Modes of Financing

1-Musharakah:
The term of Musharkah is used in Islamic mode of financing. It comes from
word Sharikah that means sharing. It can be separated into two kinds.
Sharikat ul Milk:
It refers to combined ownership of the property by two or more parties.
Sharikat ul Aqd:
It means partnership by mutual contract
It has further three sub divisions:
1. Sharikat-ul-amaal
2. Sharikat-ul-amwaal
3. Sharikat-ul-wajooh
Basic Rules Terms & Conditions:
We can explain some basic rules, term & conditions of Musharakah.
All the valid conditions of sale should be present in the Musharkah for
its validity.
Investment comes from all parties
Percentage of profit should be determined when contract is made
Lumpsum amount is not allowed in Musharakah
Ratio of profit distribution is a conflicting point in Musharakah.
On the point of loss all the Islamic jurists are given one view that loss
will be distributed according to the share of investment.
Any partner can exercise its right for the termination of contract.
If the partner dies or insane then the contract is automatically
terminated.
2-Mudharibah:
"Mudharibah" is a special kind of partnership where one partner gives money
to another for investing it in a commercial enterprise or business. The
investment comes from the first partner who is called "rabb-ul-mal", while
the management and work is an exclusive responsibility of the other, who is
called "mudarib.
Basic Rules Terms & Conditions:

 Rabul Mall may specify a specific business and Mudarib have to do that
business.
Rabul Mall can contract with more than one person
Islam has not specified the percentage of profit it depends upon the
parties mutual consent, but it is prohibited strictly to allocate lump.
Any party can terminate the contract only condition is a notice to other
party.
3-Murabahah:
Murabahah is one of the most common modes used by Islamic Banks. It
refers to a sale where the seller discloses the cost of the commodity and
amount of profit charged. Therefore, Murabahah is not a loan given on
interest rather it is a sale of a commodity at profit.
Basic Rules Terms & Conditions:
Investment from one partner while working from other partner
Investor cannot be a working partner
Only Rabb-ul-Mal suffers loss
Investor is liable up to the amount of investment
Asset purchased from investment of investor, remains in the ownership
of investor before sale. Therefore, if it is terminated at this stage,
Mudarib is not entitled to share in the exceeding price of that asset.
4-Ijarah:
It is also a term used in Islamic Fiqh, which means to give something on
rent
It has two different types:
Ijarah (Lease or Hire):
The bank acquires machinery /equipment, building etc for his client
and charges a certain rental for their use.
Ijarah Wa Iqtinaa (Hire-Purchase):
The bank finances the purchase of equipment and the client uses them
under a contract. The contract provides that the client will pay the cost of the
instrument and a share in the net rental value of the equipment which is
proportional to the outstanding shares in the total investment.
Basic Rules Terms & Conditions:
For valid lease contract property must be in the custody of lessor.
Lease asset is only used for purpose mentioned in lease contract.
Damage to the leased asset by misuse or negligence must be tolerated
by lessee.

 Rent amount must be fixed, but it is permitted that for different phase,
different rent is fixed.
If the rent is not paid on agreed time the lessee can be accountable to
pay price calculated in approved rate.
5-Bai Salam:
Salam means a contract in which advance payment is made for goods to be
delivered at a future date. The seller promise to supply some specific goods
to the buyer at a future date in exchange of an advance price fully paid at
the time of contract. It is necessary that Product must be quantified,
identified and Measured with quality.
Purpose of Bai Salam:
o -To meet the need of small farmers who need money to grow
their crops and to feed their family up to the time of harvest.
o -To meet the need of traders for import and export of goods.
o
Basic Rules Terms & Conditions:

Pay 100% amount in Advance.

Product must be quantified, identified and Measured with quality.
Date of delivery, Time, Place must be mentioned clearly in advance.
Salam is not valid for a specific farm/land/garden.

6-Bai Istisna:
The Bank enters into an agreement with the client for purchase of any
goods before it comes into existence.
Basic Rules Terms & Conditions:
Not necessary to pay the 100% amount in advance Like Bai Salam.
Price must be decided on beginning of the contract.
Qualities, features of that product must be clearly identified.

Sales Transaction in Islam:

Definition of Bai and its types:
Bai (Sale):
The sale of a commodity in exchange of cash.
Types OF Bai according to Quality:

Bai Sahih ( Valid Sale)

Sale is valid because certain conditions are met like; Offer and
acceptance, Buyer and Seller and condition of sold goods.
Bai Batil (Void/Non existing Sale)
Sale is void because certain conditions are not met like; Offer and
acceptance, Buyer and Seller and condition of sold goods.
Bai Fasid (Existing sale but void due to defect)
Sale will exist but will be void due to defect because of non conformity
to condition of sold goods & conditions of price.
Bai Mauqoof (Valid but disliked sale)
Sale is valid but not like due to certain conditions like; Sale after Juma
Azan, sales by intervention of third party while two negotiations.

