|



Ô

 
 CAMELS RATINGS
‡ Examiners continue to emphasize the asset/liability
management process. Banks must manage their
financial position and

 rating.

‡ C - Capital adequacy
A - Asset quality
M - Management quality
E - Earnings
L - Liquidity
S - Sensitivity to Market Risk
 rohibition of Riba

Those who take „
 è s
 o
inte
est) will not stand b t as stands the one whom the
demon has d
iven c
az b his to ch. That is beca se the have said: T
ading is b t like
„
. So, whoeve

eceives an advice f
om his Lo
d and stops, he is allowed what has
passed, and his matte
is p to Allah. And the ones who
eve
t back, those a
e the people
of Fi
e. The
e the
emain fo
eve
.
Allah dest
os „
 and no
ishes cha
ities. And Allah does not like an sinf l disbelieve
.

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 Islamic Banking Growth
‡ First formal Institution: Mit Ghamar Saving Banks, Egypt
(1963-67)
‡ Today: Over 300 institutions worldwide in over 75 countries
‡ Islamization at National levels: Sudan, Iran and Pakistan
‡ Comprehensive levels as a system: Malaysia and Bahrain
‡ Parallel Banking Mega Groups: e.g., Arab Banking
Corporation, Citibank, HSBC, Kleinworth Benson, The
Australia and New Zealand Banking Group, United Bank of
Kuwait
[
 |nf
ast
ct
e |nstit tions
  


     Liquidity
|    Management Center
|   


 ||

International Islamic Islamic Financial

Financial Market Services Board
||
 |

International Islamic
Rating Agency
|| 
ü
 Some Common Myths and Mis-
Conceptions-1
‡ Any return on deposit is Riba
‡ If return is pre-fixed, it becomes Riba
‡ Repayment of loans in Not a serious issue. It should be
waived off (Qard e Hassan)
‡ Trade rofit is similar to Interest on Loans / Debts
‡ Sale rice of Cash and Credit sale Must be same
‡ rofit margin on credit sales by banks resembles Riba
‡ Money can be rented like other assets
‡ roducts of Islamic banking look the same as those of
conventional banking ·
 Myths-2
‡ Hazrat Muhammad ( BUH) himself carried out trading.
Trading profits are allowed because they involve the
jfforts and Risk of the trader
‡ Islam recognizes the concept of Time Value of Money so
it allows traders to charge a different pre determined
and mutually agreed price for cash and credit sales
‡ Therefore, when banks extend some goods to customers
(and not money), they have a right to earn some profit
when the customer will not pay right away

Î
 isting ishing Feat
es
Conventional Banking
Conventional banking prices
money
epositors get a fixed rate
regardless of the bank¶s
profitability, thus insulating
them from the bank¶s true
performance
eals in money or papers
Islamic Banking
Islamic banking prices goods and
services (a
 )
Profit is shared with the depositor,
higher the bank¶s profit, higher the
depositors¶ income
eals in assets
â
 Definition of Riba
‡ Any stipulated profit on any debt is Riba
‡ Any increase over and above the principal
amount payable in a contractual agreement /
obligation is Riba if it is not covered by a
corresponding increase in the
± Commodity
± Labor
± Risk or
± Expertise
 
 Types of Riba
‡ 

  ÷
   

± Quality premium in exchange of low quality with better
quality goods of same kind; prohibited e.g. dates for
dates, wheat for wheat etc.

‡     ˜
   

± Riba Al-Nasia (Riba Al-Ouran) involved in credit/delay;
modern banking transactions falls under Riba Al-
Nasia,
10
 Islamic Sale

‡ Definition of Sale è 

±      

     

±   
  

 

11
 Islamic Sale
Ë 
 4ai Sahih

‡   
  


   

‡   
  

±
  
±  

± 
±  !

12
Islamic Modes of Financing
Debt Creating Modes
Murabaha
Salam
Istesna
Ijara
artnership Based Modes
Musharakah
Mudarbah
1(
 Islamic Modes of Financing
‡ The basic conditions for a @alidity of a sale in Shriah are:
± The purchased commodity must be existing
± The seller should have acquired the ownership of that
commodity
± The commodity must be in the physical or constructive
possession of the seller

1[
 Murabaha
‡ Murabaha is a particular kind of sale where the
seller discloses its cost and profit charged
thereon
‡ The price in this sale can be both on spot and
deferred

1ü
 Banking Murabaha
‡ It is a contract wherein the institution, upon request by the
customer, purchases a asset from the third party usually a
supplier /
vendor and resells the same to the customer either against
immediate payment or on a deferred payment basis
‡ It is a bunch of contracts completed in steps and ultimately
suffices the financial needs of the client
‡ The sequence of their execution is extremely important to
make the transaction Shariah compliant
‡ The Bank / Institution is the seller and the client is buyer

1·
 Banking Murabaha
‡ It is a fixed price sale and normally is
done for short term
‡ The transaction can be used in order
to meet the working capital
requirements however it cannot be
used to meet cash / liquidity
requirements of the customer
1Î
 Banking Murabaha -
  
 

Ë! |
|
 " !




