IMU252: Islamic
Investment
Topic 6:
Shariah Contracts in
Investment.
IMU252: Islamic Investment
Prepared by: Ustazah Noor Hasyimah Bt. Sulaiman
Learning Outcomes:
At the end of the course, students should be
able to:
Explain the Shariah contracts in investment as
well as the importance of intention and its
applications in investment activities.
List of Contents
6.0
Shariah Contracts in Investment.
6.1
Partnership Contract : Mudharabah and Musyarakah
6.2
Leasing Contract- Ijarah
6.3
Selling Contract: Murabahah & Tawarruq
6.0 Introduction to Shariah Contracts in Investment
5.1 Introduction
The legal form of an Islamic business enterprise or
contracts sheds light on how capital is raised, how
labour is employed, how factors are remunerated,
who makes decisions, how much enterprises or
contracts are dissolved, and who bears the risks of
failure.
Those types of business contracts and organizations
that were in use before and during the time of the
Prophet Muhammad (sallahu alaihi wa sallam) and
that he did not prohibit, are accepted as legal forms
of Islamic enterprises or contracts.
Therefore, the Islamic Shariah provides various modes
of finance or business contracts each of which has its
own distinctive features and utilization capital.
6.1 Partnership Contract
6.1.1 Mudarabah
6.1.1 (a) Definition of Mudarabah
Literally
Derived from the phrase al-darb fi al-ard which
means to make a journey.
Technically
The Mudarabah contract is a form of partnership
between one who contributes capital (rabb almal/capital provider) and the other who contributes
efforts in the form
of
managerial
skills
(mudarib/manager).
Muqaradah and Qirad are also synonymous with
Mudarabah. Profit from the outcome of the venture is
shared between the capital provider and manager
according to mutually agreed profit-sharing ratio
whilst losses are borne solely by the capital provider,
provided such loss is not due to the manager’s
negligence or violation of specified conditions.
6.1.1 (b) Legitimacy of Mudarabah
Quran
...others travelling through the land,
seeking of Allah’s bounty...”
(Al-Muzammil:20)
And when the Prayer is finished, then may
ye disperse through the land, and seek of
the Bounty of Allah; and celebrate the
Praises of Allah often (and without stint):
that ye may prosper.”
(Al-Jumu`ah:10)
* These verses do not directly address the permissibility of
Mudarabah but are interpreted to imply Mudarabah by referring
to those who travel for the purpose of trading and seeking
permissible income including those who undertake labor with
someone else’s capital in exchange for part of the profit.
Cont… 6.1.1 (b) Legitimacy of Mudarabah
Muslim Jurists
The Muslim jurists have
reached Ijma’ among them
upon conducting Ijtihad on the
permissibility of the
Mudarabah contract.
Cont… 6.1.1 (b) Legitimacy of Mudarabah
Hadith
Ibnu Abbas r.a. reported that: “When our
leader Abbas Ibn Abd al-Mutallib gives his
property to someone for Mudarabah, he
stipulated conditions for his partner not to
bring the capital throughout the sea; and not
to bring with him the capital crossing a
valley; and not to buy livestock with the
capital; and if his partner violates the
conditions, he should guarantee the loss
occurred. These conditions have been
brought to the attention of Prophet
Muhammad (SAW) and he approved
them.”
(Mu’jam Al-Awsat; Al-Tabrani)
Cont… 6.1.1 (b) Legitimacy of Mudarabah
Hadith
Suhayb r.a. reported that the Prophet
Muhammad (SAW) said: “Three
matters that have the blessing (of
Allah): A deferred sale, Muqaradah
(Mudarabah), mixing the wheat with
barley for domestic use and not for
sale.”
(Sunan Ibn Majah)
Cont… 6.1.1 (b) Legitimacy of Mudarabah
The Tacit Approval of the Prophet
Muhammad (SAW)
Mudarabah venture has being
practised before the Prophet’s (SAW)
first revelation and he did not raise
or show any objections against the
practice.
This is considered a tacit approval by
the Prophet Muhammad (SAW).
(Sunan Ibn Majah)
6.1.1 (c) Pillars and Conditions Of Mudarabah
Contracting
Parties
• Mudarib
• Rabbul Mal
• Must be qualified
persons under law,
sound mind.
Ra’sul Mal
Mashru’
Ribh
Sighah
Capital:
Must be cash
or things that
can be valued
by money.
Project
or
business venture:
must be lawful
according
to
Islamic law, i.e. it
must be halal.
Pre-determined
profit allocation:
should be
determined and
mutually agreed.
Ijab (Offer)
Qabul
(Acceptance):
verbally, in
writing or other
means of
communication.