1-Bai Sahih (Valid Sale):

Sale is valid because certain conditions are met like; Offer and
acceptance, Buyer and Seller and condition of sold goods.
Elements of a valid sale are:
Contract (Aqd)
Subject Matter (Mabeea)
Price (Saman)
Possession or delivery (Qabza)
Elements of Bai Sahih (Valid Sale):
Contract (Aqd):
Offer & Acceptance (Ijab-o-Qabool)
Oral (Qauli)
Implied (Hukmi)
Buyer and Seller must be:
Sane
Adult / Muture
Wise
Conditions of Contract:
Sale must be non contingent
Sale must be immediate
Subject Matter (Mabeea)
Existing
Valuable
Usable
Capable of ownership / title
Capable of delivery / possession
Specific & Quantified
Seller must have title & risk
Price (Saman)
Quantified (Maloom)
Specified & Certain (Mutaiyan)

Qabza (Delivery / Possession)

Physical (Haqiqi)
Constructive (Hukmi)

Rules of Bai:
Nobody can sell such Product / Commodity which:
Does not exist
No ownership
Not in the possession
Note:
Exceptions are:
(1) Bai Salam
(2) Bai Istisna

Bai must be on unconditional basis & implemented right away. If the

sale of any product is attached with a condition of any future incident
or date, it will not be valid.
Bai must be done of such product which has a value/price in the
market
Bai of a product is not permissible, which has no use other than Haram
Product must be identified, clear with all demanding qualities
Selling product must be given in the possession of buyer. It should not
be based on any incident, struggle etc.
Price of the product must be clearly mentioned and identified
There should be no unusual condition in Bai otherwise it will not be
valid.

Difference between Istisna and Salam:

Istisna deal with manufacturing items, but Salam could or could not be
manufactured, but Salam ideal of agriculture sector.
In Salam advance payment is necessary, but in Istisna its not.
Date, time of delivery the necessary part of Bai Salam, But in Istisna, it
is not the part of the deal.
In Bai Salam, it can be cancelled one sided, but in Istisna, it could be
cancelled, if production is not started yet.

Salam:

In
In
In
In

Salam, it could or could not be. Or Subject can be anything.

Salam, it is necessary to make full payment in advance.
Bai Salam, it cannot be cancelled one sided.
Salam, it is the basic part of the deal.

Istisna:

In Istisna is permissible for any item / commodity which need to be

produced / manufactured.
In Istisna, advance payment is not necessary.
In Istisna, it could be cancelled, if the production is not started yet.
Date, Time of delivery does not have to be fixed.

Insurance
1-Why conventional insurance in unacceptable in Islam?
Scholars view the insurance contract as an exchange contract means money
is being exchanged for money overtime. Insurance is a buy and sell
agreement
Objection to conventional insurance:
Insurance is Haram because its concept involves in the category of:
Uncertainty (Gharrar)
Interest (Riba)
Gambling (Maysir)
Gharrar:
Gharrar is forbidden in Islam because it is not showing the full knowledge,
disclosure and transparency. Gharrar describe Risk
In simple words, Uncertainty about the existence and delivery of the object,
or uncertainty about the outcome.
Gambling:
Insurance include Qimar where insured makes a bet on the happening of loss
and insurer also do it.
Interest:
Every profit must be based on liability and risk otherwise it is Riba according
to Islam. Conventional insurance companies normally place the insurer fund
in interest bearing instruments like loans and bonds.

Conventional Insurance Principles

Pooling of Risk
Payment of fortuitous loss
Risk Transfer
Indemnification
Profit for the share holders from underwriting results and
investments.

The concept of Takaful:

Orginates from the Arabic word kafala which means guaranteeing each
other or join guarantee

Takaful is commonly referred to as Islamic insurance

Takaful concept based on the contributions from the participants to create a
fund which will provide financial help at the occurrence of certain losses,
Partnership among the participants,
Need of an operator, the management contract between the participants and
the operator.
Takaful Models:
There are three different Takaful models:
Mudharibah Model:
The participants and the operator enter into a Mudharibah contract from the
beginning of the relation, for indemnification and share of the underwriting
results.
Wakalah Model:
The work Wakalah is taken from the Arabic word which means
representative. The Wakalah concept is essentially an agent-principal
relationship, where the Takaful operator acts as an agent on behalf of the
participants.
Wakalah based on Waqf:
The share holders create a Waqf fund to extend the help to those who want
to cover against financial loss. The participants contribute to the fund and
the operator manages the fund. All under writing results belong to the fund
which itself has a legal entity.
Define Riba and briefly explain its types?
Riba is defined as any excess charged on the original capital borrowed over a
period of time and which has been contractually agreed upon.
All conditional benefits on loan fall in the category of Riba.
In the words of Prophet (SAW), by Ali Ibn Abi Talib.
Every loan that draws interest is
Riba.

Types of Riba:
Riba Al-Nasa:
Riba Al- Nasa also called Riba Al- Nasiah. Any predetermined / conditional
increase over principal amount.
Riba Al-Fazal or Riba-al-Bai :
Currency exchange in the form of commodities, especially in trading called
Riba Al-Fazal.

 Riba Al-Mufrad (Simple Interest):

Interest calculated only on the initial investment
Riba Al-Murakkab (Compound Interest):
Reinvestment of each interest payment on money invested to earn more
interest.

Interest (Commercial Interest):

Interest paid on loan taken for productive and profitable purpose.
Usury (Sarafi Interest):
Interest paid on loan taken for personal needs and expenses.