MBF707: Monetary and Fiscal Framework in Islamic Finance

1. MBF707: Monetary and Fiscal Framework in Islamic Finance COMSATS Institute of Information Technology (Virtual Campus)

2. Combination of Musharakah & Mudarabah • In Mudarabah, Fund Provider -----> RabbulMaal • Mudarib add Capital, if agreed with Mudarabi Combination: RabbulMaal -------------------> Rs. 100,000 Mudarib Add Own -------------> Rs. 50,000 Profit Distribution Mudarabi: • Certain Percentage of Profit as Mubarib • Another Percentage of Profit as Sharik • 1/3 : 2/3 or 1/3 + ¼ of the remaining profit to mudarib or any other agree proportion.

3. MUDARBAH & MUSHARKAH AS A MODE OF FINANCING

4. PROJECT FINANCING

5. PROJECT FINANCING • “Financer want to finance whole project” • Mudarabah & Musharakah both easily adopted Musharakah: • Investment comes from both sides • Management both responsibility Combination: • Management responsibility of one party • Investment comes from both

6. PROJECT FINANCING Withdraw One Party from Musharakah • Other party want to continue • Purchase the shares. • Units can also be sold at intervals. Financial Institution • Don’t want to remain partner forever • Sale of share as one unit, if liquidity permits • Financer divide into smaller units to be sold.

7. SECURITIZATION OF MUSHARAKAH

8. SECURITIZATION OF MUSHARAKAH • Big Project , Huge Amount Required • Limited No. of people cannot afford to finance Musharakah Certificate: • Each certificate represent his proportion of ownership in the asset of musharakah. • Negotiable Instruments • Buy or Sell in Secondary Market

9. SECURITIZATION OF MUSHARAKAH NOT ALLOWED Certificate Trading other than Par Value • Assets are in Liquid Form • Cash , Receivables or Advances due Example: No. of Share ----------------------> 100 Shares Value of Share -------------------> 01 Million Total Worth of Project -----------> Rs. 100 Million • Nothing Purchased by this Money • Not Allowed Sale other than Par Value • Money Exchange with Money, excess side ----------> Riba

10. SECURITIZATION OF MUSHARAKAH Example: Musharkah Project Non - Liquid Assets ----------> 40% Liquid Assets -----------> 60 % Face Value of Share ------------> Rs. 100 If Sold Higher Price Sold Price -------------------> Rs. 110 It Represents: Liquid Assets ------------------> Rs. 60 Non – Liquid Assets ----------> Rs. 50 ( Previous was Rs. 40 ) 110 in the 40% : 60% = 44 : 66

11. SECURITIZATION OF MUSHARAKAH • Sold Less than Rs. 60 Not Allowed • Rs. 60 Liquid Assets ( Cash , Receivables etc) • Money Exchange with Money, • Low / High side ----> Riba • Difference of opinion among Fuqhaa • At non liquid assets should > 50% for transaction of certificates at higher price.

12. Financing of a single Transaction

13. Financing of a single Transaction • Mudarabah & Musharakah both may be Used Import Financing : • Letter of Credit( L/C ) without Any Margin-------> Mudarabah With Some Margin -------->Musharaksh/ Combination Expiry of Term • Imported good are not sold • Importer may himself purchase the share of Financer • Pre-Agreed Price or Market Price

14. Financing of a single Transaction Export Financing : • Exported has a specific order from abroad • Export goods Price is known • Easily Calculate Expected Profit Finance on the basis of Mudarabah & Musharakah Pre-Agreed Ratio of Profit on Export Bill In Order to Secure Financer Himself , Put Condition: • Export goods with Full Conformity, will be responsibility of exporter • If Some Disturbance found, exporter will be responsible only (Mudarabah) • If Some Disturbance found other than Negligence, All Partners bear the Loss (Musharakah)

15. SHARING GROSS PROFIT ONLY

16. SHARING GROSS PROFIT ONLY • Financing on the basis of Musharakah Problem: • Difficult to valuate All Assets & Depreciation / Appreciation Cost Solution 1 : • Pay Agreed Rent to Client of All fixed assets (Machinery , Building ) from Musharakah fund • Remaining to distribute according to agreed ratio

17. SHARING GROSS PROFIT ONLY Solution 2 : • Gross Profit will be distributed • Higher Profit Ratio of Client • Gross Profit Means Only Direct Expenses will be deducted from the Sales (Material, Labor, Electricity)

18. RUNNING MUSHARKAH ACCOUNT ON THE BASIS OF DAILY PRODUCTS

19. RUNNING MUSHARKAH ACCOUNT Conventional System Many financial institutions finance the working capital of an enterprise by opening a running account for them from where the clients draw different amounts at different intervals, but at the same time, they keep returning their surplus amounts. On the date of maturity, the interest is calculated on the basis of daily products. Musharakah: • Opening Running A/c • FI’s finance working capital of the clients • Deposit & Withdraw Amount any time • Profit on Average Balance

20. RUNNING MUSHARKAH ACCOUNT • A certain percentage of the actual profit must be allocated for the management. • The remaining percentage of the profit must be allocated for the investors. • The loss, if any, should be borne by the investors only in exact proportion of their respective investments. • The average balance of the contributions made to the musharakah account calculated on the basis of daily products shall be treated as the share capital of the financier. • The profit accruing at the end of the term shall be calculated on daily product basis, and shall be distributed accordingly.

21. RUNNING MUSHARKAH ACCOUNT Argument: Why share Profit when other Party, during a period had no Money invested in the Business ? Example : A & B Agreed ----------------> Musharakah Each Contribute --------------> Rs. 50,000 When A didn’t invest his money into Join Pool Earn Profit --------------> Rs. 10,000 on Rs. 50,000 Distribute --------------> Agreed Ratio Musharakah Contract Made: • Subsequent Transaction effected • Regardless, Whose Money Utilized

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