Concept, types & Characteristics of different modes of Investments

Concept, types & Characteristics of different modes of Investments

Different Modes of Investment under Islamic Shariah, Concept, Types &Characteristics of different modes of Investments

 Shari’ah

The word “shari’ah” literally means “a way.” In Islamic terminology, it means the legal system of Islam.

The shari’ah is a complete way of life; no aspect of human life is outside its domain. Islam expects a Muslim to follow its laws in every aspect of life: personal and familial, religious and social, moral and political, economic and business, etc.

Sharia has been presented by fear mongers as monstrous, murderous and a grave threat often without even understanding what the term means.

The word sharia means a “path” or “a way” in Arabic and it covers a huge range of human activity. On a personal level, sharia is a system of guidance for everyday life.  It is not an exaggeration to say that it covers a person’s entire existence. Birth, death, marriage, diet, hygiene, sex, beliefs, theology, prayer, fasting, charity and funerals are all covered by sharia. Either way, sharia has been practiced in the west for a very long time.

The word Shariah means “the path to a watering hole.” It denotes an Islamic way of life, not just a system of criminal justice.

It is a code of living that most Muslims adopt as part of their faith.

On a broader level sharia covers a large number of legal branches such as:

  • finance and trade
  • civil law
  • international law
  • constitutional law
  • family law
  • inheritance
  • tort law
  • criminal law
  • military law

 

The word Shariah means “the path to a watering hole.” It denotes an Islamic way of life, not just a system of criminal justice.

It is a code of living that most Muslims adopt as part of their faith.

A.1: MUDARABA

 

What is Mudraba?

 

Definition of Mudaraba:
Mudaraba is a partnership in profit whereby one party provides capitaland the other party provides skill and labour. The provider of capitalis called “Shahib al-maal” while the provider of skill and labour iscalled “Mudarib”.

Types of Mudaraba:
Mudaraba Contracts are generally divided as under:

a) Unrestricted Mudaraba and
b) Restricted Mudaraba

a) Unrestricted Mudaraba:
Unrestricted Mudaraba may be defined as a contract in which the Shahibal-maal permits the Mudarib to administer the Mudaraba fund withoutany restriction.

b) Restricted Mudaraba:
Restricted Mudaraba may be defined as a contract in which the Shahibal-maal restricts the actions of the Mudarib to a specified period orto a particular location or to a particular type of business.

Terms and elements of Mudaraba:

 

>> Contracting Parties:

 

There are two contracting parties in Mudaraba:

  1.     The provider of the capital i.e. ‘Shahib al-maal’ and
    2.      The Mudarib.

>> Capital/Shahib al-maal’/
Capital is the amount of money given by the provider of funds i.e.Shahib al-maal to the Mudarib with the purpose of investing it in theMudaraba business.

>> Profit & Loss:
Profit should be for both Shahib al-maal and Mudarib as per agreedratio. Loss should be borne by the Shahib al-maal.

>> The main features of Mudaraba:

  1. a)      There should be two parties: Shahib al-maal (financer/Investor) and businessman isMudarib (Who provides skill and labour).
    b)      There should be written agreement/contract between the Bankand the businessman which includes nature of business, period/time,sharing of profit etc.
    c)      Bank will finance and the businessman will run the business byproviding his labour& skill.
    d)      The Bank will not interfere in the business.
    e)      The businessman will appoint employee(s) and he will run thebusiness independently.
    f)      The Shahib al-maal /Financier/Investor reserves the right tocheck/verify the accounts of the business at any time.

2.MUSHARAKA
>> Definition of Musharaka:
Musharaka is a contract of partnership between two or more parties inwhich all the partners contribute capital, participate in the management, share the profit in proportion to their capital or as per pre-agreed ratio and bear the loss, if any, in proportion to their capital/equity ratio.

>> Types of Musharaka:
In the context of Islamic Banking financing, Musharaka may be of two types:

  1. Permanent Musharaka
  2. Diminishing Musharaka
  3. Permanent Musharaka:

Permanent Musharaka may be defined as contract of partnership businessbetween the Islamic Bank and its clients in which the Bank participates in the equity and share the profit at a pre-agreed ratio or bear the loss, if any, in proportion to the ratio of capital/equity where termination period of the contract is not specified. This is also called continued Musharaka.

2. Diminishing Musharaka:

Diminishing Musharaka is a special form of partnership in which one ofthe partners promises to buy the share of the other partner graduallyuntil the title to the equity is completely transferred to him.

