Shariah Compliant Funds Rising and
Shariah Compliant Securitization
April 24, 2012
Alhuda-CIBE Trainings
Avari Towers, Karachi
Abdul Samad
Shariah Advisor
The Bank of Khyber
Rulings In Islam
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These 5 primary objectives follow by Shariah can
be observed though the Al Ahkam (rulings) upon
which Fiqh (Islamic Jurisprudence) rotate around.
The rulings are categorized as follows:
a. Wajib (obligatory)
e. Haram (unlawful)
b. Mustahab (recommended) (Sunnat)
c. Mubah (permissible)
d. Makruh (disliked)
Islam and Shariah
Islam
Aqidah
(Faith & Belief)
Shariah
(Practices & Activities)
IBADAT
(Man to God Worship)
Political Activities
Akhlaq
(Morality & Ethics)
Muamalat
(Man to Man Activities)
Economic Activities
Banking & Financial Activities
Social Activities
Most Important Islamic Teaching
Related To Business
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9.
Elimination of Interest (Raba)
The prohibition of uncertainty (Gharar)
The prohibition of Gambling (Qimar)
The precipitation of games of chance (Maser)
Honesty and Fair Trade (Ghishsh and Khilabah)
Spending in the Good Cause
Buy Back
Two Mutually
Conditional Contract
Entitlement to profit depends on liability for risk
Human Financial Needs
Fulfillment of Financial Needs
Own Capital
Others’ Capital
Equity Financing
Debt Financing
Shirkah
Scope of the Presentation
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Terminology of Musharaka
Types of Musharaka
Structure of Musharaka
Rules of Musharaka
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Capital;
 Profit and loss;
 Termination
 Security / Collateral in Musharaka
Concept of limited liability
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Modern partnerships
Banking application
Case in point
MEANING OF SHAIRKAT
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The literal meaning of Musharakah is sharing.
The root of the word "Musharakah" in Arabic is
Shirkah, which means being a partner.
Under Islamic jurisprudence, Musharakah means
a joint enterprise formed for conducting some
business in which all partners share the profit
according to a specific ratio while the loss is
shared according to the ratio of the contribution.
LEGITIMACY OF SHIRKAT
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AllahSubhanao-Ta’ala
has
declared that He becomes a party in
a business between two Musharakain
until one indulges in cheating or
breach of trust (Khayanah) with
other in Musharakah.” (Sunan-i-Abi
Daud, Kitabul Buyuo)
Types of Shirkah
Shirkah
Shirkat-ul-Milk
Shirkat-ul-Aaqd
(Co- ownership)
(Contractual Partnership)
Shirkat-ul-Milk (Joint ownership)
• Joint ownership of two or more persons in
a particular property/ asset with out any
business intention.
• This comes into being as a result of joint
purchase, joint acceptance of gift or a
bequest and inheritance of joint property
etc.
Types of Shirkat-ul-Milk
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Shirkat-ul-Milk Optional (Ikhtiari)
This comes into operation through the act of
parties e.g., purchase of asset with mutual
consent.
Shirkat-ul-Milk
Compulsory
(Ghair
Ikhtiari)
This comes into operation without any action
on the part of parties e.g., ownership of heirs
on the inherited property.
Shirkat-ul-Aqd
(Joint venture/partnership).
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Shirkat-ul-Aqd or Contract Partnership is
an Agreement between two or more
parties to combine their assets or to
merge their services or obligations and
liabilities with the aim of making profit.
It can also be referred to as a joint
commercial enterprise or activity
Difference between
Shirkat-ul-Aqd and Shirkat-ul-Milk
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In Shirkat ul Aqd both parties create
partnership for sharing profit earned by
Shirkah asset, while in Shirkat ul milk both
partners do not intend to earn profit from
Shirkah asset.
In Shirkat ul Aqd, each partner is an agent of
others while in Shirkat ul Milk each partner is
stranger with respect to other’s share.
Kinds of Shirkat-ul-Aqd
Shirkat-ul-Amwal
(Investment /Capital Partnership)
Shirkat-ul-Aamal
(Work Partnership)
Shirkat-ul-Wojooh
(Credit Partnership)
Shirkat-ul-Amwal
Where all the partners invest some capital
into a commercial enterprise and share its
profits according to agreement.
