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

3. Islamic Banking Modes Murabaha Ijarah Musawama Musharaka Diminishing
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. 60 Rs. 40
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 RABBUL MAL MUDARIB
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 2. Agency Stage 3. Acquiring Possession
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- Promise stage
Stage One (a) for Murabaha financing
1. Client approach the bank for facility through Murabaha.
Facility approved
Bank
Client
STEP BY STEP MURABAHA FINANCING
1.The client and the institution sign an overall agreement whereby the institution promises to sell and the client promises to buy the commodity from time to time on an agreed ratio of profit added to the cost. This agreement may specify the limit up-to which the facility may be availed.
2.An agency agreement is signed by both parties in which the institution appoints the client as his agent for purchasing the commodity on its behalf.
3.The client purchases the commodity on behalf of the institution and takes possession as the agent of the institution.
4.The client informs the institution that it has purchased the commodity and simultaneously makes an offer to purchase it from the institution.
5.The institution accepts the offer and the sale is concluded whereby ownership as well as risk is transferred to the client.
All the above are necessary to effect a valid murabaha. If the institution purchases the commodity directly from the supplier it does not need any agency agreement.
Note: The most essential element of the transaction is that the commodity must remain in the risk of the institution during the period between the third and the fifth stage.
The above is the only way by which this transaction is distinguished from an ordinary interest-based transaction 18 18

19. Stage One (b) for Murabaha financing
1- Promise stage
Stage One (b) for Murabaha financing
1. Client and bank sign an agreement to enter into Murabaha.
Murabaha Facility Agreement
MOU
Bank
Client
STEP BY STEP MURABAHA FINANCING
1.The client and the institution sign an overall agreement whereby the institution promises to sell and the client promises to buy the commodity from time to time on an agreed ratio of profit added to the cost. This agreement may specify the limit up-to which the facility may be availed.
2.An agency agreement is signed by both parties in which the institution appoints the client as his agent for purchasing the commodity on its behalf.
3.The client purchases the commodity on behalf of the institution and takes possession as the agent of the institution.
4.The client informs the institution that it has purchased the commodity and simultaneously makes an offer to purchase it from the institution.
5.The institution accepts the offer and the sale is concluded whereby ownership as well as risk is transferred to the client.
All the above are necessary to effect a valid murabaha. If the institution purchases the commodity directly from the supplier it does not need any agency agreement.
Note: The most essential element of the transaction is that the commodity must remain in the risk of the institution during the period between the third and the fifth stage.
The above is the only way by which this transaction is distinguished from an ordinary interest-based transaction 19 19

20. Stage One (c) for Murabaha financing
1- Promise stage
Stage One (c) for Murabaha financing
. Client submit the purchase requisition to the bank.
purchase requisition /Promise to the bank.
Bank
Client
STEP BY STEP MURABAHA FINANCING
1.The client and the institution sign an overall agreement whereby the institution promises to sell and the client promises to buy the commodity from time to time on an agreed ratio of profit added to the cost. This agreement may specify the limit up-to which the facility may be availed.
2.An agency agreement is signed by both parties in which the institution appoints the client as his agent for purchasing the commodity on its behalf.
3.The client purchases the commodity on behalf of the institution and takes possession as the agent of the institution.
4.The client informs the institution that it has purchased the commodity and simultaneously makes an offer to purchase it from the institution.
5.The institution accepts the offer and the sale is concluded whereby ownership as well as risk is transferred to the client.
All the above are necessary to effect a valid murabaha. If the institution purchases the commodity directly from the supplier it does not need any agency agreement.
Note: The most essential element of the transaction is that the commodity must remain in the risk of the institution during the period between the third and the fifth stage.
The above is the only way by which this transaction is distinguished from an ordinary interest-based transaction 20 20

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

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

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

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

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

26. 4. Execution of Murabaha 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)
Bank
Client
Payment of Price 26

27. GENERAL MECHANICS VENDOR ISLAMIC BANK CUSTOMER
Transfer of Title
Transfer of Title
VENDOR
ISLAMIC
BANK
Agreement
CUSTOMER
Payment of Purchase Price
Payment of Marked-up Price
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 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 Credit Prising risk Banking
Risks
Credit
Liquidity
Credit
Prising risk
Market
Foreign Exchange
Solvency
Operational 29

30. Murabahah Calculation Exercise:
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.

31. Murabahah Calculation Exercise
Particulars
Amount (Rs.)
Cost of goods
Rs. 50,000
Rate of Profit
10% p.a.
Carriage
5% of cost
Total cost
50000 x 5%
=52500
Profit calculation
52500 x 10% x 6/12 = 2625
Murabahah Price
= 55125
Amount of Installment
55125/6 =
Cost = 8750
Profit=

32. Following 3 Basic Rules of Bai are exceptional for Salam & Istisna’
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