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NON-INTEREST BANKINGBanking Products & Services
- Oyindamola Dada
❖Trade Based Contracts
• Murabaha
• Bai’-Muajjal
• Salam
• Istisna’
❖Lease Based Contracts
▪ Ijarah
▪ Ijarah of Services)
3
ISLAMIC BANKING PRODUCTS & SERVICES
❖Equity (Partnership) Based Contracts
▪Musharakah
▪Mudarabah
❖Fee Based Contracts
▪Wakalah
▪ Kafalah
❖Other Contracts
▪ Qard Hassan (Benevolent Loan
MURABAHA (COST PLUS FINANCING)
The origin of Murabaha is the word ‘Rabaha’ (i.e. to make a
profit (from a deal). It is one of the trust sales contracts,
which requires a seller to fully disclose the cost price of a
good or asset and his profit margin, which could be a lump
sum or a percentage of the cost price.
A Murabaha is a sale in which the seller’s cost of acquiring
the asset and the profit earned from it are disclosed to the
client or buyer.
ISLAMIC BANKING PRODUCTS & SERVICES
The Murabaha operated by NIFIs is referred to as Murabaha To Purchase Order (MTPO)
MURABAHA …..CONT’D
August 27, 2021 ©2019 Your Company. All Rights Reserved
6
FEATURES OF MURABAHA
SUBJECT MATTER
The subject matter/asset
must exist at the time of
contract execution.
The bank must own the
asset and have either
physical or constructive
possession. The asset must
be a tangible good, clearly
identified, quantified and
Shariah compliant
✓The Murabaha asset cost,
including all expenses involved
in the asset’s acquisition, must
be declared to the client
✓Parties to the contract
establish a profit rate by
mutual consent or in relation
to a specific and known
benchmark which must be
disclosed.
✓The Murabaha price may be
charged at spot or be deferred
and paid as a lump sum at the
end of the contract or in
installments on fixed dates
during the term.
PRICE DEFAULT REPRICING
There is no concept of a late
payment in a Murabaha
contract, however, a charity
clause is established at
contract execution to serve
as a deterrent to default.
Based on the charity clause,
the client is obliged to pay a
predetermined amount to a
designated charity account,
which shall not be benefited
from by the Bank, its staff or
ACE members, and which
disbursement is to be
supervised by the ACE.
This is prohibited because
the Shariah does not
permit an increase in debt
once it is fixed.
Rescheduling is only
permissible when the
creditor provides an
extension to ease the
burden of a debtor, so a
roll-over where the bank
increases the debt in
return for an extension is
impermissible as the
resulting amount of debt
is analogous to riba or
interest.
ISLAMIC BANKING PRODUCTS & SERVICES
MURABAHA……CONT’D STEPS OF MURABAHA EXECUTION
August 27, 2021 ©2019 Your Company. All Rights Reserved
7
PRU (Purchase Requisition Undertaking)
The client’s
submission of a
purchase
requisition for
Murabaha goods.
EARNEST MONEY
The client’s unilateral promise to purchase the Murabaha goods and the financial institution’s acceptance of collateral. The Bank requests the client to furnish a security or earnest money called HaamishJiddiyyah. In case the client backs out from entering into a Murabaha, the bank makes up for the actual loss from it and returns the remainder to the client.
AGENCY
The agency agreement
between the financial
institution and the client or a
third party. During the Agency
stage the bank’s exposure to
asset risk. The Bank must also
ensure that the asset to be
purchased is not already in the
client’s possession by paying
to the supplier before the
agent/customer purchases the
goods. The Bank can equally
procure Murabaha goods
directly or establish a third
party agency.
POSSESSION
The possession of the Murabahagoods by the agent on behalf of the financial institution
ACTUAL SALE
The exchange of
an offer and
acceptance
between the client
and the financial
institution to
implement the
Murabaha sale.
ISLAMIC BANKING PRODUCTS & SERVICES
BAI’ MUAJJAL (DEFERRED/CREDIT SALE)
Bai’ Muajjal is a contract between a
Buyer and a Seller for the sale of a
specific asset to the Buyer at an
agreed fixed price payable at a
fixed future date in lump sum or
by fixed instalments.