>>  Contracting Parties:

There are two or more contracting parties known as partners. It is a condition that all the partners should be competent to give or be given power of attorney.

Capital:

Capital contributed by the partners may be in the equal or unequal andin the form of cash or cash equivalent, goods & commodities, assets orproperties etc.

Distribution of Profit:
Profit should be distributed among the partners as per their ratio ofcapital or as per agreement.

Distribution of Loss:
The loss, if incurred in the business, shall be borne by the partnersexactly according to the ratio of their respective capital.

Some Important Features of Musharaka:

1. Capital should be specific
2. Equal share is not a must
3. Nature of capital may be money or valuables
3. Active participation of partners
4. Ratio of profit prefixed
5. Variation in share of profit permissible
6. Participation and sharing profit & loss
7. Partners retains the ownership and right to management

Difference between Mudaraba and Musharaka:

Mudaraba Musharaka
1. The capital in mudaraba is the sole responsibility of Shahib al-maal. 1. In Musharaka it comes from all the partners.
2. In Mudaraba, the Shaheb al-maal has no right to participate in the
managemant which is carried out by the Mudarib only.
2. In Musharaka, all the partners can participate in the management of
the business and can work for it.
3. In Mudaraba the loss, if any is suffered by the Shahib al-maalonly,because the Mudarib does not invest anything. His loss is his labour and skill. 3. In Musharaka, all the partners share the loss to the extent of the
ratio of their investment.

 



 

B.Hire Purchase MusharakaMutanaqasa (HPMM)/ Hire Purchase Shirkatul Melk (HPSM)

 

Hire Purchase MusharakaMutanaqasa (HPMM)/ Hire Purchase Shirkatul Melk (HPSM) means purchasing and acquiring ownership of asset by sharing in equity and paying rents for the rest of the equity held by the Bank or other party.

 

It is a synthesis of three contracts:
1. MusharakaMutanaqasa or Shirkat or ShirkatulMeelk.
2. Ijarah
3. Sale
Under this mode, the Bank and the customer on contract basis jointly purchase vehicles, machineries, building, apartment etc. The customer uses the portion of the assets owned by the bank on rental basis and acquires the ownership of the same assets by way of paying banks portion of the equity on the assets on installments together with its rents as agreed upon.

 

>> Key Features of HPSM:

An agreement is executed between Hiree (Bank) and Hirer (Customer) stipulating the actual prices, monthly rents, price of the bank’s portion of the asset, payment schedule and installment amount and the nature of the security etc.

 

Bank rents out its own portion of the asset to the customer under the terms & conditions of agreement and the customer.

 

In Hire Purchase under MusharakaMutanaqasa Agreement, the exact ownership of both the Hiree (Bank) and Hirer (Client) must be recognized. However, if the partners agree and wish that the asset purchased may be registered in the name of any one of them, jointly or in the name of any third party, clearly mentioning the same in the Hire Purchase MusharakaMutanaqasa

Agreement.

 

The customer (Hirer) pays off bank’s portion of equity in installments as per the terms and conditions of the agreement.

 

As the ownership of hired portion of the asset lies with the Hiree (Bank) and rent is paid by the Hirer (Customer) against the specific benefit, the rent is not considered as price or part of price of the asset.

 

In the HPSM agreement Hiree does not sell or Hirer does not purchase the asset but they promise to sell and purchase the same part by part only.

 

Ownership of asset transfer to sole owner from joint ownership.

 

The customer acquires full ownership of the asset after payment of the entire dues of the bank.

 

Bank will not share the loss of business as this is not the mode of sharing profit or loss.

Even though if a loss is incurred due to Act of Allah, the loss may be shared as per agreed ratio.

 

>> Fixation of Rent:

  1. Rent will be fixed as per agreement between Bank and Customer.
  2. Rent on rent cannot be charged.
  3. Rent will be paid from the date only upon the asset is in usable condition.
  4. Any default of paying rent will increase the total rent.
  5. Charging of rent on grace period is highly objectionable as the asset is not generating income.
  6. Rent may be charged in gestation period if the asset is delivered in useable condition.
  7. Bank may recover the loss of gestation period by increasing the rate of rent for the remaining period or by revaluing the asset of the completion of the grace period.
  8. The amount of rent will be decreasing proportionately with the decrease of hirer’s ownership and increase of hirer’s ownership on asset as per Diminishing Balance Method.

