
aka Arboon (urdu: bia’na)
 Hamish jiddiyah can’t be used to cover cost of fund/opportunity
cost
• Operational Issues
○ Global agency agreement: only created in dire need. Bank gives
money to its client to pay to its suppliers. No purchase requisition is
created.
○ Case of JIT manufacturing:
 Problem of ownership
 Can’t segregate the time when commodity is in Bank’s
ownership
○ Banks don’t deal with brokers for Murabaha as they don’t take
inventory risk – possession of bank is questioned.
 Broker sells to some other buyer even before taking possession.
○ Physical inspection of goods to be done before sale.
○ Pricing: KIBOR + SPREAD
 It is allowed
 Example of two brothers one running the business of alcohol and
other running the business of juice and index its prices using
alcohol prices as base.
○ Never delay offer and acceptance, high inventory risks for banks.

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 ○ Difference between conventional and Islamic bank will be clear in case
of default:
 Burn the goods, and default the client 
○ In case of non-compliance, banks disburse the profit of that transaction
as charity within 3 months to charitable institutes.

Lecture 9 – Mudarbah & Musharakah – Mufti Kamal ud Din

Islamic economics
• Islam concern economics. How did you earn, where did you spend?
• Economics was imposed on Muslims after colonialism and industrialization
• Economic growth and development isn’t the core of the system, it isn’t the
end, it is means to an end.
• Islamic system is not against economic activity and profit making provided it
leads to welfare of society. It is against greed.
• A person’s greed should not hurt anyone e.g. credit card to promote
consumerism.
• Islam is also about spiritual development with material development as sub f
low priority objective.
• Colonial system developed an economic system to extract resources out of
Muslim world. After they left, the elites of our country became neo-colonists.
• Public finance is resulting in continuous extraction of resources from country.
Neo classical / capitalistic Model Islamic model

Industrialistic Collective e.g. zakat

Primary rights only Primary + secondary rights on

money

Competition Cooperation, maximum social

welfare

Available legal and economic No Islamic state and legal

structure structure

Private property, absolute Allows private property which is

authority of owner bestoed upon humans from Allah

• Because of no Islamic state, all Islamic banking initiatives are private rather
than state supported.

Musharakah
• Primary considerations
1. More than one investors

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 2. Partnership is on profit, not on input, input can be considered as scale
for sharing profit.
3. A person can take a dual role of sleeping or managing partner along
with shirkah.
• Banks now issue Musharakah (classified as Class A of Islamic contract), but
presently rich people don’t want to share profit and also the risk. So, they
usually go for Murabaha (Class D: border line transaction). Also banks are
also hesitant to share losses with investors. They are also risk averse.
• But banks themselves are working as Mudarib and are ameen of
depositors money, and they are also Wakeel (agency) of that money
when they lend it to someone. So, they avoid the risky investments as
they have to work with “due diligence”.

Mudarabah
• Only one investor i.e. Rab ul Maal
• One role per person, either Mudarib or Rab ul maal.

Mizaaj or Characteristics of Islamic Bank

Mudarabah
Musharaka
%
20/80
80/20
Lender
Borrower
Rab
Shareek
profit/loss
Islamic
ul Maal
or sharing
hEntrepreneur
institute

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Lecture 10 – Musharakah & Mudarabah
• Musharakah is by its nature non-binding
○ Sharing of profit, non-fixed return is allowed on real consumable and
financial assets.
○ Only percentage of PROFITS can be fixed to make a valid Mudarabah
and Msharakah
○ %age of return on CAPITAL isn’t permissible.
• Kinds of Shirkah.

• Aqd vs. Milk

Aqd Milk

Basic element Offer/acceptance Mixing of ownership

Joint ownership (Urdu:

Khalt)

Profit motive Very purpose Not required

Profit Sharing Agreed upon Share of ownership

Usufruct Remains with the Shared between owners

person who pays rents

• Shirkat ul Wujooh: buy on deferred payment, buyer is given goods on

GOODWILL
• Example of Hazrat Ali (RA): event of buying a camel on credit for
Dirham 80 and sold on spot for Dirham 120. Dirham 40 profit for
Dirham 4 given in alms.
• Bai I’nah – Buy back sale
• Not allowed as 2nd transaction is dependent on execution of first
transaction.
• It is a void contract and can’t be enforced by law.
• Basic Requirements of Musharakah
1. All conditions of contract
2. Agreed upon profit sharing ratio
 Constraint: sleeping partner can’t earn more than the ratio of his
investment.
3. Loss to be shared in the ratio of invested capital

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 4. Nature of capital
 Hanfi school – should be liquid capital
 Shafii’ classification – fungible (dawat ul amsaal) and non-
fungible (dawat ul Qeema’t)
 If investment is in the form of non-fungibles, then we put it into
black box (joint ownership now) and the invested value should
be market value of those non-fungibles at the commencement
of agreement. Determine the capital contribution ratio.
• It will define loss sharing ratio, necessary for
Musharakah to take place.
• Musharakah vs. Mudarabah
Musharakah Mudarabah

Investment All partners Only rab ul maal (RM)

Participation in All partners can Rab ul maal can’t

management participate without the
permission of mudarib,
but RM has monitoring
right.