As a Sale contract, the buyer must
have ownership of the asset before
the sale of same. The ownershipmay be actual or constructive
ISLAMIC BANKING PRODUCTS & SERVICES
DIFFERENCES BETWEEN MURABAHA AND BAI’-MUAJJALMURABAHAH BAI’ MUAJJAL
1. Sale on an agreed mark-up which may
be at the spot or deferred
Sale on credit or deferred payment basis
2. Key objective of a Murabahah is to
make profit, the profit mark-up is thus
an essential part of the contract
The key objective of a Bai’ Muajjal is
deferred payment of a sale which may be at
discount, par, or premium of the cost price
of the asset.
3. As one of the Trust Sale contracts, the
actual purchase price of the asset and
the mark-up must be transparently
disclosed in the contract document
The Vendor/Seller is not bound to disclose
the actual purchase price to the customer
orally or in the contract documents.
4. Murabahah purchase may be effected
either in cash or on credit
Bai’ Muajjal sale must always be on credit.
Payment is deferred.
ISLAMIC BANKING PRODUCTS & SERVICES
i. Ribawi items (are six items associated to interest) against same exceptwhile fulfilling the required rules of same quantity and on the spot and ifdifferent any quantity but also on the spot as guided by the Prophet(peace be upon him).
ii. Non-existent items except in Salam and Istisna.iii. Items not owned by the seller.iv. Items already owned by the buyer (buy back).v. Items that could not be delivered by the seller.vi. Injurious assets that are harmful to either individual or society.vii. Items prohibited by Shari’ah such as alcohol, pork meat and pork
accessories, dead animals, blood, phonographic films, etc.viii.Stolen items if the seller is aware.
ITEMS THAT CANNOT BE FINANCED IN SALE CONTRACTS
ISLAMIC BANKING PRODUCTS & SERVICES
➢ Ribawi items or similar against one another.
✓Gold-Silver
✓Gold –Naira ALL MUST BE ON THE SPOT
✓Naira – USD
✓USD – Gold
➢Transactions where both subject and payment are deferred.
ITEMS THAT CANNOT BE SOLD ON DEFERRED PAYMENT
ISLAMIC BANKING PRODUCTS & SERVICES
➢ Vehicles
➢ Household appliances
➢ Undeveloped plot of land
➢ Automobiles
➢ Computers and accessories
➢ Electronics
➢ Furniture
➢ Agricultural equipment
➢ Imports Finance
➢ Any other goods that can be easily delivered
AREAS OF FINANCING USING MURABAHA/BAI’ MUAJJAL
ISLAMIC BANKING PRODUCTS & SERVICES
i. Identification of Asset.
ii. Promise to Purchase.
iii. Provision of a valid invoice in the name of the bank or endorse to the bank.
iv. Agency Agreement.
v. Offer Letter (containing details including price and profit mark-up for Murabahaonly). While in Bai Muajjal, Bank is only required to disclose the sale price).
vi. Necessary Documentations.
vii. Purchase of asset by the Bank by way of disbursement directly to thesupplier/vendor.
viii. Signing of Murabaha/Bai Muajjal agreement and other sale related documents.
PROCESS FLOW OF MURABAHA/BAI’ MUAJJAL
ISLAMIC BANKING PRODUCTS & SERVICES
SALAM (FORWARD SALE)
Salam is one of the exceptions to the
general rule of sale, i.e. tangibility,
availability and ownership of the asset
to be sold.
Salam is a sale where the price of the
subject matter is paid in full at the
time of the contract’s execution while
the delivery of the subject matter isdeferred to a future date.
ISLAMIC BANKING PRODUCTS & SERVICES
SALAM (FORWARD sale)…..CONT’D
It is not necessary that the subject matter
exist, and be owned and possessed by the
seller at the time of the Salam’s execution as
is the customary requirement of a standard
sale, provided it meets the other criteria
specific to it.
Salam allows the buyer to purchase
commodities for a price lower than the spot
market price, while providing capital for the
vendor at the point when he needs it most,
thus creating a win-win situation. Thevendor wins and the purchaser wins.