 

Differences among Ijara, Hire Purchase and Hire Purchase MusharakaMutanaqasa (HPMM)/ Hire Purchase Shirkatul Melk (HPSM)

 

  1. HPMM is not only hire purchase but also it is the sharing of ownership.
  2. As HPMM/HPSM is sharing of ownership it differs with the conception of single ownership of asset purchase like Ijara.
  3. HPMM/HPSM is the sharing of ownership on asset not sharing of profit or loss like Musharaka.
  4. HPMM/HPSM is not diminishing Musharaka as the mentioned method implies the sharing of ownership not sharing of profit.
  5. The question of sharing of loss will only arises out from ownership risk.
  6. This ownership of risk will arise out only under act of Allah.

 

 

C] Bai Mechanism (Buying and Selling) Mode:

 

  1. Bai Murabaha mode of investment: 

The term “Bai-Murabaha” have been derive from Arabic words ‘Bai’ and ‘Ribhun’. The word ‘Bai’ means purchase and sale and the word ‘ribhun’ means an agreed upon profit. ‘Bai-Murabaha’ means sale on agreed upon profit.
Bai-Murabaha may be define as a contract between a Buyer and Seller Under which the seller sells certain specific goods permissible underIslamic shariah and the Law of land to the Buyer at a cost plus agreed profit payable in cash or on any fixed future date in lump sum or by installments.

Important Features of Bai-Murabaha:

> To offer an order by the client to the bank.
> To make the promise binding upon the client to prophase from the bank and also   to indemnity the damages caused by breaking the promise.
>  To take security in the form of cash/kind/collaterals.
> To document the debts resulting from Bai-Murabaha.
> Stock and availability of goods is a basic conditi9on.
> Bank must bear the risk until delivery of goods to the client.
> Bank may sell it at a higher price.
> Price once fixed cannot be changed.

b) Bai-Muajjal mode of investment:

 

The term ‘Bai’ and the ‘Muajjal’ have been derive from Arabic words ‘Bai’ and ‘Ajalu’. The word ‘Bai’ means purchase and sale and the word ‘Ajalu’ means a fixed time or fixed period. ‘Bai-muajjal’ means sale for which payment is made at a future fixed date or within a fixed period. In short, it is a sale on credit.
Bai Muajjal may be defined as a contract between a buyer and a seller under which the seller sells certain goods permissible under Islamic Shariah and the Law of the country to the buyer at an agreed fixed price payable at a certain fixed future date in lump sum or within a fixed period by fixed installment. The seller may also sell goods purchase by him as per order and specification of the buyer.

Important Features of Bai-Muajjal:

It is permissible for the client to offer an order to purchase by the Bank particular goods deciding its specification and committing himself to buy the same from the bank on Bai-muajjal i.e. deferred payment sale at fixed price.
>It is permissible to make the promise binding upon the client to purchase from the Bank, that is, he is either satisfy the promise or to identify the damages caused by breaking the promise without excuse.

>It is permissible to take cash/collateral security to Guarantee the implementation of the promise or to identify the damages.

>Stocks and availability of goods is a basic condition for signing a Bai-Muajjal Agreement.

>Therefore, the Bank must purchase the goods as per specification of the Client of goods to acquire ownership of the same before signing the Bai-Muajjal Agreement with the client.
>After purchase of goods the Bank bust bear the risk of goods until those are actually delivered to the Client.
>The Bank must deliver the specified goods to the Client on specific date and at specific place of delivery as per Contract.
>The Bank may sell the goods at a higher price than the purchase price to earn profit.

>The price once fixed as per agreement and deferred cannot be further increased.
>The Bank may sell the goods at one agreed price which will include both the cost price and the profit. Unlike Bai-Murabaha, the Bank may not disclose the cost price and the profit mark-up separately to the Client.

Difference between Murabaha and Bai-Muazzal:

Murabaha Musharaka
1. Bank sell it at a higher price an spot payment or as any future date. 1. Bank sell it at a higher price but payment will be deffered.
2. Bank must bear the risk until delivery of goods to the client. 2. Client bear the risk of goods as the Possession of goods are in
party control.
3. Possession  of goods under bank’s control. 3. Possession  of goods under party’s control.
4. Cost of the goods sold and the amount of profit should be mentioned in the Murabha Agreement. n Bai-Muazzal mode any selling price of goods should be mentioned in the Bai-Muazzal agreement
5. Pledge of goods by the bank. 5. Goods to be hypothecated  by the bank.