Mudarib also has

relationship of Ameen and
he is supposed to work
with due diligence.

Share in loss All partners RM only

Revaluation gains All partners RM only

• If negligence of amen is proved then he has to let go his fee.

• Types of Mudarabah Contract
1. Muqaiyidah: Mudarib can trade only certain things/units not others as
mentioned by RM.
2. Mutaqa’: absolute right of mudarib to trade in all units.
• Problems occur in Musharakah when multiple transactions are involved,
so better do it on Contribution Margin or Gross Margin to avoid Gharar.
• Revolving credit via Musharakah
• Problematic: find daily profits, as all the credit line isn’t used raher a
portion of it is used. Difficult to track it to specific property.

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Lecture 11 – Sukuk (Faisal Sheikh)
• Sukuk is certificate of something. Mostly used for securitization. NCD –
negotiable certificates of deposits, also COD.

Ijarah Sukuk
• Used for secondary markets, especially for financing long term bonds
e.g. housing mortgages
• Trading of traditional bonds us actually trading of debt called Bai
Dayn which isn’t allowed due to Gharar.
• Sukuk is trading of assets – issuer owns the asset.
• Which sukuks are tradable and which are not?
○ Ijarah sukuks are tradable as it is the trade of assets
○ Murabaha (Muajalla) and salam sukuks are not tradable as it is debt
(deferred payment). So, it is not allowed.
• Examples of Islamic banking shaping regulations
○ GE capital corp. issued sukuk.
○ UK amendment – financial act 2010: sukuk as Alternative Finance
Investment Bonds
○ GoP 2006 – Euro Dollar Sukuk
○ UK 2003 – Diminishing Musharakah made legal as financial transaction
○ Govt. of Bahrain issued Sukuk
○ GoP – Wapda issued sukuk on generators
○ GoP also issued sukuk on Isb-Lhr motorway
○ Luxemburg – sukuk returns are tax deductible
○ Pakistan – Sitara Chemicals Industry – MTFS (Musharakah Term
Financing Sukuk)
• 2009 hit on sukuk – statement by Mufti Taqi Usmani about the complex and
Shariah non compliant structure of Musharakah sukuk – Musharakah sukuks
should not have guaranteed returns
• Musharakah vs. Ijarah
○ Musharakah: Returns dependent on performance of project
○ Ijarah: returns are known/predictable. Deterministic returns.
○ Same difference between Musharakah and ijarah sukuk
• Buy on credit and sale on spot analogy – Shirkat ul Wujooh
1. Take short term Islamic loan for bridge finance
2. Purchase an asset
3. Issue ijarah sukuk
4. Pay back to bank
5. Transfer ownership to sukuk owners
• Structure

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 ○ Create SPV which is just a legal trustee
 Benefit of creating SPV: assets not on the balance sheet of
holding company. SPV just acts as trustee of asset, actual
ownership is with investors.
 If parent defaults then it has no effect on SPV
○ SPV then gives Ijarah to original company on behalf of investors
○ Sukuk can be callable and premium can be paid, as it is ownership of
asset which can earn profit.
 Callability doesn’t create Gharar, as it concerns mainly for
transaction price not for time period.
○ Expense of SPV are charges to investors.
○ Pakistani Law: SPV can’t hold actual tangible asset on its balance
sheet as it is a financial institution, so all sukuk in Pakistan are issued
on Diminishing Musharakah.
 Also under STAMP DUTY ACT, every time a transaction of
diminishing Musharakah takes place, stamp duty has to be paid,
which hinders the transaction of diminishing Musharakah by
increasing its cost.
○ Benefits of Sukuk
 Alternative to bonds
 Financing of govt. projects – transfer ownership to public to
avoid destruction or damage due to wrong usage of that
property.
 Project financing and product financing.