ISLAMIC BANKING PRODUCTS & SERVICES
FEATURES OF SALAM (FORWARD SALE)
HOMOGENEIT
YSalam may be
executed for
homogeneous
commodities but
not for specific
commodities and
mediums of
exchange
The quantity and
quality of Salam
goods must be
specified in order to
avoid any ambiguity
that may lead to
dispute between
contracting parties
NO AMBIGUITY PRICE DELIVERY
Salam price must
be paid at spot. The
price is fixed and
cannot be
increased due to an
increase in the
price of Salam
goods in the
market during the
contract’s term
The place of
delivery of Salam
goods must be
specified and
they must be
delivered in their
entirety on a
fixed future date
or in instalments
on
predetermined
dates
ISLAMIC BANKING PRODUCTS & SERVICES
FEATURES OF SALAM (FORWARD SALE)….CONT’D
PARALLEL SALAM
Salam goods cannot be sold to
a third party before receiving
possession however a parallel
Salam may be executed for
them. A Parallel Salam is a
transaction executed
simultaneously with the
original Salam. The buyer of
goods in the first Salam is the
seller of goods in the second or
Parallel Salam. It is permitted
with a third party only.
The Khiyar al ‘Aib
(option of defect)
may be exercised
for Salam subject
matter, however,
not the Khiyar al
Rooyat (option of
refusal).
OPTIONS SALAM
TERMINATIONOnce executed, a Salam
may not be revoked
unilaterally by either
party. It is a sale contract
binding on both parties
and may be terminated
completely or partially by
mutual consent by
returning the actual or
proportionate amount of
the price paid
ISLAMIC BANKING PRODUCTS & SERVICES
➢Agricultural Financing such as fertilizer, seeds, equipment, etc.
➢Working Capital Financing (for raw materials requirement of
companies).
ISLAMIC BANKING PRODUCTS & SERVICES
AREAS OF FINANCING USING SALAM
PROCESS FLOW OF SALAM (FORWARD SALE)
ISLAMIC BANKING PRODUCTS & SERVICES
❑ Discussion/Request to the Bank
❑ Application
❑ Promise to sell
❑ Items identified and description made
❑ Bank enters into parallel Salam with a buyer
❑ Offer Letter (with full details)
❑ Necessary documentation
❑ Sale/Buy agreement signed
❑ Disbursement is made to customer
❑ Described goods supplied to the Bank at harvest or on maturity
❑ Facility terminated.
❑ Bank deliver goods to the second buyer in parallel Salam.
PROCESS FLOW OF SALAM……CONT’D
ISLAMIC BANKING PRODUCTS & SERVICES
ISTISNA’ (MANUFACTURING/CONSTRUCTION) FINANCING
Istisna, like Salam, is the second exception to the
general rule of sale.
An Istisna is a transaction used to acquire an asset
manufactured on order. It may be executed directly
with the supplier or any other party that undertakes to
have the asset manufactured.
There are usually three parties involved in an Istisna
contract; the Istisna requestor, or orderer, the
manufacturer and the Bank.
An Istisna takes place when one party agrees to
manufacture a product for another party at a specific
price. This agreement involves an exchange of an offer
and an acceptance which completes the contract.
ISLAMIC BANKING PRODUCTS & SERVICES
FEATURES OF ISTISNA’SUBJECT
MATTER
The subject
matter of an
Istisna need not
exist, be owned
or possessed by
the
manufacturer at
the time of
contract
execution
It must be an
item that is
manufactured as
customary market
practice and
undergoes
processing to
convert from one
form to another
SUBJECT
MATTER
SUBJECT
MATTERPRICE
The quantity or
quality of Istisna
subject matter can
be changed by
mutual consent of
the contracting
parties
The Istisna price,
agreed at the time of
contracting between
the istisna requestor
and the manufacturer,
may be paid at the
time of contract
execution, in fixed
instalments over the
contract’s term or as a
lump sum at the end
of the contract’s term
ISLAMIC BANKING PRODUCTS & SERVICES
FEATURES OF ISTISNA’
PARALLEL ISTISNA
A parallel Istisna is a second Istisna contract executed alongside the first Istisna. The manufacturer in the original contract serves as the Istisna requestor in the parallel contract and profits from a difference in price. The parallel Istisna is completely separate and independent of the original Istisna contract
The Islamic bank may
demand security in its
capacity as requestor or
manufacturer. The
security is called Urbun.
