Fundemental of Islamic finance Instructor : Zakariye Ahmed Mohamed

1. Presentation Fundemental of Islamic finance Instructor: Zakariye Ahmed Mohamed Date: 13-September-2018

2. Fundemental of Islamic finance Presentation GROUP C Group Name: • Abdullah Mohamed Ali • Abshir Gedi Idow • Hassan Mohamud Mohamed • Abdullahi Mohamed Umiye

3. Fee-Based Products – Wakalah (Agency) and Kafalah (Guarantee)

4. Objectives of the study • Definition of wakalah. • Tenets of wakalah. • Pillars of wakalah. • Conditions of Al-wakalah. • Termination of wakalah. • Letter of Credit. • Definition of Kafalah. • Pillars of Al-kafalah. • Types of Al-kafalah. • Advantages of Al-kafalah. • Conditions ofAl-kafalah. • Letter of Guarantee.

5. PART A

7. Wakalahin Islamic bank is used in such cases where an Islamic bankacts as an agent (wakil) for the customer (muakkil) for offering any type of service. The bank charges fixed fee as service charge. • Wakalah refers to a contract where a party, as principal (muwakkil) authorizes another party as his agent (wakil) to perform a particular task on matters that may be delegated, with or without imposition of a fee.

8. WAKALAH (AGENCY) Customer appoints the Bank as its investment agent Customer (principal) Bank (agent) • Wakalah is a contract whereby somebody (principal) hires someone else to act on his behalf i.e. as his agent for a specific task. • The agent is entitled to receive a predetermined fee irrespective of whether he is able to accomplish the assigned task to the satisfaction of the principal or not as long as he acts in a trustworthy manner. However, the agent would be liable to penalties only if it can be proved that he violated the terms of the trust or acted dishonestly. • In the case of a financial wakalah contract, clients give funds to the bank/company that serves as their investment manager. The bank/company charges a predetermined fee for its managerial services. Entire profit or loss is passed back to the fund providers after deducting such a fee. 3. The Bank distribute the return & capital from the investment. 2. Customer pay the Bank agency fee/ commission.

9. TENETS OF WAKALAH The three tenets of Wakalah which are as follows: • Contracting parties i.e. Muwakkil (principal) and Wakil (agent); • Subject matter of wakalah: Specific responsibility of Wakil and wakalah fee; and • Ijab & Qabul, i.e., Offer and Acceptance

11. Flows of Al-Wakalah

14. PART B

15. Letter of Credit A Letter of Credit (LC) is major tool of trade finance and clients of a bank require bank to extend facility. With the availability of LC facility, exporters can obtain quick, secure and guaranteed payment of goods from the banks. In conventional banking, a Letter of Credit (LC) facility is regarded as temporary interest-based loan. In Islamic banking a Letter of Credit (LC), can be issued using the principles of Wakalah, or Murabaha or the combination of both Wakalah, and Murabaha.

16. Continue..... In some arrangement the Letter of Credit (LC) is issued under Wakalah, contract (agency relationship) and thereafter the goods purchased is financed under the Murabaha contract. Goods must beShari’ahcompatible, in an Islamic bank LC(Letter of Credit).

17. Define Letter Of Credit • The letter of credit is a commitment by the buyer’s bank on behalf of the buyer (importer) to effect payment to the seller (exporter) / beneficiary subject to fulfillment of certain conditions by the seller.

18. Letter of Credit (Murabaha Contract) Steps: • A trader requests the bank to finance import of specified goods from a foreign supplier. • The bank asks the trader to provide all details – such as supplier’s name, price of goods, type and quantity of the goods and other costs. • The trader provides all necessary details and submits a document called a “Promise to Purchase (PTP)”, along with an application to establish a Letter of Credit (LC). The PTP document states that the trader will purchase from the • bank the goods upon the bank purchasing them from the supplier at a price which constitutes the bank’s purchase cost and its profit and will pay theanount within a specified period. • The bank establishes the LC in favor of supplier and pays the negotiating bank using its funds.  • The supplier ships the goods to the bank as purchaser and submits documents corresponding to the LC to the bank. Consequently the bank purchases the goods in its own name. This fulfils the basic Shari’ah requirement: possession of the asset before selling to the buyer.