Lecture 12 – Trade Finance (Faisal Sheikh)

• Letter of credit
○ Sight and usance L/C. usance L/C involves bank guarantee and is of
high price.
○ Conventional banks deal in documents ONLY. But Islamic banks deal in
documents and goods.
• Trade financing can be done through:
○ Musharakah and Mudarabah
○ Murabaha
• Export financing
○ Musharakah / Mudarabah
○ Know customer’s business
○ Usance L/C Done under shirkat ul wujooh – goodwill
 Bank procure goods on behalf of customer.
• Trade Financing through Murabaha
○ Same procedure as mentioned in Lecture 7 & 8 by mufti Najeeb
○ Murabaha or istisna financing for exports can be used.

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 • Import financing via Murabaha
○ Finance L/C for importer
○ Master Murabaha agreement
 Promise to buy/sell in future
 All terms and conditions are mentioned in it
○ Agency agreement with customer
 Customer as agent
 Allowed to buy specific commodity
 Agency agreement date should be before Bill of Lading date.
○ Payment Scenarios
i. On spot – sign musawamah declaration
• No financing involved due to on-spot transaction
• Offer and acceptance is there as it is actual sale
transaction
• Qabza is given to buyer if the goods are usable
• Customer’s acceptance doesn’t work as guarantee to pay
if goods turn out damaged.
i. Financing for certain period
1. Nostro account (A banking term to describe an account
one bank holds with a bank in a foreign country) of bank
is used for making international payments. Vs. Vostro
account (Local currency account maintained by a local bank for a
foreign (correspondent) bank.)
○ Profit is calculated from the time the Nostro
account is debited till the date of payment
○ Murabaha receivable is created.
○ PAD (Payment Against Document)
 Banks keep the B/L and customer pays
against B/L to release the goods.
1. Shipping Guarantee e.g. Air Cargo (tricky transaction)
○ Goods reach before documents
○ Banks issue shipping guarantee and delivery order
○ Price of goods isn’t formally known as it is written
on Air way bill which reaches after goods.
○ Or dollar value of goods is known but don’t know
which date the customer is going to make
payment. So, can’t negotiate dollar rate.
○ Solution: issue sub Murabaha with 110% margin
based on FX rate prevailing on issuance date of
shipping document. Bank later adjust with
customer by paying/receiving the difference.
○ Usually assume higher discount rate and later
discount to customer.

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 ○ Profit doesn’t change, only cost is adjusted – so no
Gharar on profit side
○ Murabaha gets converted to dayn i.e. A/R

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Lecture 13 – Diminishing Musharakah (Musharkat ul
mutaffisah)
• Mostly home financing – substitute of mortgage
○ In case of default: contribution wise division of asset.
• Contracts and Relationships involved in Diminishing Musharakah
Contracts and corresponding Relationships

Shirkah Begins with shirkat ul milk

Ijarah Lessor (bank) & lessee (owner)

Promise Promisor (buyer) & promissee (bank)

Sale – Bai Bai (buyer), mushtree (seller, bank)

• It ends with client’s ownership of property

• Nick name  IMBT – Ijarah Muntahia (urdu: Intihaa, means ends with) bit
(of) Tamleek (ownership)
• MM (Murabah e Muajjila) not Modigliani & Miller
• DM (Diminishing Musharakah) not Deutsche Marks
• IMBT vs. DM
○ IMBT: Ijarah Muntahia Bittamleek means "Ijarah contract ending with
ownership". It is also known as Ijarah wal Iqtina' or Al Ijarah Thumma Al
Bay. The above contract is similar to the Ijarah contract. However, at
the end of this contract, the asset does not return to the bank, but
rather the customer is given the choice to acquire the asset. No
client ownership from the start of contract.
○ DM: smooth transfer from small ownership to complete ownership of
client
• DM can be Shirkatul Milk or Shirkatul Aqd
DM as Shirkatul Milk DM as Shirkatul Aqd (sub category:
Shirkatul Amwal)

e.g. housing contract e.g. business / trade purpose

Ijarah hazir (present) Ijarah ghayab (not present)

Thaman (negotiated price) is admissible, Qeema’t (market price) is valid measure.

so, unilateral promise can be made But if buyer buys at fixed price per unit
which guarantees the fixed return, then
this isn’t allowed. It should be P&L
sharing

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 ○ Shirkatul milk can be on Qeema’t but due to fluctuation, customer and
banks won’t like it.

• Bai Ina’h vs. Bail bil wafa

Bai Ina’h Bai bil wafa

Buy back, but second sale is contingent Second sale is just a unilateral promise
on first one by buyer (of 1st sale) to buy it from seller
at some price

If 2nd sale won’t execute then first sale As 2nd sale is not contingent on 1st sale,
will be void so its failure won’t invalidate the first
sale

• How DM is different from conventional Mortgage?