Urbun is a non-refundable
down payment that the
seller/manufacturer
receives from the
buyer/requestor, in order
to secure the purchase of
goods
URBUN NO BUY-BACK ISTISNA
TERMINATIONThe Istisna must notinvolve a buy-back atany stage. Before theIstisna is executed itis important toensure that thecontracting partiesare separate andindependent legalentities
Either of the twocontracting parties mayterminate the Istisnaunilaterally provided themanufacturing processhas not commenced. Ifmanufacturing hasbegun, then the contractis binding on bothparties and can only beterminated by mutualconsent
ISLAMIC BANKING PRODUCTS & SERVICES
➢ House Financing
➢ Project Financing such as power, roads, water treatment plants etc.
➢ Manufacturing Companies
➢ Financing of Raw Materials
➢ Government Awarded Contracts
➢ Any other Shariah compliant project.
AREAS OF FINANCING USING ISTISNA’
ISLAMIC BANKING PRODUCTS & SERVICES
PROCESS FLOW OF ISTISNA’
ISLAMIC BANKING PRODUCTS & SERVICES
➢ Idea discussion/request
➢ Promise to buy
➢ Identification and description of asset to be manufactured.
➢ Identification and engagement of contractor for second Istisna
➢ Offer letter (including details of price, payment date and delivery)
➢ Necessary documentation
➢ Istisna Sale Agreement
➢ Agreement with contractor (separate and independent from the Saleagreement above)
➢ Completion of the project
➢ Delivery to the Bank and the Bank to the customer.
PROCESS FLOW OF ISTISNA’…….CONT’D
ISLAMIC BANKING PRODUCTS & SERVICES
DIFFERENCES BETWEEN SALAM AND ISTISNA’
Salam Istisna
Subject Commodity Agricultural produce or existing
and off the shelf goods or assets
Items not in existence or not fully
developed or assembled to be fit
for purpose
Price Paid in full in advance Flexible; may be in advance, at
milestones or upon project delivery
Time of Delivery Must be fixed at the contracting
stage
May be reviewed, especially in the
case of project delivery
Cancellation of Contract Can not be unilaterally cancelled
once concluded
Can be cancelled unilaterally even
after concluding the contract, but
must be before manufacturer or
developer commence the project
ISLAMIC BANKING PRODUCTS & SERVICES
IJARAH (LEASING)
Ijarah is the lease of a specific asset or service to aclient for an agreed period of time in exchangefor rent which at the end of the lease period mayresult in transferring the subject matter’sownership to the lessee. In principle, an Ijarahcontract is executed for an asset owned by thelessor or an usufruct owned by the sub-lessor.
The subject of lease must have a valuable use, sothings having no usufruct at all cannot be leased.
ISLAMIC BANKING PRODUCTS & SERVICES
IJARAH (LEASING)…..Cont’d
August 27, 2021
©2019 Your Company. All Rights Reserved
29
TYPES OF IJARAH
A lease contract in which someone
hire/employ a person on wages. It is a
contract in which someone is hired to
provide his skills and services and
gets paid in return for his services and
expertise
IJARAH TUL
AAMAALIJARAH TUL
MANAFAAY
A lease contract executed to transfer the
benefits of an asset, service or usufruct in
exchange for an agreed price. It does not
involve the services of specific persons.
ISLAMIC BANKING PRODUCTS & SERVICES
IJARAH (LEASING)……cont’dIjarah classification based on transfer of ownership to lessee
Standard/Operating Ijarah
A lease contract where the lessee
benefits from the asset or a service
for a specific time period but it
does not result in the eventual
transfer of ownership of the asset to
the lessee.
Ijarah wa Iqtina
A lease contract to transfer
ownership of the leased asset
to the lessee gradually through
the lease period.
Ijarah Muntahiah Bitamleek
A lease contract conducted solely to transfer
ownership of the leased asset to the lessee at
the end of the lease period.
Ijarah Maushufa fi Dzhimah (Forward
Ijarah)
A lease contract used to finance asset under
construction. The customer pays advanced
rent during the construction period of the
asset.
ISLAMIC BANKING PRODUCTS & SERVICES
IJARAH (LEASING)….CONT’D
The client and lessor enter into
a promise to execute an Ijarah
for the usufruct of a particular
asset or service
The bank undertakes to provide
the asset or service and the
client undertakes to enter into a
lease contract for it
The asset or service must be
owned by the lessor and made
available to the lessee before the
Ijarah commences
The lease period commences
once the subject matter of the
lease is made available to the
lessee.