 

  1. c) Bai- Salam

 

Question: What is the meaning of Bai- Salam?

 Ans: Bai- Salm has two words. One” Bai” and another one is “ Salam”. “Bai” means “ sales and purchase” and “ Salam” means advance sale and purcahse.

 Question: How to define Bai- Salam?

Ans: Bai-salam defined as a contract or agreement with a buyer and seller in which the seller is sold in advance the certain commodity (ies)/ products(s) permissible under Shairah and law of land to the buyer as per terms and conditions of agreement. And the merchandise/ commodity (ies)/ products(s) is/are delivered as per specification, size, quality at a future time in a specific place.

 We can say in other words, Bai-salam is an advance buying and selling procedure which is allowed by the shariah principle. In this mode, commodity (ies)/ products(s)/ goods are supplied after a specific time (in future) but the payment/exchange is made ob spot (i.e. at present).

 In a nutshell, Bai-Salam is that type of procedure where the price is paid in cash, but the delivery of goods is deferred

Question: What are the feature of Bai- Salam?

Ans: Important features of Bai- Salam are given bellow:

1)      In this mode, the seller can sold the goods without having the physical possession.

2)    If the goods are ready for sales, Bai-salam mode is not allowed by the Islamic Shariah Principle.

3)    Generally, this mode is used to meet up the urgent need of the shortage of fund/cash of Industrial and Agricultural products.

4)    It is permissible to obtain collateral security to minimize the risk of investment.

5)    It is also permissible to obtain mortgage or personal guarantee from the third party as security at the time of signing agreement or before the signing of the agreement.

6)    The seller (manufacturer)/ client may be made agent of the to sell the goods delivered to the bank by him provided a separate agency agreement is executed between the bank and the client (Agent ).

7)    This mode is used for only agricultural product.

8)    Detailed specification of the goods must clearly mentioned in the contract to avoid ambiguity.

9)    The exact time and place of delivery must be specific.

10)  Mode of transportation, transport costs, storage charge/ godown rent, insurance etc if any (who will bear) must specified in the contract.

11)  All risk and responsibility on the seller or client, if any loss arises, the seller must payback the value of commodities/products.

12)  It is not necessary to mention cost of commodities/products and profit separately in the contracts; only purchase price may be mentioned.

13)  The seller shall responsible for maintaining quantity, quality, and specification of the commodities/ products until making physical/constructive delivery of the same to the buyer.

 

Procedure of Bai-Salam investment in Export oriented industries

  1. a)        This mode of investment may be allowed after opening of back to back L/C, arrival of raw materials, shipment of raw materials etc.
  2. b)       The bank may sell/export it goods through the seller/exporter (client) under a separate agreement or this may be done dully incorporating in the Bai-Salam Agreement unless otherwise settled and prescribed.
  3. c)        The price of the Bai-Salam deal shall be fixed up keeping in view the export/sales price mentioned in the relative export L/C/contract, the bank shall fix up its profit as per rate prescribe by the head office time to time.

The following Accounting entries shall be passed at various steps of Bai-Salam Investment:

 Step One:

When bank as Bai-Salam purchaser make advance payment to the client

(Producer/Manufacturer /supplier) against purchase of a certain quantity/number of goods a per Bai-Salam Agreement:

Bai-Salam Investment A/C No. ……of M/S…..(Client’s name)
Payment Order/Demand Draft/ TT a favoring to the client or Current account of the client.

[ Being the amount paid for purchase of ………….units of ………under Bai-Salam mode of investment from M/S…………for ultimate sale/export of the same as per Bai-Salam Agreement.]

 

Step Two:

After export/sale, when the client(Producer/Manufacturer /supplier) submits the bills either foreign or local to the bank and if the bank purchases or negotiates the same:

 

FBP/FBN/IBP Account of M/S. ….(Producer/Manufacturer /supplier)
Bai-Salam Investment A/C No. ……of M/S…..(Client’s name)- to the extent of outstanding liability
Investment A/C (Bai-salam) (ensuring prescribed Rate of Return fixed by HO.)- to the extent of profit as per Agreement.
F.C. held against B.B. Bills
Various Investment A/Cs liability
Current Account No………..M/S ……( Client Producer/ Manufacturer/Supplier)( Being the sales proceeds of the balance/ remaining items/goods after adjustment of client’s liability, if any, due to the bank including profit)

 

Step Three:

 When Export/Sales proceeds is realized:

Bank’s General (ID) Account
FBP/FBN/IBP Account of M/S. ….(Producer/Manufacturer /supplier)
{Being amount of FBP/FBN/IBP Account (export proceeds) realised}

 NB: Any other entries regarding FBP/FBN to be passed as per instruction/circular issued/ to be issued by ID from time to time.