 The c stome
app
oaches the Bank with the
eq est fo

financing
 The Bank p
chases and
eceives title of owne
ship f
om the
vendo

 The Bank makes pament to the vendo

 The Bank t
ansfe
s the title ove
to the c stome
pon pament
 The c stome
makes pament p-f
ont o
on a defe

ed basis
 Basic Rules For Murabaha
‡ Subject of sale must exist
‡ It should be in ownership of the seller at the time
of sale
‡ Subject of sale should be in physical or
constructive possession of the seller
‡ The sale should be instant and absolute
‡ Subject matter should be something having @alue

1 
 Basic Rules For Murabaha

‡ Subject of sale should not be used for

un-Islamic purpose
‡ It should be specific and identifiable
‡ 4uy 4ack arrangement is not allowed
‡ Deli@ery date should be certain
‡ Price certainty
‡ Sale must be unconditional
20
   
‡ Seller undertakes to supply specific goods to the
buyer at a future date in exchange of an
advanced price fully paid at spot
‡ rice is in cash at spot but the supply of goods is
deferred

‡ Background of Salam
± Before prohibition of interest farmers used to get interest based
loans for growing crops and harvesting. After prohibition of
interest, they were allowed to do Salam transactions. This
helped them to get money in advance for their needs

21
   
‡ urpose of Salam
± To meet the needs of small farmers who need money to grow
their crops and to feed their family up to the time of harvest
± To meet the need of traders for import and export business

‡ Benefits
± Salam is beneficial to the seller, because he receives the price
in advance,
± It is beneficial to the buyer, because normally, the price in
Salam is lower then the price in spot sales

22
 |

‡ Istesna is sale transaction where

commodity is transacted before it comes
into existence

‡ It is an order to producer to manufacture

a specific commodity for the purchaser

2(


 |

‡ The subject of Istesna is always a thing which

needs manufacturing
‡ Manufacturer use his own materials
‡ Quality and Quantity should be agreed in
absolute terms
‡ Purchase price should be fixed with mutual
consent
2[
 | 
‡ Transferring of usufruct and not ownership to another person at an agreed
price, at an agreed consideration
‡ Subject of lease should be
± Valuable,
± Identified &
± Quantified
‡ Consumable things cannot be leased out.
± Anything which cannot be used without consuming cannot be leased outë

 



 
‡ All Liabilities of ownership are borne by lessor
± Corpus of leased property remains in the ownership of the seller

2ü
 | 
‡ eriod of lease
± Must be determined in clear terms at the time of contract
‡ Lease for specific purpose only
± If no specific purpose is identified in the agreement, then it can
be used for any purpose for which it is used in normal course
‡ The lessee is liable to compensate the lessor for every
harm to the leased asset caused by any misuse or
negligence
‡ The leased asset shall remain in the risk of the lessor
throughout the lease period
2·
 | 
‡ Lease of jointly owned property
± Is permitted and rentals shall be distributed between all the joint
owners according to the proportion of their respective shares in
the property.
‡ Expenses consequent to ownership to the lessor
± As the lessor is the owner of the asset, he is liable to pay all the expenses
incurred in the process of its purchase and its import to the country of the
lessor for example expenses of freight and customs duty etc.
‡ If the lessee contravenes any term of the agreement, the lessor
has a right to terminate the lease contract unilaterally. If not
then it can be terminated through mutual consent only
2Î
 !    
‡ The rental must be determined at the time of contract for
the whole period of lease
‡ It is permissible that different amounts of rentals are fixed
for different phases during the lease period, provided that
the amount of rent for each phase or formula for calculation
of rentals is specifically agreed upon and specified at the
time of effecting the lease
‡ The lease period shall commence from the date on which
the leased asset has been delivered to the lessee.
‡ Rental will be charged when the Leased asset is handed
over to the lessee
2â
 | 
‡  
|    
±  expenses relating to the corpus of the
asset i.e. insurance, accidental repairs etc. will
be borne by the lessor
±  actual operating/overhead expenses
related to running the asset will be borne by the
lessee