Prerequisites of
an Ijarah
ISLAMIC BANKING PRODUCTS & SERVICES
PROCESS FLOW OF IJARAH
ISLAMIC BANKING PRODUCTS & SERVICES
✓ Idea discussion/Declaration of interest
✓ Promise to rent and buy
✓ Identification of asset
✓ Offer Letter and Acceptance
✓ Ijarah Wa Iqtina Agreement
✓ Necessary documentations
✓ Provision of equity contribution by customer
✓ Purchase of asset by the bank
✓ Signing of agreement (Lease and Sale).
PROCESS FLOW OF IJARAH……..CONT’D
ISLAMIC BANKING PRODUCTS & SERVICES
IJARAH SERVICES
Ijarah Services is based on the contract of
Ijarah i.e. the hire/acquisition of services
of persons in exchange for a fee, financial
or material consideration.
The bank assigns to the customer the
enjoyment of the acquired service at a
marked-up rate, which the customer pays
up in a deferred lump sum or on agreed
instalments.
ISLAMIC BANKING PRODUCTS & SERVICES
The service in anIjarah of servicescontract shall berecognized byShariah, valuable,identifiable andaccessible.
The service shall becapable of beingdelivered by theservice provider andassignable by theBank.
Permissible services
in this Ijarah contract
will be: Intangible
assets, such as
trademark, patent,
educational services,
property rent,
medical service, and
other forms of
services which are
capable of being
hired or acquired.
The Bank may
appoint the customer
or a third party as an
agent to acquire the
service.
Service fee shall be
determined and
agreed upon by the
contracting parties at
the inception of the
Ijarah contract.
The contracting parties
may mutually agree for
the service fee to be
paid by the customer in
the form of cash or kind;
in advance or in arrears;
in a deferred lump sum
or by instalments.
FEATURES OF IJARAH OF SERVICES
August 27, 2021
35
PERMISIBILITY OF SERVICE
PERMISIBILITY OF SERVICE …CONT’D
AGENCY & SERVICE FEE SERVICE FEES
ISLAMIC BANKING PRODUCTS & SERVICES
The contractingparties may agreefor the service feeto paid in fixedamount; to bedetermined via areference to aspecifiedbenchmark orformula; or to bepaid using acombination ofboth.
The Bank cannotincrease the service feeonce it is fixed andagreed upon.No increase in theservice fee due may bestipulated by the bank incase of delay in paymentby the customer. Theunpaid fee becomes adebt and any penaltypaid by the customerdue to delay in paymentof the service fee shallbe donated to charity
It is permissible for the
Institution to require
the customer to pay
an initial service
amount to ensure the
customer’s seriousness
in hiring the acquired
service. This amount
of Customer’s
payment shall be
adjusted against the
total hire amount of
the Services
instalments.
The customer shall
be bound to utilize
the Services solely
for the purpose for
which it was acquired
and is intended
FEATURES OF IJARAH OF SERVICES…..cont’d
August 27, 2021 ©2019 Your Company. All Rights Reserved
36
DYNAMIC OF SERVICE FEE
INCREASE IN SERVICE FEEINITIAL SERVICE
AMOUNTUTILIZATION OF SERVICE
ISLAMIC BANKING PRODUCTS & SERVICES
STEPS OF IJARAH OF SERVICES CONTRACT
August 27, 2021 ©2019 Your Company. All Rights Reserved
37
EARNEST MONEY
The client’s unilateral
promise to hire the service
and the financial
institution’s acceptance of
collateral. The Bank
requests the client to
furnish a security or
earnest money called
Haamish Jiddiah. In case
the client backs out from
hiring the service, the bank
makes up for the actual
loss from it and returns the
remainder to the client.
AGENCY
The agency agreement
between the financial
institution and the client or a
third party. The Bank must also
ensure that the service to be
acquired is not already in the
client’s possession by paying to
the service provider before the
agent/customer acquires the
services. The Bank can equally
acquire the services directly or
establish a third party agency.
ACQUISITION OF THE SERVICE
The acquisition
of the service by
the agent on
behalf of the
financial
institution.
ACTUAL ASSIGNING OF SERVICE
The exchange of an
offer and acceptance
between the client and
the financial institution
to implement the
assigning of the
service.