○ In mortgage – ownership is with the financer, yet he doesn’t take risk
of ownership.
○ E.g. in earthquake that destructed Margala towers, the flat financed by
Meezan bank was the loss of bank, but for the one owned by Citibank,
full payment of house was taken from buyer.
• TEST EXAMPLE:
○ Car financing through:
 MM
 IMBT
 DM
○ Which one will be preferred by bank, and which one will be by
customer?
 MM: fastest transaction for bank. It is a sale and risk of
ownership is passed to buyer immediately. In case of client
default bank can’t roll over the amount, no option for bank, can’t
put penalty (due to riba)
 IMBT: slowest transaction for bank, risk of ownership transfers to
buyer at the end. In case of customer default, bank can charge
penalty in increased rentals.
 DM: it is in between the above two transactions.
○ 3 major criteria for assessment
 Risk of ownership and transfer of title
 Case of client default
 Case of destruction/loss/damage of property
• Cost of capital fluctuation risk

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 ○ Banks don’t fix KIBOR because they don’t want lower returns on their
assets.
○ In MM, KIBOR is used only once but in Ijarah, rental can be pegged with
KIBOR of that month. Rentals can move up and down.

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Lecture 14 – Salam and Istisna
• Salam Goods
○ Can’t be on non-fungible (unique) goods.
○ Agricultural and trading goods
○ Quality and quantity are required
○ Mousuf bis zima: that can be adequately described, no Gharar no
dispute
• Istisna Goods
○ Can be on products and on services
• Both violate “Don’t sell what doesn’t exist or you don’t own”
• Salam started with financing the farmers to grow their produce and carry out
cultivation cycle.
• Bai al kali bil kali – deferred payment with deferred delivery is not allowed.
• Options of Buyer
○ Khiyar-e-Wasf – option of rejecting the goods if they don’t meet their
specifications
○ Khiyar-e-aib – option of rejection after defect. Aib by the norms of
market e.g. 3 legged chair.
○ Khiyar-e-Roeyat – option of rejection after inspection. Initially it was
allowed to reject the product if the buyer doesn’t like it after
completion of production, but this isn’t allowed anymore.
• Istisna is proved through Ijma’ (part of Islamic jurisprudence). It is based on
istehsaan.
• Jualah vs. Istisna
Jualah Istisna

Can be on anything Only for manufactured goods

Can’t specify the amount of labor and Specify the time and cost involved
time etc. e.g. find a lost camel and get a
reward.

Only on labor On labor + goods

• Hanfi fuqaha don’t allow Jualah.

• Rules of Salam
○ Can’t do salam on sarf (currency) and between commodities in same
genre/genus.
○ Wheat against barley not allowed with deferred delivery
○ Use well known measure for salam, aka ma’roof measurement.
• How to use salam for banking?

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 ○ Parallel salam – high exposure to risk of banks due to money
fluctuations, if don’t do parallel salam.
○ Why banks don’t do it?
 High default risk
 Product may fail to meet its specs
 Also it doesn’t require funding and financing due to parallel
salam.
○ Why involve banks and pay them a spread?
 Bai Ina’h not allowed i.e. producer of a crop sells his produce on
salam with a condition to buy it later from buyer, in order to sell
the same product in market place.
○ Salam VS. forward transaction
Salam Forward transaction (short selling)

In salam the buyer owns the In short selling buyer borrows the
goods goods and don’t own them.

Buyer is LONG on salam. Buyer is SHORT on salam.

Seller is SHORT on salam Seller is LONG on salam

Payment is on spot, but delivery Payment and delivery are both in

is in future future

Once in salam, buyer can’t sell

salam contract, but can enter
into a different salam contract
which is independent from the
first one. E.g. case of parallel
salam results in two salam
contracts rather than one
contract.

• Istisna for house construction

○ Client enter in contract with Islamic bank on Istisna basis, who then
contacts Contractor for construction of house.

DOW Jones Index

• Developed a set of criteria for stock screening
○ 1st Screen
 Primary business: 2/3rd of revenues from halal business
 Leverage is permissible under Shariah compliance. This is
different from Shariah enabling which results in no leverage.

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 ○ 2nd Screen
 Debt/market cap.
 A/R > 50%, then stock can only be sold at par, can’t sell it above
or below actual value.
 If financial assets >33% then trading of stocks of such company
isn’t allowed.
 Income criteria: 5% haram income then it requires
purification/charity
 Controlling shares: if company has haram income then don’t
invest in controlling shares as a director/CEO as you will be
liable to take action against interest/haram income.
 COBM: Cost of Being Muslim
 Quarterly monitoring

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