6.1.1(d) Functions of Mudarib
6.1.1 (e) Types of Mudarabah
6.1.1 (f)Termination of Contract
6.1.1 (g) Differences Between Mudarabah and Musyarakah
Criteria
Capital
contribution
Types of
capital
Business
Operation
Loss
6.1.1 (h) Modus Operandi of Mudarabah
Mudarabah Contract
At agreed PSR
Profit
At agreed PSR
100%
Loss
6.1.1 (i) Nature of Mudarabah
In general, the contract
of Mudarabah allows
anyone
of
the
contracting parties to
terminate the contract
unilaterally.
The contract shall not be
terminated unilaterally if the
manager has commenced
the work or when both
parties have agreed not to
terminate
the
contract
during a specified time.
6.1.1 (j) Application Of Mudharabah in Investment Activities
Mudharabah contract is applied in deposit
taking arrangement such as current account,
savings account and investment account.
Mudharabah contract is also applied in interbanks investment and Islamic bonds. In
takaful industry, mudharabah contract is
used as one of the operational model as well
as being applied for investing the takaful funds
5.3 (j) Cont…. Application Of Mudharabah in Investment Activities
Premier Mudharabah Account-I by Maybank Islamic
https://www.maybank2u.com.my/iwov-resources/pdf/personal/accounts/PBAi-GSAi-PMAi_PDS.pdf
5.3 (j) Cont…. Application Of Mudharabah in Investment Activities
Premier Mudharabah Account-I by Maybank Islamic
https://www.maybank2u.com.my/iwovresources/pdf/personal/accounts/PBAi-GSAi-PMAi_PDS.pdf
5.3 (j) Cont…. Application Of Mudharabah in Investment Activities
Premier Mudharabah Account-I by Maybank Islamic
6.1.2 Musyarakah
6.1.2 (a) Definition of Musyarakah
Literally
Sharing. The root of the word
“Musharakah” in Arabic is Shirkah, which
means being a partner.
Technically
A form of partnership where two or more
persons combine either their capital or
labor together, to share the profits,
enjoying similar rights and liabilities.
6.1.2 (b) Legitimacy of Musyarakah
Quran
(Sad:24)
Cont… 6.1.2 2 (b) Legitimacy of Musyarakah
Muslim Jurists
There is a consensus among the
jurists of all schools of thought
(including Hanafiyyah,
Malikiyyah, Shafi’iyyah and
Hanbaliyah) that musyarakah is
a valid and legitimate contract
in Islam.
Cont… 6.1.2 (b) Legitimacy of Musyarakah
Hadith
Hadith reported by Abi Hurairah R.A that the
Prophet S.A.W said “Allah had said that: “I
am the third of E the partners, as long as any
one of them does not betray the other. If
he/she does betray the other, I will withdraw
(move away) from them”.
Hadith reported by As–Saib Al–Makhzumi
R.A that he used to be a partner of the
prophet S.A.W (in business) before his
prophet-hood. During the opening of Mecca
he said to the prophet S.A.W “Welcome my
brother and partner!”
6.1.2 (c) Pillars and Conditions Of Musyarakah
Shuraka’
Ra’sul Mal
Mashru’
Ribh
Shareholders/ Partners:
Must be qualified.
Partnership and
company-based
business can be made
between individuals or
organization
Capital:
Must be cash
or things that
can be valued
by money.
Project
or
business venture:
must be lawful
according
to
Islamic law, i.e. it
must be halal.
Pre-determined
profit allocation:
should be
determined and
mutually agreed.
Sighah
Ijab (Offer)
Qabul
(Acceptance
6.1.2 (d) Types of Musyarakah
Cont…6.1.2 (d) Types of Musyarakah
Cont…6.1.2 (d) Types of Musyarakah
i. When a partnership fulfills its obligation or
when its duration is expired.
ii. By mutual consent of the parties.
iii. By a request made by one of the parties
which is subsequently approved by other
parties.
iv. By death or incapacity of one of the
parties whose TYPES heirs or their guardian
decide to discontinue the partnership
v. The bankruptcy of the partners
6.1.2 (e) Dissolution Of
Musharakah
6.1.2 (f) Modus Operandi of Musharakah
Musharakah Contract
Partner
Partner
Capital
Capital
At agreed PSR
Profit
At agreed ratio
Loss
At agreed PSR
At agreed ratio
6.1.2 (g) Application Of Musharakah in Investment Activities
(i) Islamic Venture Capital Based on Musharakah
A partnership between two parties (or more)
to finance a business venture whereby all par
ties contribute capital.
If the venture is profitable, the profit will
be distributed based on a pre-agreed ratio
.
In the event of a loss, the loss shall be shared
on the basis of capital contribution.
Cont… 6.1.2 (g) Application Of Musharakah in Investment Activities
(ii) Musharakah Investment.