ISLAMIC BANKING PRODUCTS & SERVICES
➢ Education
➢ Medical services
➢ Property Rent
➢ Airtime
➢ Consultancy/Advisory
➢ Travels including Hajj and Umrah
➢ Any other permissible services
MAJOR AREAS OF FINANCING USING IJARAH SERVICE CONTRACT
ISLAMIC BANKING PRODUCTS & SERVICES
➢ Physical asset (buy)
➢ Already owned or enjoyed services
➢ Salaries of companies – Except where the Bank gets directcontact/contract with the employees of such companies.
➢ Any services that is unlawful or aims towards unethical.
NOT ALLOWED UNDER IJARAH SERVICES
ISLAMIC BANKING PRODUCTS & SERVICES
➢ Identification of the services by customer
➢ Discussion with the bank
➢ Promise to buy/hire the service
➢ Provision of security deposit
➢ Offer Letter
➢ Ijarah Service Agreement
➢ Necessary documentation
➢ Purchase or hiring of the services by the bank
➢ Sale/re-hire of the services to the customer by the bank at a higher cost.
PROCESS FLOW OF IJARAH SERVICE
ISLAMIC BANKING PRODUCTS & SERVICES
MUSHARAKAH (ACTIVE PARTNERSHIP)
A Musharakah is a partnership that is set up
between two or more parties usually to
conduct business or trade. It is created by
investing capital or pooling together expertise
or goodwill.
Partners share profit based on ownership
ratios and to the extent of their participation
in the business and share loss in proportion to
the capital they invest.
Profit cannot not be fIxed in absolute terms
such as a number or percentage of invested
capital or revenue.
ISLAMIC BANKING PRODUCTS & SERVICES
Musharakah capital may be in the form of cash or it may be in kind, for instance contributing assets to the business in which case it is necessary to ensure the assets are valued at the time of Musharakah execution.
Profit may not be
guaranteed or fixed in
absolute terms for any
of the Musharakah
partners
Profit may not be set
as a percentage of
capital
One partner cannot
guarantee any part of
the profit or capital of
another partner.
Silent partner’s profit
ratio may not exceed
his investment ratio.
During the
Musharakah, a partner
may surrender all or
part of his profit share
to another provided
doing so is not agreed
at the time of
Musharakah
execution.
Profit sharing
mechanism and profit
ratios must be clearly
determined at
Musharakah inception.
Musharakah may only
announce an expected
return for the business;
actual returns are
declared only after they
are known.
FEATURES OF MUSHARAKAH
August 27, 2021
MUSHARAKAH CAPITAL MUSHARAKA PROFIT MUSHARAKAH PROFIT MUSHARAKAH PROFIT
ISLAMIC BANKING PRODUCTS & SERVICES
PROCESS FLOW OF MUSHARAKAH
August 27, 2021 ©2019 Your Company. All Rights Reserved
43
ISLAMIC BANKING PRODUCTS & SERVICES
➢ Any business that is permissible can be considered.However emphasis should be on only businessesthat could not be accommodated by eitherMurabaha, Ijara etc.
➢ Bring examples…………………..
AREAS OF MUSHARAKAH OPERATIONS
ISLAMIC BANKING PRODUCTS & SERVICES
MUDARABAH (SILENT PARTNERSHIP)
With respect to the scope of business activity, Mudarabah may be
unrestricted or restricted.
Unrestricted Mudarabah: The Mudarib is free to invest capital in any
Shariah-compliant project of his choice.
Restricted Mudarabah: The Mudarib’s investment of capital is restricted
to specific sectors and activities and/or geographical regions only. Here
too, all investments must be Shariah-compliant.
ISLAMIC BANKING PRODUCTS & SERVICES
A Mudarabah is a partnership between
two or more parties usually to conduct
business or trade. Typically, one of the
parties supplies the capital for the
business and the other provides the investment management expertise
Partners capital maybe in the form ofcash or it may be inkind, for instancecontributing assetsto the business inwhich case it isnecessary to ensurethe assets arevalued at the timeof Mudarabahexecution
✓ The capital
contribution can be
made by more than
one Rabb al Maal.
The Mudarib can
also contribute
capital provided that
the Rabb al Maal/
Arbaab al Maal
approve
✓ Only the Mudarib
possesses the right
to manage the
business.