Step Four :

After export/sale, while the client (Producer/Manufacturer /supplier) submits the bills either foreign or local to the bank and if the bank sends of the same for collection:

No entry for Bai-Salam investment but contra liability vouchers is to be passed regarding FBC as per instruction/circular issued/ to be issued by ID from time to time.

While the proceeds of Bills sent for collection is realised:

 

Step Five :

Bank’s General (ID) Account
Bai-Salam Investment A/C No. ……of M/S…..(Client’s name)- to the extent of outstanding liability
Investment A/C (Bai-salam) (ensuring prescribed Rate of Return fixed by HO.)- to the extent of profit as per Agreement.
F.C. held against B.B. Bills
Various Investment A/Cs liability
Current Account No………..M/S ……( Client Producer/ Manufacturer/Supplier)( Being the sales proceeds of the balance/ remaining items/goods after adjustment of client’s liability, if any, due to the bank including profit)

 

(Being the proceeds of FBC No….against the bills submitted by the client (Producer/ Manufacturer/Supplier realised).

2.The contra entry passed earlier while sending the bills on collection to be reversed.

If the client delays in production /delivery /supply/sale/export the goods and if fine is charges as per contract:

Bai-Salam Investment A/C No. ……of M/S…..(Client/ Producer/Manufacturer/Supplier)
Investment Income A/C(Being the amount recovered of fine charged for the delayed period as per contract.)

If the client fails to produce /delivery /supply/sale/export the goods, Bank will realise the amount along with fine passing the following entries:

Current A/C No….. of the Client/ Producer/Manufacturer/Supplier)
Bai-Salam Investment A/C No. ……of M/S…..( Client/ Producer/Manufacturer/Supplier))- to the coverage of outstanding liability
Investment Income A/C-to coverage fine amount.(Being the amount recovered/realized for closing the Bai-Salam Investment A/C of the client along with fine as per contract)

If the investment A/C becomes classified as SS/DF, the following entries shall be passed for the Investment Income/Fine accrued for the period from the beginning of the year to the date of classification (for the unclassified/overdue period of the year). If it is classified as Bad/Loss (B/L) accounting of investment Income/ Fine must be stopped

(as per Instruction of Bangladesh Bank i.e. central Bank)

Bai-Salam Investment A/C No. ……of M/S….. (Client/ Producer/Manufacturer/Supplier)( for the classified period)
Investment Income A/C (for the unclassified overdue period of the year)
Fine Suspense A/C (Bai-Salam)(Being the amount recovered of fine transferred to fine suspense A/C against classified Bai-Salam Investment A/C No……of M/S……….)

At the time of filing suit for recovery of B.L. Classified Investment, the following entries shall be passed. Every effort be exhausted for disposal of Asset/Property, if any, under Bank’s custody before filing the suit.

(i)

Bai-Salam Investment A/C No. ……of M/S….. (Client/ Producer/Manufacturer/Supplier)( for the classified period)
Fine Suspense A/C (Bai-Salam)(Being the amount of fine accrued for B/L classified period not charged earlier, now charged)

(ii)

a)      Suspense A/C : Court Fee b)     Expenditure A/C : Legal Expenses
Payment order / A/C of the lawyer(Being the amount paid to the lawyer for court fees and lawyer charges and other related expenses for filing suit)

 

while Recovery /Deposit is made from/ by the client after filing suit, the following entries shall be passed:

Cash/ Current A/C No. ……of the client/ Producer/Manufacturer/Supplier
Bai-Salam Investment A/C No……of M/S…. the client/ Producer/Manufacturer/Supplier(Being the amount paid/deposited by the Investment client after filing suit)

 

 

 

  1. d) ISTISNA’AMeaning:
    The word Istisna’a has been derived from a Arabic word which means Industry. Istisna’a means to purchase specific product(s) by placing order to a manufacturer or to sale specific product(s) after having the same manufactured against order of a buyer.