2 
 Car Ijara At An Islamic Bank
‡ How it is  V 
different   
  
 
from
conventiona
l Car
 

 
Financing
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 Car Ijara At An Islamic Bank
ow it is  


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diffe
ent f
om
conventional   
  
 
Ca
Financing

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  # 
‡ Musharakah literally means   
‡ The word Musharakah has been derived from ³# ´
which means being a partner
‡ Musharakah means a joint enterprises formed for
conducting some business in which all partners share
the profit according to an agreed ratio while the loss is
shared as per the ratio of investment
‡ Musharakah is Commingling by two or more persons
either their money or work or obligations to earn a profit
or a yield or appreciation in value and to share the loss if
any according to their proportionate ownership
(2
  
  # 
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± Each partner has a right to take part in Musharakah management
± The partners may appoint a managing partner by mutual consent
± One or more of the partners may decide not to work for the
Musharakah and work as a sleeping partner
‡
 
± Share capital in a Musharakah can be contributed either in cash or
in the form of commodities. In the latter case, the market value of
the commodities shall determine the share of the partner in the
capital.
± However, the commodities to be contributed must be evaluated at
the time of execution of Musharakah

((
  
  # 
‡ !   
± The ratio of profit distribution must be agreed at the time of execution
of the contract
± The ratio must be determined as a proportion of the actual profit
earned by the enterprise and
‡ Not as percentage of partner¶s investment
‡ Not in lump sum amount
± The partners may agree on any ratio of profit distribution provided the
ratio of profit of sleeping partner does not exceed his ratio of
investment
‡   
± In case the business incurs a loss, all partners will have to share the
loss in exact proportion to their investment
± This rule is based on a saying of Hazrat Ali: 6 
    


     

 
   
  


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± Musharakah will be deemed to have terminated in the
following events
‡ Each partner has the right to terminate the Musharakah at
any time after giving prior notice to other partners
‡ If any of the partners die during the currency of the
Musharakah his heirs will have the option to
± Either liquidate their share or
± Continue with the business
‡ If any one of the partners becomes insane or otherwise
incapable of conducting commercial transactions
(ü
 
  #
‡ ermanent Musharaka
± ermanent Musharaka is the partnership of permanent nature,
which is not bound with a time period
‡ Temporary (ë 
) Musharaka
± Musharakah can be for a limited time period, after that it will be
redeemed. Redemption of Musharakah will take place through
sale of shares from one partner to another
‡ Diminishing Musharaka
± It is a form of partnership in which one of the partner promises
to buy the equity share of the other partner gradually until the
title to the equity is completely transferred to him
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‡ Mudarbah is a special kind of partnership
where one partner gives money to
another for investing it in a commercial
enterprises.
‡ The investment comes from the first
partner who is called ³ 
´
‡ The management and work is an
exclusive responsibility of the other, who
is called ³

 ´ ( 


 
‡
 
± In principle, the capital of Mudarbah must be provided
in the form of cash. However, it may be presented in
the form of tangible assets, in which case the value of
the assets is the contribution to the Mudarbah capital.
± The Capital of Mudarbah should be clearly known to
the contracting parties and defined in terms of quality
and quantity in a manner that eliminates any
possibility of uncertainty or ambiguity

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‡ $! 

± The profit sharing ratio should be specific because it is the

subject of the contract and being unknown abrogates the
contract
± It is impermissible to stipulate a lump sum as profit to either
party

± Losses accruing in the Mudarbah shall be only sustained by the

Rabb-ul-Mal and not the Mudarib. The Mudarib shall only to
responsible for the recovery of loss in the case of negligence
and willful misconduct [1


 
‡   

 
± The contract of Mudarbah can be terminated at
any time by either of the two parties. The only
condition is to give a notice to the other party

[2
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 ˜ 
 ÷ 
 Nature of Deposit in Conventional Banking
according to Shariah
‡ Deposits made in the conventional banks are Qard
according to Shariah not Amanah (derived from
Amanat) as generally believed

‡ According to Shariah
± Amanah cannot be used by the holder and has to be returned
± He cannot be held responsible for any loss or damage suffered
by Amanah without his negligence
±

            




 
± Therefore any benefit drawn from such deposit / investments /
Qard by conventional banks is not permissible according to
Shariah [[