✓ The profit sharing
mechanism must be
clearly defined for all
the partners at the
Mudarabah’s inception
or before profit or loss
is generated.
✓ A partner may
voluntarily surrender
all or part of his profit
share to another
partner provided it is
not pre-agreed at
contract execution
✓ The Rabb al
Maal/Arbaab al
Maal bear(s) the
entire loss based
on capital
contribution
ratios. The
Mudarib does
not bear any loss
except that
caused by his
proven
negligence.
FEATURES OF MUDARABAH
August 27, 2021 ©2019 Your Company. All Rights Reserved
46
MUDARABAH CAPITAL MUDARABAH BUSINESS MUDARABAH PROFIT MUDARABAH LOSS
ISLAMIC BANKING PRODUCTS & SERVICES
PROCESS FLOW OF MUDARABAH
August 27, 2021 ©2019 Your Company. All Rights Reserved
47
Rabb-ul-mal
(Investing Partner)
(4) Profit
Investor bears loss(2)
Capital
Mudarabah
Enterprise
Mudarib (Managing
Partner)
(3)
Expertise
(5)
Profit and
Performance Fee
(1)
Profit-Sharing
Agreement
ISLAMIC BANKING PRODUCTS & SERVICES
Deposit Sourcing:
➢ Savings Account
➢ LOTUS Profit Sharing Account
➢ Mudaraba Term Deposit
Financing:Not yet operational due to issues of moral harzard.
AREAS OF MUDARABAH OPERATIONS
ISLAMIC BANKING PRODUCTS & SERVICES
Differences between Musharakah and Mudarabah
Musharakah
All partners have the right to
participate in the business.
All partners must contribute capital.
All partners bear loss pro-rata to their
capital contributions
Mudarabah
The Mudarib is solely responsible for managing the
business.
The Rabb al Maalprovides the business
capital.
Rabb al-Maal bears any loss to the
business provided it is not due to the
Mudarib’s negligence
ISLAMIC BANKING PRODUCTS & SERVICES
WAKALAH (AGENCY)
Wakalah is a contract in which a person (the principal or muwakkel) appoints a
representative (the agent or wakil) to undertake transactions on his/her behalf, that the
principal does not have the time, knowledge or expertise to perform themselves — similar to
a power of attorney agreement in conventional legal terms.
The agent's services may include selling and buying, leasing, lending and borrowing, debt
assignment, guarantee, gifting, litigation and making payments, and may be utilized in
numerous Islamic products like Musharakah, Mudarabah, Murabaha, Salam and Ijarah.
Wakalah are of two types viz:
Wakalah without Fee: where the Bank appoint its customer as an agent to undertake
transactions on his/her behalf such as in Murabahah finance, Istisna, etc.
Wakalah with Fee: where Customers appoint the Bank to invest their fund on agency
contract for a fixed fee, and at times with a promise to share from the profit, if the returns on
investment exceeds a particular benchmark.
ISLAMIC BANKING PRODUCTS & SERVICES
KAFALAH (GUARANTEE)
This is a contract in which a third party accepts an existing obligation and becomes
responsible for fulfilling someone’s liability. It is a pledge given to the creditor that a
debtor will repay his debt.
In conventional finance, this situation is called surety or guarantee.
However, in Islamic finance, kafalah is a gratuitous contract. This means that the service
rendered by the guarantor is done freely without any reward or payment. However, it is
possible that a guarantor may recover actual cost incurred for his service.
ISLAMIC BANKING PRODUCTS & SERVICES
QARD HASSAN (BENEVOLENT LOAN)
Qard is a loan extended on a goodwill basis, with the debtor only required to repay the amount
borrowed. It is that loan which a person gives to another as a help, charity or advance for a certain
time (charitable or non-commutative contracts).
The repayment of loan is obligatory.
The lender is not entitled to demand or enjoy any kind of benefits from the borrower on account of
the loan. This is because the lender has not undergone any risk, since the borrower must make
repayment to the lender upon request.
Imposing any specific benefit on account of the loan becomes usury, same applies where the
borrower promises the creditor a gift or benefit on account of the loan.
However, the shariah permits husnul Qada (i.e. gracious repayment of loans/debts) where a debtor
repays the lender in excess of the principal of his free will, devoid of preconditions or prior demands.
ISLAMIC BANKING PRODUCTS & SERVICES
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