Definition:
Istisna’a is a contract between a manufacturer/seller and a buyer under which the manufacturer/seller sells specific product(s) after having manufactured, permissible under Islamic Shari’ah and Law of the Country after having manufactured at an agreed price payable in advance or by instalments within a fixed period or on/within a fixed future date on the basis of the order placed by the buyer.

In short, it is a contract with a manufacturer to make something.
Features of Bai-Istisna’a:

  1. a)      Istisna’a contract is another exceptional method where by commodities are bought and sold without existence of it.
  2. b)      Delivery of goods is deferred and payment may also be delayed. Advance payment/ spot payment like Bai-Salam is not necessary. However payment may be made in advance or by installments.
  3. c)      Sometimes advance payment against the goods is being paid to meet the production cost.
  4. d)      Buyer gets the opportunity to make payment within the stipulated date in future or by installments.
  5. e)      If the production of the commodity started or part payment is made, none of them can revoke the contract.
    f)      If the product(s) are ready for sale, Istisna’a is not allowed in Shari’ah.
    g)      It gives the buyer opportunity to pay the price in some future dates or by installments.
    h)      Istisna’a is specially practised in Manufacturing and Industrial sectors. However, it can be practised in agricultural and constructions sectors also.Diference between Istisna’a and Bai-Salam:

 

Sl Istisna’a Bai-Salam
1 The subject of istisna’a is always a thing which needs manufacturing 1 Bai-Salam can be effected on anything, no matter whether it needs manufacturing or not.
2 It is not necessary in Istisna’a that the price is paid in full in advance. 2 It is necessary in Bai-Salam that the price is paid in full in advance.
3 The contract of Istisna’a can be cancelled before the manufacturer
starts the work.
3 The contract of Bai-Salam, once effected, can not be cancelled unilaterally.
4 It is not necessary in Istisna’a that the time of delivery is fixed. 4 The time of delivery is an essential part of the sale in Bai-Salam.

Islamic Banking Modes

 

Islamic banks are mainly invested in the following modes:

 

1)            Mudaraba;

2)            Musharaka;

3)            Bai-Murabaha (Murabaha to the purchase orders);

4)            Bai-Muajjal;

5)            Salam and parallel Salam;

6)            Istisna and parallel Istisna;

7)            Ijara;

8)            IjarahMuntahiaBittamleek (Hire Purchase);

9)            Hire Purchase MusharakaMutanaqisa (HPMM);

10)          Direct Investment;

11)          Investment Auctioning etc.

12)          Quard

13)          Quard Hassan etc.

 

1.Mudaraba:

Mudaraba is a shared venture between labour and capital. Here Bank provides with entire capital and the investment client conducts  the business. The Bank, provider of capital, is called Sahib-Al-Maal and the client is called Mudarib.  The profit is to be distributed between the Bank and the investment client at a predetermined ratio while the bank has to bear the entire loss, if any.

 

  1. Musharaka:

Musharaka means partnership business. Every partner has to provide more or less equity funds in this partnership business. Both the Bank and the investment client reserve the right to share in the management of the business. But the Bank may opt to permit the investment client to operate the whole business. In practice, the investment client normally conducts the business. The profit is divided between the bank and the investment client at a predetermined ratio. Loss, if any, is to be borne by the bank and the investment client according to capital ratio.

 

  1. Bai-Murabaha:

Contractual buying and selling at a mark-up profit is called Murabaha. In this case, the client requests the Bank to purchase certain goods for him. The Bank purchases the goods as per specification and requirement of the client. The client receives the goods on payment of the price which includes mark-up

profit as per contract. Under this mode of investment the purchase/ cost price and profit are to be disclosed separately.

 

4.Bai-Muajjal:

Meaning: “Bai-Muajjal” means sale for which payment is made at a future fixed date or within a fixed period. In short, it is a sale on Credit.

 

It is a contract between a buyer and a seller under which the seller sells certain specific goods (permissible under Shariah and Law of the Country), to the buyer at an agreed fixed price payable at a certain fixed future date in lump sum or within a fixed period by fixed installments. The seller may also sell the goods purchased by him as per order and specification of the buyer. In Bank’s perspective, Bai-Muajjal is treated as a contract between the Bank and the Client under which the bank sells to the Client certain specified goods, purchased as per order and specification of the Client at an agreed price payable within a fixed future date in lump sum or by fixed installments.