19. Continue.............. • In exceptional circumstances, the bank can allow the trader to receive the documents in his name. In such situation the bank appoints the trader as its agent to import the goods for and behalf of the bank. • Upon receipt of goods from the supplier, the bank sends a notice to the trader asking him to purchase the goods from the bank as per the terms of his Promise to Purchase (PTP). • The trader purchases the goods from the bank under the Murabaha contract. Consequently, the title and the possession of the goods are transferred from the bank to the trader. The bank releases the import documents. • Customer is given a deferred payment term for settlement of the sale price which includes cost of importing the goods plus profit of the bank. • The bank can ask the customer to submit a security deposit (Hamishjiddiyyah). If a customer falls back to fulfill his commitment under Promise to • Purchase (PTP), the goods imported should be disposed off and any short-fall should be recovered from the security deposit.

20. Letter of Credit (Contract: Al-Wakalah / Agency) • The bank acts as the agent of the customer (importer) under this concept. Steps: • The customer requests the bank to open Letter of Credit (LC). • The customer deposits full amount of the price of imported goods –Wadi’ahwad dhaman. • The bank releases import documents. • The bank charges fee/commission –ujrah.

21. Wakalah Deposits in Islamic Banks – Deposit Product • As mentioned earlier, in addition to current, saving and investment deposit accounts, Islamic Banks also accept Wakalah deposits from the customers. Under the agreement the fund provider (muakkil) places a specified sum of money with the bank, which acts as agent (wakil) for investing the deposited funds in specific investment activities of the bank with the objective of making profits. The Islamic bank invests the fund as wakil and charges fixed agency fee for its services. The return of the bank is not linked to the profit sharing as is the case in a saving and general investment deposit account. However, in order to encourage the fund manager (bank) the investor (muakkil) may increase the compensation of the bank as an incentive for good performance.

23. PART C

24. Kafalah (Guarantee) Kafalah is used in cases where an Islamic bank offers guarantee on behalf of thecustomer.

25. Definition

32. PART D

38. Letter of Guarantee • Letter of Guarantee (LG) may be provided in respect of the performance of a task, settlement of a loan, etc. Islamic banks usually offer Letter of Guarantee (LG) facility on the Shari’ah approved mechanism of Kafalah. Kafalah is defined as a surety given by one party who agrees to discharge a liability of a third party – in case the third party defaults in fulfilling his obligations. • The client may be required to place a certain amount of deposit for this facility, which the bank accepts under the principle of wadi’ah wad dhaman. The bank charges the client a fee for the services it provides. • The bank issues all types of guarantees related to trade finance, construction, project related finance, shipping and other financial guaranteed which involve undertaking risk on behalf of corporate customers.

39. Islamic Bank - An Agent of the Customer: • An Islamic bank may carry out different types of transactions as an agent of the customer on his behalf. The bank charges agency fees for providing such services. Such common services offered by Islamic Banks against agency fees are as follows: • LC operating and acceptance. • Collection of export bills. • Inward bill of collection. • Outward bill of collection. • Underwriting and IPO services. • Financing against export bills. • Payment / receiving of cash on behalf of the customer

40. Islamic Bank – As Guarantor: • An Islamic bank provides guarantee on behalf of the customer. Some common types of guarantees offered by Islamic banks include: • Letter of Guarantee. • Shipping Guarantee. • Performance Guarantee. • Advanced Payment Guarantee. • Maintenance Guarantees. • Financing related Guarantee. • Bid Bonds

41. Other services offered by Islamic Banks: • The bank charges ujr for providing these services.  • Sales and purchase of foreign currencies. • Zakahdeduction on behalf of the customers. • Electronic On-line transfer, Tele-banking. • ATM Services. • Demand Draft. • Cheque books. • Pay order. • Clearing facility. • Lockers

42. Termination of kafalah The termination of Kafalah may be: • Through guaranteed property – normal closure, gift, absolution and speech. • Through guaranteed person. • delivery of the person