ISLAMIC BANKING MODES OF FINANCE

Group Members
Syed Mazhar Ali (GL) Roll No: 43
Ibrahim Saleem Roll No: 14
Adil Hanif Roll No: 01
Haris Ali Khan Roll No: 13
Kashif Ali Roll No: 16
 What is Islamic Banking?

“A banking activity that is consistent with principles and

applications of Islamic laws through the development
of Islamic Economics”
 Islamic Economics

“Body of Islamic studies literature that identifies and

promotes an economic order that conforms to Islamic
scripture and traditions, is an interest-free Islamic
banking system, grounded in Sharia's condemnation
of interest in the economic world”
 Philosophy in the Light of Quran
Surat Al-Baqarah: Verse No 2:275

“Those who consume interest cannot stand except as one

stands who is being beaten by Satan into insanity. That
is because they say, "Trade is like interest." But Allah has
permitted trade and has forbidden interest. So whoever
has received an admonition from his Lord and desists
may have what is past, and his affair rests with Allah .
But whoever returns to those are the companions of the
Fire; they will abide eternally therein”.
 Philosophy in the Light of Quran

• Sharia prohibits interest but not all gains on

capital.
• Sharia allows risk sharing and profits on
basis of trading.
 Islamic Banking vs. Conventional
Banking
ISLAMIC CONVENTIONAL

 Elimination of Risk
 Bear The Risk
 Transaction With
 Transaction With
Consumer Without
Consumer With
Liability
Liability
Islamic Banking Modes of Finance
 MURABAHA
 IJARAH
 IJARAH-WAL-IQTINA
 MUSAWAMAH
 ISTISNA’A
 MUDARABAH
 MUSHARAKAH
 MURABAHA

“A particular kind of sale, compliant with shariah, where

the seller expressly mentions the cost he has incurred
on the commodities for sale and sells it to another
person by adding some profit or mark-up thereon which
is known to the buyer”.
 PROCEDURE FOR MURABAHA
SALE
Step 1: Agreement between the Client and Institution.
Step 2: Both Parties sign agreement of Agency.
Step 3: Client Purchases Commodity on Behalf of
Institution.
Step 4: Client informs the Institution and makes an
offer.
Step 5: Institution accepts the offer for sale.
 IJARAH (Leasing)

“A transfer of usufruct for a consideration which is rent

in case of hiring of assets and wage in case of hiring of
persons”.
PROCEDURE FOR IJARAH
Step 1: Bank (lessor) purchases specific property or
asset for a specified time.
Step 2: Asset is leased to customer (lessee) at a specific
rent for duration of asset’s economic life.
Step 3: Bank retains the ownership and custom can
use it as long as he pay the rentals as per agreement .
Step 4: At the end of specified time, asset reverts back
to the bank. However, often custom is given an option
to purchase asset from bank with mutual agreement.
 IJARAH-WAL-IQTINA (Hire Purchase
Financing)

“A contract under which an Islamic bank provides

equipment, building or other assets to the client
against an agreed rental together with a unilateral
undertaking by the bank or the client that at the end of
the lease period, the ownership in the asset would be
transferred to the lessee.”
PROCEDURE FOR IJARAH-WAL-IQTINA
Step 1: Agreement between the Customer and Vendor.
Step 2: Islamic mortgage provider purchases property
and enters into future agreement with customer.
Step 3: Simultaneously, customers enters into a lease
with mortgage provider.
Step 4: Customer pays mortgage provider monthly
payments which are fixed every 12 months .
Step 5: Customer may purchase the property any time
from mortgage provider by paying bank the balance.
 MUSAWAMAH

“A general and regular kind of sale in which price of the

commodity to be traded is bargained between seller and
the buyer without any reference to the price paid or
cost incurred by the former”.
 PROCEDURE FOR
MUSAWAMAH
Step 1: Customer request bank to purchase a certain
commodity.
Step 2: Bank purchase the commodity and acquire it.
Step 3: After adding bank’s profit, bank offers the
customer to purchase it.
Step 4: Customer can accept, refuse or negotiate the
offer.
Step 5: If customer agrees, he repays the total amount
to the bank with agreed installments.
 ISTISNA’A

“A contractual agreement for manufacturing goods and

commodities, allowing cash payment in advance and
future delivery or a future payment and future delivery”.
PROCEDURE FOR ISTISNA’A
Step 1: Customer expresses his intention to bank to
purchase a commodity that has to be build,
manufactured or assembled at a specified price.
Step 2: Bank undertakes to have the subject
commodity manufactured and delivered to customer
within a certain period in return for a specified price.
Step 3: Simultaneously, bank enters into a back-to-
back contract with the third party to have subject
commodity manufactured, built or assembled.
 SALAM (Advance Payment Against
Delivery)

“A sale whereby seller agrees to supply specified goods to

a buyer by a future date in consideration of price paid
in advance at a time specified in the contract”.
Conditions for Valid Transaction
1. Payment of Purchase Price: In Cash
2. Subject of Sale: Determined with all specifications
3. Sale of Salam: Take into effect for things with
specifications.
4. Time & Place of Delivery: Agreement
5. Commodity Sold : Must be available in the market
6. Period of Delivery: Not less than a month
7. Obligation on Buyer: Can’t sell the commodity till
gets delivery from the seller.
 MUDARABAH

“A form of partnership where one party provides the

funds while the other provides expertise and
management”.
 Salient Features of
MUDARABAH

• Investment is sole responsibility of Rabb-ul-Maal.

• Only Mudarib has right to participate in management.
• Loss is suffered by Rabb-ul-Maal Only.
• Liability is limited to the investment of Rabb-ul-Maal
• Goods purchased by Mudarib is solely owned by Rabb-
ul-Maal and Mudarib can his share in the profit only.
 MUSHARAKAH

“A relationship established under a contract by the

mutual consent of the parties for sharing of profits and
losses in the joint business”.
 Salient Features of
MUSHARAKAH
• Investment can come from all the partners.
• All partners have the right to participate in
management.
• All partners share the loss to extent of the ratio of their
investment.
• Liability of the partners is normally unlimited.
• All partners can benefit from the appreciation of value
of their assets in proportion to their investment.
ISLAMIC BANKING LIMITATION

Product development is Difficult

FUTURE OF ISLAMIC BANKING
1. Will Islamic banking survive?
2. What shape might the Islamic banking industry take in the
future?
3. What, or what type of, challenges might Islamic banking face in
the coming years?
4. What changes might Islamic financing bring about in the way
people live, businesses work and governments run public affairs?
5. How might development of Islamic financing affect the
disciplines of Fiqh, Accounting, Business Administration (in
particular, Finance and Marketing and Business Management),
Economics and Public Policy?
CONCLUSION