 

  1. Salam and Parallel Salam:

Salam means advance purchase. It is a mode of business under which the buyer pays the price of the goods in advance on the condition that the goods would be supplied / delivered at a particular future time. The seller supplies the goods within the fixed time.

 

Parallel Salam:

Parallel Salam is a Salam contract whereby the seller depends, for executing his obligation, on receiving what is due to him – in his capacity as purchaser from a sale in a previous Salam contract, without making the execution of the second Salam contract dependent on the execution of the first one. The following conditions are essential in the contracts of Murabaha, Bai-Muajjal and Salam. The respective contracts must include the following aspects regarding the goods:

 

*   Number/Quantity

*   Quality

*   Sample

*   Price and amount of profit

*   Date of supply/time limit

*   Place of supply

*   Who will bear the cost of supply?

*   Timeframe for payment in case of Bai-Murabaha and Bai-Muajjal.

 

  1. Istisna and parallel Istisna:

A contract executed between a buyer and a seller under which the seller pledges to manufacture and supply certain goods according to specification of the buyer is called Istisna. An Istisna agreement is executed when a manufacturer or a factory owner accepts a proposal placed to him by a person or an Institution to produce/manufacture certain goods for the latter at a certain negotiated price. Here, the person giving the order is called Mustasni, the receiver of the order is called Sani and the goods manufactured as per order is called Masnu. An order placed for manufacturing or producing those goods which under prevailing customs and practice are produced or manufactured will be treated as

 

Istisna contract.

 

 Conditions & characteristics of Istisna are enumerated below:

  1. a) The concerned Agreement must contain the details, such as, the type, class, quantity and features of the goods to be produced, so that no misunderstanding is created later on.

 

  1. b) The price has to be settled; payment time/schedule and modes thereof is to be predetermined.
  2. c) When, where and on whose cost the goods to be supplied has to be clearly mentioned.
  3. d) If agreed by both parties, payment may be made in advance to the seller in part or in full or may be deferred to be paid in due course/ agreed time.

 

  1. e) Generally timeframe  is  not  mandatory  for  supplying  the  goods  under Istisna agreement. It may be executed without determining timeframe. But in case of bank, timeframe for supplying goods must be determined to avoid any dispute in future.

 

  1. f) Condition for imposing stipulated compensation/penalty may be included in the Istisna agreement against the party who breaches the terms of the agreement causing the other party to suffer. But no compensation/penalty would be imposed on any party if it happens for any valid reason or unavoidable circumstances.

 

  1. g) As per opinion of the contemporary jurists, the compensation in case of Istisna may be treated as legal income.

 

Parallel Istisna:

 

If it is not stipulated in the contract that the seller himself would produce/provide the goods or services, then the seller can enter into another contract with third party for getting the goods or services produced/ provided by the third party. Such a contract is called Parallel Istisna. This may be treated as a sub-contract.

 

The main features of Istisna contract are:

 

  1. i) The original Istisna contract remains valid even if the Parallel Istisna contract fails and the seller will be legally liable to produce/ provide the goods or services mentioned in the Istisna contract.
  2. ii) Istisna and Parallel Istisna contracts are treated as two separate contracts.

iii) The seller under the Istisna contract will remain liable for failure of the sub-contract.

 

  1. Ijara :

 

The mode under which any asset owned by the bank, by creation, acquirement / or building-up is rented out is called Ijara or leasing. In this mode, the leasee pays the Bank rents at a determined rate for using the assets/properties and returns the same to the Bank at the expiry of the agreement. The Bank retains absolute ownership of the assets/properties in such a case. However, at the end of the leased period, the asset may be sold to the client at an agreed price.

 

 

  1. IjarahMuntahiaBittamleak (Hire-Purchase):

 

Under  this  mode,   the  bank purchases vehicles, machineries and  instruments, building, apartment etc. and allowed clients to use those on payment of fixed rents in installments with the ultimate objective to sell the asset to the  client at the end of the rental period . The client acquires the ownership/ title of the assets/ properties subject to full payment/ adjustment of all the installments.

 

  1. Hire-purchase MusharakaMutanaqasa (HPMM):

 

Hire-purchase  MusharakaMutanaqasa  means purchasing and acquiring ownership by one party by sharing in equity and paying rents for the rest of  the equity held by the Bank/or other party. Under this mode, the Bank and the client on contract basis jointly purchase vehicles, machineries, building, apartment etc. The client uses the portion of the assets owned by the bank on rental basis and acquires the ownership of the same assets by way of paying banks portion of the equity on the assets in installments together with its rents as agreed upon.

