Mufti Ehsan Waquar Ahmad

Member Shariah Committee/ Manager Shariah Compliance

Emirates Global Islamic Bank Limited
Shawwal 16, 1428 - October 29, 2007
Objective of this Session
 The participants develop an understanding of the
fundamental reasons for practicing Islamic Banking:

 Prohibition of Riba

 Prohibition of Gharar

 Encouragement of Healthy Trade and Business

 Islamic Modes of Financing

Definitions of Riba & Gharar
 Riba means any excess compensation over and above
the principal without due consideration, merely against
time.
 Gharar is any element in a financial contract which
leads to ambiguity or uncertainty like in gambling,
speculation
 Healthy Trade is something where every individual has
a chance of participation in real economical activity
without corrupting the society.
Wisdom behind the Prohibition of Riba &
Gharar
 Exploitation of the needy

 Concentration of wealth in few hands

 Creation of monopolies

 Development of Classes among the inhabitants of the

society

 Development of greed, selfishness and anxiety

 Ultimately leading to injustice, oppression, moral disorders

and economical instability
Islamic Sale Contract
 A valid sale requires certain elements and conditions
 Contract
 Buyer and Seller
 Offer & Acceptance
 Non Contingent
 Immediate
 Subject matter
 Ownership/Possession
 Worthy
 Specific
 Price
 Quantified
 Possession
 Physical or Constructive
Islamic Financial Modes
 Islamic Financial modes can be divided into two main
types

I. Investment Mode
i. Musharaka
ii. Mudaraba

II. Trade Mode

i. Murabaha & Musawama
ii. Ijara
iii. Salam
iv. Istisn'a
Islamic Financial Modes
Investing Modes
 In these modes investment and management is carried
out either by one or more partners

 Profit sharing is done on a pre agreed ratio but loss has to

borne by the investors as per their participating ratio.

 There are minimum restriction and maximum freedom.

 The credit risk is high therefore banks avoid participating

in these modes.
Islamic Financial Modes
Trading Modes
 Under these modes an asset, services or its usufruct is
traded between the contractors

 The basic concept of sale is applied however little

adjustment are made according to the need while
following the guidelines of Shariah.

 Extreme care is needed. Any error may lead to surrender

entire income into charity.

 The risk as compared is lower, which attracts banks in its

participation.
Musharaka
Shirkah

Shirkat-ul-Milk Shirkat-ul-Aqd

Optional Enforced Shirkat-ul-Amwal Shirkat-ul-Aamaal Shirkat-ul-Wujooh

Musharakah
There are two types of Shirkah
I. Shirkat-ul-Milk
Joint ownership of two or more persons in a particular property
i. Optional; jointly purchased land
ii. Enforced; property jointly owned through inheritance
II. Shirkat-ul-Aqd
Joint partnership through mutual contract
i. Shirkat-ul-Amwal; participating capital in an enterprise
ii. Shirkat-ul-Aamaal; rendering services jointly
iii. Shirkat-ul-Wujooh; sharing Goodwill together
Few basics of Musharakah
1. Management of Musharakah
 All or any one as managing partner.
 Anyone or few can become sleeping partner
2. Profit & Loss Distribution
 Any ratio of profit
 Loss as per participation
3. Capital
 Any form
 Valuation of commodities
4. Termination
 Any partner can terminate
 Asset redemption; liquid and non-liquid
 Option for heirs to continue
Musharakah as a Mode of Finance
 Project Financing

 Working Capital

 Running Financing

 Saving & Term Deposits

Areas of Musharakah
Asset side Financing
 Short/medium/long-term financing
 Project Financing
 Small & Medium enterprises set up financing
 Import financing
 Import bills drawn under import letters of credit
 Inland bills drawn under inland letters of credit
 Bridge financing
 LC with margin
 Export financing (Pre-shipment financing)
 Working capital financing
Areas of Musharakah
Liability Side Financing
 For saving and investment accounts
 Term finance certificates and Certificate of investment
 Securitization for large projects
Mudarabah
Mudarabah
 A partnership with one investor and another manager