Shirkat-ul-Aamal
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Where all the partners jointly undertake to
render some services for their customers, and
the fee charged from them is distributed among
them according to an agreed ratio.
For example, if two persons agree to undertake
tailoring services for their customers on the
condition that the wages so earned will go to a
joint pool which shall be distributed between
them
Shirkat-ul-Wujooh
Where the partners have no investment at
all, they purchase commodities on
deferred price by their goodwill and sell
them on spot. Their capital is their credit
worthiness and reputation.
Types of Shirkat-ul-Aqd
All the three are further divided in to two types:
Shirkat-ul-Amwal
Shirkat-ul-Mufawadah
Shirkat-ul-Aamal
Shirkat-ul-Wojooh
Shirkat-ul-Inan
Subdivision of Shirkat-ul-Aqd
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1-Shirkat-ul-Mufawadah:
Where capital, profit, loss and management are
equal among the partners.
2-Shirkat-ul-Inan:
Partners’ share capital, management, profit and
risk are not equal and may differ for each
partner. This is common type of partnership.
SHIRKAH
Shirkatul-Aqd
Shirkatul-Amwal
Shirkat-ulMufawada
h
Shirkatul-Inan
Shirkatul-A’mal
(ShirkatulAbdan)
Shirkat-ulMufawadah
Shirkatul-Inan
Shirkatul-Milk
ShirkatulWajooh
Shirkat-ulMufawadah
Optional
Shirkatul-Inan
Compulsor
y
Rules of Shirkat-ul-Milk
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Each partner is a stranger with respect to the
share of the others.
The partners are not allowed to undertake any
act of disposal with respect to the other’s
share except with the latter’s permission.
Each partner can sell his own share without
the other partners’ consent, except in cases
where share of one partner can not be
distinguished from the other.
Rules of Shirkat-ul-Milk
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Profit & loss will be according the ratio of
ownership.
Expenses related to ownership will be borne by
all partners according to the ratio of
ownership.
Every partner has the right to sale/gift/lease to
the extent of his share.
One partner can promise to purchase the
share of other partner at any price, may be at
face value, market value or pre-agreed price.
Shirkat-ul-Ammwal
Definition:
 It is an agreement between two or more
persons to invest a sum of money in a
business and share its profits according to
agreement. The investment of this
partnership consists of capital contributed
by the partners.
SHIRKAT-UL- AMWAL:
Capital of Musharakah
It should be known, ascertained and available at the
time of contract.
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The value should be agreed upon in case of kinds;
Capital paid in different currencies should be valued into the
currency of Shirkah;
Capital advanced by the parties. Should be uniform
(currency of partnership).
Share capital in a Musharakah can be contributed
either in cash or in the form of commodities
In the letter case the market value of the commodities
shall determine the share of the partner in the capital.
Capital of Musharakah
Capital of partnership is Amanat in the
hands of partners. If loss occurred due to
negligence, the partner responsible for
loss, will compensate the loss.
Management of Musharakah
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Each partner has right to take part in Musharakah
management.
The partner may appoint a managing partner by mutual
consent.
One are more of the partners may decide not to work for
the Musharakah and work as a sleeping partner.
It is not allowed to specify a fixed remuneration to a
partner Musharaka who manages funds or provides
some form of other services, such as accounting;
However, it is permissible to give him a greater share of
profit than he would receive solely on the basis of his
share in the partnership capital;
Distribution of Profit
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The ratio of profit distribution must be agreed
at the time of execution of the contract.
It is not necessary for sharing profit according to
proportionate capital contribution;
It is not allowed to defer the determination of
profit until realization of profit.
The ratio must be determined as a proportion
on the actual profit earned by the enterprise.
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Not as percentage of partner’s investment.
Not in lump sum amount.
It is not allowed to defer the determination of profit
until realization of profit.
A sleeping partner cannot share in the profit more
than the percentage of his capital.
Rules of Profit
Determination/Distribution
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No guarantee can be given by the partners for the
payment of profit or capital.
Different partners may be given different weightings
according to amount and period of their investment.
Tiered profit sharing ratios can also be agreed.
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Profit ratio can either be fixed or variable according to the
tiers;
Both partners can agree that first 6-month profit e.g.
will be distributed at ratio of 50% : 50% and next 6month profit will be distributed at ratio of 30% : 70%.