• A musharakah investment occurs when an Islamic banking
institution becomes one of the shareholders in a newly set-up or an
existing company.
• Under musharakah investment, an Islamic banking institution may
enter a musharakah agreement to acquire some shares from a
separate legal entity that undertake Shariah-compliant activities.
• Musharakah investment may occur in the following circumstances:
• The Islamic banking institutions hold equity in another entity
for investment purposes; or
• The Islamic banking institutions acquire a proportion of shares
in another entity as a risk mitigant to the financing facilities
extended to the entity.
Cont… 6.1.2 (g) Application Of Musharakah in Investment Activities
The structure of the musharakah investment is exemplified by the following
diagram:
6.2 Leasing Contract
6.2.1 Ijarah
(a) Definition of Ijarah:
A contract of proposed and known usufruct with a specified and lawful
return or compensation for the effort or work which has been
expended. It is used to express the sale (bai') of a known benefit in
return for its known equivalent.
Under this concept, the financial institutions makes available to the
customer the use of service of assets/equipment such as plant, office
automation, motor vehicle for a fixed period and price.
Practice:
The property to be leased belongs to the lessor.
The lessor has the right to repossess the property on a default of the
lesse.
6.2.1 Ijarah
(b) Pillars of Ijarah:
Muajjir (A
person who
give
something for
hire – Lessor,
landlord,
owner etc.)
Musta’jir (A
person who
takes on hire –
Lessee,
tenant, renter
etc.)
Ma’jur (A
thing given for
rent)
Al-Manfaah
(The benefit
from a thing –
usufruct,
services etc.)
Ujrah (Price or
fee given for
the payment
of rent or
lease)
Sighah (Offer
(Ijab) and
Acceptance
(Qabul)
Application of Ijarah in Sukuk
Ijarah sukuk (singular: ijarah sakk) are certificates of equal value which are issued by
the owner of an existing property or asset either on his own or though a financial
intermediary, for the purpose of leasing it against a rental from the subscription
proceeds. After subscription, the underlying becomes owned by the sukuk holders.
Ijarah sukuk could also be issued by the owner of the usufruct (manfa'ah) of an
existing property/ asset (or a specified future property/ asset) for the purpose of
leasing it against a rental being the subscription revenues. After subscription, the
usufruct passes into the ownership of the sukuk holders. In the same token, the
underlying could be the services of a specified party, whether existing now or in the
future. After subscription, the sukuk holders become the owners of such services.
Application of Ijarah in Sukuk
6.3 Selling Contract: Murabahah & Tawarruq
6.3.1 Murabahah
(a) Definition of Murabahah:
Sale in which the mark up is disclosed to the purchaser as per the
seller’s purchase price for a trust-sale for a certain specific asset.
Allows customer:
To take delivery of the goods immediately.
Settle deferred payment agreement wit the seller.
6.3.1 (b) Pillars of Murabahah
(b) Pillars of
Murabahah:
Seller
Buyer
Merchandise/
goods
Price
(mark-up)
Sighah : Offer
(Ijab) and
Acceptance
(qabul)
6.3.1 Murabahah
Murabahah can be applied:
Ordinary Murabahah Sale:
Murabahah Based On Order &
Promise:
Involve 2 parties – seller & buyer.
Widely applicable because used as
one of financing tools by Islamic
financial institutions worldwide.
The seller is an ordinary so trader
who buys a commodity without
depending on a prior promise of
purchase, then he display it for
Murabahah sale for a price and a
profit to be agreed upon.
Murabahah to the purchase orderer
for a pre-agreed selling price, this
having been specified in the
customer’s promise to purchase.
The payment is payable within a
fixed future date in lump sum of by
fixed installments.
Application of Murabahah in Sukuk
7
6.3.2 Tawarruq
Definition:
A tawarruq consists of two sale and purchase contracts. The first
involves the sale of an asset by a seller to a purchaser on a deferred
basis. Subsequently, the purchaser of the first sale will sell the same
asset to a third party on a cash and spot basis.
Evidences:
Based on Qiyas: Permissible based on analogy, the contract is similar to
other sale and purchase contracts i.e. the transfer of ownership is taken
place.
Cont… Tawarruq
Contracting Parties:
The contracting parties to each sale and purchase contract in
a tawarruq shall be a seller and a purchaser.
The seller in the first sale and purchase contract shall not be
the purchaser in the second sale and purchase contract in the
same tawarruq.
Application of Tawarruq in Fixed Deposit-i
Source: https://www.ocbc.com.my/OCBCAl_Amin/download/Fixed_Deposit-i_PIS_ENG.pdf
Cont… Application of Tawarruq in Fixed Deposit-i
Source: https://www.ocbc.com.my/OCBCAl_Amin/download/Fixed_Deposit-i_PIS_ENG.pdf
Thank you