 There are two types of Mudharabah

1. Restricted “ ‫”مقیٌدہ‬

2. Unrestricted “‫”غیر مقیٌدہ‬

Few basics of Mudarabah
1. Management of Mudarabah
 Only one as managing partner “ Mudarib”.
 The investor is the “Rub-ul-Maal”
 Investor cannot work but only if the Mudarib agrees
2. Profit & Loss Distribution
 Any ratio of profit
 Loss borne by the investor only while the manager get no
remuneration
3. Capital
 Any form
 Appreciation of assets benefit the investor only
4. Termination
 Any partner can terminate
Mudarabah as a Mode of Finance
 Bank Deposits

 Bank’s Investments
Ijarah
Ijarah
 A similar meaning to that of lease. Can be a rental
contract of any asset or its usufruct or services for a
defined period against any agreed remuneration.

 A sale of usufruct takes place between the contractors.

 As the title remains with the lessor therefore no charges

regarding ownership will be transferred to the lessee.
Few basics of Ijarah
1. Subject Matter of Ijarah
 Valuable, identifiable and quantifiable.
 Definite time period
2. Liabilities of Ijarah
 Lessee is responsible for any damages caused due to negligence
 Routine maintenance is lessee’s responsibility
3. Compensation against Ijarah
 Any amount fixed or floating can be fixed.
 Rental can be tied up with bench marks
 Rental cannot be altered without mutual consents
4. Termination
 Any breach of term by the lessee enable the lessor to terminate the
contractor can terminate
Murabaha
 Murabaha is a particular kind of sale where the cost is
disclosed to the seller and a known profit is charged

 This is the only difference from Musawamah

 Banks usually do not deal in commodities therefore an

agent is appointed.

 Remember the points for a valid sale agreement

Few basics of Murabahah
Murabaha contract requires certain documentation &
procedures
 Documentation
 Main Murabaha Finance Agreement
 Agency Agreement
 Purchase Requisition
 Payment Schedule
 Offer & Acceptance Form
 Roll over in Murabaha is not possible
 Defaults and Rebates
Few basics of Murabahah
 Subject Matter in Murabaha
 Ownership/Possession
 Intrinsic utility
 Halal utility
 Physical Verification of Purchases
 Direct Payment
 Incase of default in Murabaha
 Sells commodity in the market & recovers the price
 No opportunity cost
 Incase of shortfall recover from the customer
Areas of Murabaha

Short/Medium/Long term finance for:

 Raw Material
 Inventory
 Equipment
 Import financing
 Export financing (Pre-shipment)
 Consumer goods financing
 House financing
 Vehicle financing
 Land financing
 Inter bank lending/borrowing with conventional bank (Commodity
Murabaha)
Salam
There are two exceptions in a sale contract:
1. Salam
2. Istisn'a

The exception is that the subject matter does not exist at the time
of sale

 Salam is a type of sale against full advance payment

at a future supply date.
 Benefits seller; advance payment
 Benefits buyer; lower price
Few basics of Salam
Salam contracts requires certain conditions
 Cannot be of a peculiar property
 Must be zat-ul-amthal ﴾‫﴿ذاة االمثال‬
 Particular and specific
 Quantified by weight, measurement or count
 Exact date and place of delivery
 Normally available in market at delivery time
 No pre arranged buy back agreement
 Parallel Salam allowed but with a third party
 Defaults can be charged from the supplier
Areas of Salam

 Agricultural financing
 Inventory financing
 Export financing
 Operational cost management
 Working capital financing
Istisna
This is the second exceptional sale contract where the
subject matter does not exist.
 It relates to goods which needs manufacturing
 The commodity must be known and specific to an
extent where there is no ambiguity or confusion with
a fixed price and may be on a deferred payment
 If the goods does not conform to the specification or
the delivery is delayed, the buyer can refuse to
accept goods
 Other conditions are similar to Salam
Areas of Istisna
 House financing (Construction & Renovation)
 Financing of Plant/factory/building (Construction &
Renovation)
 Booking of Apartment
 BOT arrangements

Note:
 They can either enter into a parallel Istisna with a third party or hire the services
of a contractor.
 That parallel Istisna must have no linkage with the original Istisna contract.