WORKING CAPITAL FINANCE

CONTEMPORARY AND
ISLAMIC WAYS
PREPARED BY
ASAD DANISH SIDDIQUI (1462)
SYED RAUF UR RAHEEM (1772)
AHMAR JAMAL(XXXX)
TALHA YOUSUF(XXXX)
ASIM RAZA(XXX)
INTRODUCTION TO WORKING CAPITAL

Funds deployed for managing business operations

Working Capital refers to that part of the firms capital, which is
required for financing short-term or current assets such as
cash, marketable securities, debtors and inventories.

Funds thus invested in current assets keep revolving fast and
are constantly converted into cash and this cash flows out
again in exchange for other current assets.

Working Capital is also known as revolving or circulating
capital or short-term capital.

WORKING CAPITAL CYCLE
GENERAL SOURCES OF WORKING
CAPITAL FINANCING

Working Capital is financed by following sources:

OWNED FUNDS
A portion of long term funds, equity share capital
and reserves & surplus is utilized to fund working
capital.

BANK BORROWINGS
Various bank products like cash credit, packing
credit, bills discounting etc.

CREDITORS

PRIMARY FORMS OF WORKING CAPITAL
FINANCING
Islamic Law of Contract disapproves the
contemporary methods due to violation
of law of contract.
OPTION REASON FOR REJECTION
1 Line of Credit. INTEREST BASED
2 Accounts Receivable (AR)Loan. DEBT SOLD FOR BIGGER
UNEQUAL DEBT
3 Factoring. DEBT AGAINST DEBT
4 Inventory Loan. LOAN AGAINST UNFINISHED
GOODS AS SECURITY.
5 Term Loan. INTEREST BASED
THE ISLAMIC SOURCES OF WORKING
CAPITAL FINANCING
Most possible islamic ways of working
capital financing are.
1.Murabaha.
2.Istisna.
3.Ijara.
4.Mudarabah
5.Musharakah (preferably Diminishing
Musharakah).

ISTISNAA
IJARA

IJARA WA-
IKTINA

MUDARABA

Musharaka MURABAHA
Asset
based
Funding
agreement
No fixed
delivery date
Advance
funding

Asset
based
Hybrid
Analo
gous
Asset based
Lease with
option
Analogous
to finance
lease
sharing;
profit and loss
Limited
partnership
Restricted
or
unrestricted

profit and
loss sharing
General
partnership
Provides
working
capital
Asset based
Trade
finance
Uncondition
al contract
Profit from
marked-up
Bank/Vendor Customer
1
2
3
MODEL I TWO PARTY REALTIONSHIP
Bank Customer
Phase 1:
The customer approaches Bank (Vendor) and
identifies Asset(s) and collects relevant
information including cost and profit.

Phase 2:
Bank sells Asset(s) to the Customer, transfer
risk and ownership to the Customer at certain
Murabaha Price.

Phase 3:
Customer pays Murabaha Price in lump sum
or in installments on agreed dates.
MODEL I - PHASES
Customer Bank
Vendor
1
2
3
4
6
5
MODEL II THREE PARTY RELATIONSHIP
(Bank-Vendor) and Customer

11
Phase 1:
Customer identifies and approaches the Vendor or Supplier of the
Asset(s) and collects all relevant information.

Phase 2:
Customer approaches the Bank for Murabaha Financing and
promises to buy the Asset(s).

Phase 3:
The Bank makes payment to vendor directly. Phase 4:
Vendor delivers the Asset(s) & transfers the ownership of Asset(s) to
the Bank.

Phase 5:
Bank sells the Asset(s) to Customer on cost plus basis and transfers
ownership.

Phase 6:
Customer pays Murabaha Price in lump sum or in installments on
agreed dates.

MODEL II - PHASES
MODEL III THREE PARTY
RELATIONSHIP
Bank and (Vendor-Customer)

Bank
Customer
Vendor
4
3
2
1

5


5


6

Offer Acceptance
7
13
PHASE I - PROMISE TO PURCHASE AND SELL
PHASE II - APPOINTMENT OF AGENT
PHASE II - DOCUMENTATION
PHASE III & IV PURCHAHSE OF ASSETS BY
AGENT, DOCUMENTATION
PHASE V - DISBURSEMENT OF FUNDS / PAYMENT
TO VENDOR
PHASE VI - MURABAHA EXECUTION STAGE
(OFFER AND ACCEPTANCE)
PHASE VII - PAYMENT OF MURABAHA PRICE BY
CUSTOMER
MODEL III - PHASES
14
SECURITIES IN MURABAHA
Bank can obtain any of the following security from
its Customer client depending upon the nature of
credit facility, amount of facility and credibility of
the customer.

HYPOTHECATION OF ASSETS
PLEDGE OF GOODS AND/OR MARKETABLE
SECURITIES.
LIEN ON DEPOSITS.
MORTGAGE ON IMMOVABLE PROPERTIES.
BANK GUARANTEES.
PERSONEL GUARANTEES.



Questions?

Thank you