Zubair Mughal Chief Executive Officer AlHuda : Centre of Islamic Banking & Economics

2. Zubair Mughal Chief Executive Officer AlHuda : Centre of Islamic Banking & Economics Editor in Chief. Islamic Banking and Finance News , True Banking. • Islamic Banking and Finance Products 2

3. PRODUCT TREE Islamic Banking Modes Partnership Based Modes Trade Based Modes Rental Based Modes • Murabaha (Cost Plus Profit Sale) • Musawama (Bargain sale ) • Salam (Commodity Sale) • Istisna (Sale on Order) • Ijarah ( Leasing ) • Diminishing Musharaka ( Transfer of Ownership) • Musharaka (Joint Venture Profit Sharing ) • Mudaraba ( Trustee Profit Sharing)

4. Musharakah • Characteristics • All parties share in the capital • All parties share profits as well as losses • Profits are distributed as per agreed ratio • Loss is borne by the parties as per capital ratio • Every partner is agent of other

5. MUSHARAKAH May be in any agreed ratio PROFIT Rs. 100 Rs. 40 Rs. 60 PARTNER A PARTNER B VENTURE Rs.1000 Rs.1000 Rs. 50 Rs. 50 LOSS Rs.100 Must be according to capital ratio

6. Mudarabah • One partner (Rab al Mal) contributes capital and the other (Mudarib) contributes his skills or services to the venture • Venture may for a fixed period or purpose • Both share profit in pre-agreed ratio • Loss is borne by Rab al Mal only, Mudarib loses his services

7. MUDARABAH PROFIT 60 % 40 % VENTURE SERVICES CAPITAL RABBUL MAL MUDARIB ALL MONETORY LOSS LOSS OF SERVICES LOSS

8. Trade Based Mode in Islamic Banking and Finance ( Murabaha – Salam – Istisna etc.)

9. Basic Rules of Bai • Existence of Product/Commodity • Ownership of Product/Commodity • Possession of Product/Commodity

10. Basic Rules of Bai • Unconditional basis • Product have value/Price. • Bai on Such product which is permissible in Islam.

11. Basic Rules of Bai • Product Must be Identify, clear with all demanding Qualities. • Not based on any incident, struggle etc • Price must be clearly identified.

12. Bai (Buying & Selling) Basic Kinds of Bai

13. Kinds of Bai • Bai Musawamah • Bai Murabaha • Bai Surf • Bai Salam • Bai Istisna’ • Bai Urboon

14. Basic Kinds of Bai • Bai Eenna • Bai Touliya • Bai Wadhia

15. Bai There are three basic type of Bai’s which are using in Islamic Banking as the mode of financing in Pakistan • Murabahah • Salam • Istisna’

16. Murabahah 16

17. STAGES OF MURABAHA 1. Promise Stage 2. Agency Stage 3. Acquiring Possession 4. Execution of Murabaha 5. After Execution of Murabaha 17

18. Stage One (a) for Murabaha financing 1. Client approach the bank for facility through Murabaha. 1- Promise stage Bank Client Facility approved 18

19. Stage One (b) for Murabaha financing 1. Client and bank sign an agreement to enter into Murabaha. 1- Promise stage Bank Client Murabaha Facility Agreement MOU 19

20. Stage One (c) for Murabaha financing . Client submit the purchase requisition to the bank. 1- Promise stage Bank Client purchase requisition /Promise to the bank. 20

21. 2- Agency stage Bank Client Agency Agreement Agreement to Murabaha 2. Client appointed as agent to purchase goods on bank’s behalf 21

22. 2- Agency stage Bank Client Agency Agreement Agreement to Murabaha Disbursement to the Supplier Stage Two for Murabaha financing . Bank gives money to supplier through client’s account for purchase of goods. Islamic Bank 22

23. 3. Acquiring Possession Client purchases goods and takes possession Vendor Transfer of Risk Bank Client Stage three for Murabaha financing . Client purchases goods on bank’s behalf and takes their possession. 23

24. 4. Execution of Murabaha Bank Client Offer to purchase Stage four (a) for Murabaha financing . Client makes an offer to purchase the goods from bank. 24

25. 4. Execution of Murabaha Murabaha Agreement + Transfer of Title Bank Client Stage four (b) for Murabaha financing . Bank accepts the offer and sale is concluded. 25

26. 4. Execution of Murabaha Bank Client Payment of Price Stage four (b) for Murabaha financing . Client pays agreed price to bank according to an agreed schedule. Usually on a deferred payment basis (Bai Muajjal) 26

27. Transfer of Title Transfer of Title CUSTOMER VENDOR ISLAMIC BANK Payment of Purchase Price Payment of Marked-up Price Agreement GENERAL MECHANICS • The customer approaches the Bank with the request for financing • The Bank purchases and receives title of ownership from the vendor • The Bank makes payment to the vendor • The Bank transfers the title over to the customer upon payment • The customer makes payment up-front or on a deferred basis 27

28. Theory & Practice of Murabahah Documentation: Declaration Securities as per security documents Demand Promissory Note Schedule of payment

29. Risk Dimensions Credit Liquidity Credit Prising risk Banking Risks Market Foreign Exchange Solvency Operational Credit 29

30. : Purchase of poultry feed stock Murabahah Facility: 180 Days Payment: Six monthly installments Rate of Profit: 10% p.a. Carriage cost: 5% Murabahah transaction: Rs. 50,000 Securities: Personal surety or Pledge of feed stock, etc. Murabahah Calculation Exercise

31. Murabahah Calculation Exercise

32. Bai Important Note Following 3 Basic Rules of Bai are exceptional for Salam & Istisna’ • Existence of Product/Commodity • Ownership of Product/Commodity • Possession of Product/Commodity

33. Salam • 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.

34. Istisna’ • 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.

35. Thank you