 

The features of this mode are elaborated below:

 

  1. a) The client applies to the Bank expressing his/her wishes to purchase the assets/properties and the bank accords its approval after proper evaluation/ scrutiny.

 

  1. b) The client deposits his/her share of equity with the bank after obtaining approval and the bank pays total price of the assets/properties together with its equity.

 

  1. c) Before purchase of the assets/properties an agreement is executed stipulating the actual prices, monthly rents, price of the bank’s portion of the assets/properties, payment schedule and installment amount and the nature of the security etc.

 

  1. d) The bank shall rent out its own portion of the assets/properties to the client as per terms & conditions of the agreement.

 

  1. e) The client (Hirer) pays off in installments bank’s portion of equity on the assets together with its fixed rent as per the terms and conditions of the agreement.

 

  1. f) With the payment of installments by the client, the ownership of the bank in the assets/properties gradually diminishes, while that of the client increases.

 

  1. g) The amount of  the  rent  receivable  by  the  bank,  reduces  gradually proportionate to the increase in the ownership of the client on the assets/properties.

 

  1. h) The client acquires full ownership of the goods/assets after payment of the entire dues of the bank.

 

  1. i) The client may acquire the full ownership of the assets/properties before expiry of the deal by paying off the entire dues to the bank.

 

  1. j) The rent remains payable in proportion to Bank’s ownership, if the client fails to pay the due installment(s).

 

  1. k) The bank can take of the assets / properties under its control, if the client fails to pay the installment(s) as per the terms and conditions of the agreement.

 

  1. L) The ownership of the assets/properties remains with the bank until the entire equity provided by the bank together with the fixed rent is fully paid off. On full payment/ adjustment of Bank’s dues, it transfers the ownership to the client.

 

  1. m) The amount which the bank receives as rent is its income. The rent should not treat as a part of the equity in any way.

 

  1. Direct Investment:

Under  this  mode,  the  bank  can  under  its  full proprietorship conduct business by directly investing in the industries, trading, transports etc. In these cases, the profit/loss fully goes to the bank.

 

11.Investment Auctioning:

Selling by auction of those assets/goods acquired by the bank through direct investment is called Investment auctioning. Generally, the bank establishes industrial units by direct investment, makes the same operationally profitable and then sells out on auction. This mode of investment is very helpful for  industrialization of the country.

 

12.Quard:

It is a mode to provide financial assistance/ loan with the stipulation to return the principal amount in the future without any increase thereon.

 

  1. Quard Hassan:

This is a benevolent loan that obliges a borrower to repay the lender the principal amount borrowed on maturity. The borrower, however, has the discretion to reward the lender for his loan by paying any amount over and above the amount of the principal provided there will be no reference (explicit or implicit) in this regard. If a bank provides its client any loan, it can receive actual expenditure relating to the loan as service charge only once. It cannot charge annually at a percentage rate. If a loan is provided against the money deposited by a client in the bank, it has the right not to pay any profit against the amount of money given as loan. But profit should be paid on the rest of the amount deposited as per previous agreement.

 

 

 

 

 

 

 

 

Different Modes of Investment under Islamic Shariah, Concept, Types &Characteristics of different modes of Investments

 

 

  1. A) Different modes of Investment under Islamic Shariah

 

1)            Mudaraba;

2)            Musharaka;

3)            Bai-Murabaha (Murabaha to the purchase orders);

4)            Bai-Muajjal;

5)            Salam and parallel Salam;

6)            Istisna and parallel Istisna;

7)            Ijara;

8)            IjarahMuntahiaBittamleek (Hire Purchase);

9)            Hire Purchase MusharakaMutanaqisa (HPMM);

10)          Direct Investment;

11)          Investment Auctioning etc.

12)          Quard

13)          Quard Hassan etc.

 

  1. B) Concept, types & Characteristics of different modes of Investments

 

 

  1. a) Sharing or Partnership Mode:
  2. MUDARABA
  3. MUSHARAKA

 

 

  1. b) Partnership in ownership or ShirkatulMeelkMode:

Hire Purchase UnderShirkatul Melk (HPSM)

 

 

  1. c) Bai Mechanism (Buying and Selling) Mode:

 

  1. Bai- Murabaha
  2. Bai-Muajjal
  3. Bai-Salam
  4. Bai-Istishna