Rules of Loss
Determination/Distribution
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Sharing of Loss:
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As a matter of principle the loss has to be shared according to
the ratio of capital contribution;
Partners are not allowed to adopt any other mechanism except
the mechanism that ensure distribution of loss among partners
on pro rata basis;
Any other arrangement, even agreed upon by partners, will be
invalid and void.
It is not allowed to hold one partner or group of partners liable
for entire loss.
Guarantees in Shirkah Contracts
- All partners in Shirkah maintain the assets of the partnership as a
trust.
- No one is liable except in cases of breach of the contract, misconduct
or proven negligence.
- Negligence will be considered to have occurred in any of the
following three cases:
(i) A partner does not abide by the terms and conditions of the contract;
(ii) A partner works against the norms of the concerned business; and
(iii) The established ill-intention of a partner.
- The profit or even capital of any partners cannot be guaranteed by the
co-partners.
- One partner can demand from another partner to provide any surety,
security or pledge to cover the case of misconduct and negligence.
Rules of Musharakah – termination
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Musharakah terminates in any of the following event:
 Death of a partner during the Musharakah;
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Heirs of the deceased partner have option either to draw the share
of the deceased from the business, or to continue with the contract
of Musharakah;
If any one of the partners becomes insane or otherwise becomes
incapable of effecting commercial transactions, the Musharaka
stands terminated.
In normal course of business, every partner has a right to terminate the
Musharakah at any time after giving notice to other partner;
In this case, if all the assets of the Musharakah are in cash form then
they will be distributed pro rata between the partners;
In case they are mixed assets the partners may agree either on:
 Physical distribution of the assets among partners; or
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Liquidation of the assets in open market (market price); or
Internal liquidation i.e. purchasing from one partner share of other
at any agreed price between them;
Rules of Musharakah – termination
with one partner
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In case a partner wishes termination of the Musharakah, while
others do not, this can be achieved by mutual consent;
The partners who wish to run the business may purchase the share
of the other partner who wants termination;
The reason is that the termination of Musharakah with one partner
does not imply its termination between other partners;
However, in this case, the price of the share of the leaving partner
has to be determined by mutual consent;
In case of dispute on the valuation of the share the leaving partner
may compel other partners on the distribution of the assets;
However, if they are not divisible then the partner may an arbitrator
to solve the dispute;
Musharakah – banking application
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Musharakah
is
top
preferable
mode
of
financing
recommended by Islam;
 It one of the important factors that help in achieving ‘distribution
of wealth’ which is a key feature of Islamic financial and economic
system;
 As Mudarabah, Musharakah is also not a vastly practiced Islamic
mode of financing by Islamic banks due to certain reasons;
However, Musharakah could easily be used as a vast mode of
financing for almost every financial need;
Below are some fields where this mode can easily be applied:
 Long-term Finance;
 Running Finance (limited scope);
 Investment Banking;
 Project Financing;
 Private Equity Investment;
 Redeemable capital investment.
Islamic securitisation
Transforms bilateral risk sharing between
borrowers and lenders into market-based
refinancing of one or more underlying Islamic
finance transactions
Scholar verification process: (i) type of assets;
and (ii) transaction structure including credit
enhancement and ownership conveyance
Conditions
Real purpose behind fund raising; type of asset
identified and not consumable
Investor pay-off from profitable ventures only
Collateral assets must not be debt, cash or
haram
No interest generation
Investors hold unconditional, unsecured
payment obligation (no guaranteed promissory
note)
Ownership element
Sukuk
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Most popular ABS structure within Islamic
finance, legitimised in February 1988
Financial instruments / trust certificates
representing undivided ownership share in
underlying asset or interest held by issuer
Most sponsored by sovereign and quasisovereign issuers in Islamic countries
Right to share in profits and asset
realisations
Bought and sold in secondary market and
used in conjunction with other structures
Sukuk al Ijara
CERTIFICATE HOLDERS
Issue
proceeds
Return
Sells assets
SELLER
Issues
Sukuk
Leases assets
SPV ISSUER
Purchase price
(issue
proceeds)
LESSEE
Rent
Sukuk al Musharaka
CERTIFICATE HOLDERS
Issue
proceeds
Return
Issues
Sukuk
ORIGINATOR
SPV ISSUER
Cash
contribution
Share in
profits
and
losses
Share in
profit
and
losses
VENTURE
Contribution in kind (at
least 30%)
QUESTIONS??