CHAPTER# 6
ISLAMIC MODES OF
FINANCING
BY
KOKAB MANZOOR
CHAPTER`s OUTLINES
1
2
3
4
5
6
SHARAKAT( MUSHARAKAH)
MODARABA
BAI-SALAM
BAI-MURABAHA
BAI-MUAJJAL
IJARA
Introduction and Importance

Business require large financial
resources to carry out production
and related business operations.
Such large scale monetary
resources are sometimes beyond
their own capacity. To obtain them
it is inevitable to seek the
cooperation of other individuals or
organizations.
Cont`d…

Islamic economics provides several
modes to secure such financial
resources of which the following are
particularly noteworthy;
1
2
4
6
Sharakat( Musharakah)
Modarbah
3
Bai-Salam
Bai-Murabaha
5
Bai-Muajjal
Ijarah
1 Musharakah

Shirkah (partnership):
It literally means sharing. The
sharing may be of money, labor, or
anything else.

Shirkah (partnership): is defined
as a contract between partners on
both capital and profit.
1

Musharakah
Musharakah (partnership) is
actually participation of two or
more persons in a certain
business with defined amount of
capital invested according to a
contract for jointly carrying out a
business and for sharing profit
and loss in specified proportions
Kinds of Partnerships
1 Shirkat ul-milk
(partnership of ownership):
It means joint ownership of two or
more persons in a particular property.
 This kind of Shirkah may come into
existence in two different ways.
 By the partners choice:
 Without the partners choice:
Kinds of Partnerships
2 Shirakal al-aqd
(partnership of a contract):
which means a partnership
effect by a mutual contract.
This kind of Shirkah exists in
three types:
Shirakal al-aqd
 Shirkal ul-amwal
(partnership in trade):
 Shirkat ul-A`mal
(partnership in services):
 Shirkal ul-wujooh
(partnership in goodwill):
Basic Rules of Musharakah
A)
Distribution of profit
1. The proportion of profit to be
distributed between the partners must
be agreed upon at the time of the
effecting of the contract.
2. The ratio of profit for each partner
must be determined in proportion to
the actual profit accrued to the
business, and not in proportion to the
capital invested by him.
B ) Sharing of Loss
In the case of loss each partner
shall suffer the loss exactly
according to the ratio of his
investment. If a partner has
invested 40% of the capital, he
must suffer 40% of the loss, not
more, not less.
C ) The Nature of the Capital
Most of the Muslim
jurists are of the
opinion that the
capital of a joint
venture must be in
monetary form, but
in some cases part of
it can be contributed
in commodities.
2 Mudarabah

The word Modarbah comes from the
Arabic root (Dharabahfi al ard),
which means going and working to
obtain livelihood.

The first partner is called “Mudarib,”
(the manager) and the second
partner is called “Rabb ul-mal.” (the
one who invest money)
Mudharabah…..

Under mudharabah, one party
provides capital and the other
utilizes it for business purposes
under the agreement that profit
from the business will be shared
according to a specified
proportion
Types of Mudarabah
a)
Al-Mudarabah al-muqayyadah
(restricted Modarbah):
b)
Al Mudarabah al mutlaqah
(unrestricted Modarbah):
Distribution of the Profit
It is necessary for the validity of
Mudarabah that the parties agree
right at the beginning on a definite
proportion of the actual profit to
which each one of them is entitled.
They can share the profit in equal
proportions, and they can also
allocate different proportions for the
Rabb-ul-mal and the Mudarib.
Termination of Mudarabah


The Mudarabah contract can be
terminated at any time by either of
the two parties. The only condition is
for notice to be given to the other
party.
If all the assets of the Mudarabah
are in cash form at the time of
termination, and some profit has
been earned on the principal
amount, it shall be distributed
between the parties according to the
agreed ratio.
Cont`d…

If the assets of the Mudarabah
are not in cash form, the
Mudarib shall be given an
opportunity to sell and liquidate
them, so that the actual profit
may be determined.
3


BAI-SALAM
DEFINITION
Seller agrees to supply specific
goods to the buyer at a future
date in exchange of an
advanced price fully paid at
spot.
Price is in cash but the supply of
goods is deferred.
Purpose 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 working capital.
To meet the needs of liquidity
problem.
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, and it is beneficial to
the buyer also, because
normally the price in salam used
to be lower then the price in spot
sales.
4 Bai 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.
Murabaha

Involve purchase of commodities
from third parties (through a bank
as an agent of the fund) and
reselling the same to the bank on
deferred basis

Profit between the bank and the
fund is comparable to returns
from money market instruments
Difference b/w Salam &
Murabaha
Salam


purchased goods
are defferred,
price is paid on
spot.
In Salam price
has to be paid in
full in advance
Murabaha


purchased
goods are
delivered at
spot, price may
be either on spot
or differed.
price may be on
spot or differed
Difference b/w Salam &
Murabaha
Salam


.
Murabaha
It can not be executed
in the particular
commodity but
commodity is specified
by specifications.
It cannot be effected in
respect of things, which
must be delivered at
spot. e.g Salam b/w
wheat barley


It is executed in
particular
commodity.
It can be
executed in those
things.
5 Ijarah (hire)
Definition of Aqd al-Ijarah:

It is a contract on using the
benefits or services in return
for compensation.
Ijarah (hire)
The term Ijarah is used for two different
situations:
1.
It means to employ the services of a
person on wages given to him as a
consideration for his hired services.

The employer is called Mustajir, the
employee is called Ajir
CONT`D..
2.
Relates to the usufructs (right
to use of a property) of assets
and properties

Ijarah in this sense means to
transfer the usufruct of a
particular property to another
person in exchange for a rent
claimed from him.
Conditions of Ijarah (Islamic
Leasing)






The commencement of lease
Rent should be charged after the
delivery of the leased asset to the
lessee
Expenses consequent to ownership
to the lessor
Lessee as Ameen
Penalty for late payment of Rent
Termination of Lease
6
Bai Mu’ajjal
(Sale on Deferred Payment Basis)

A sale in which the parties
agree that the payment of
price shall be deferred.
Shariah orders for Bai Muajjal
1
2
3
4
5
Item on sale must be owned in
physical by seller.
Seller has right to ask for mortgage
Seller has right to take profit of that
sold item if he bears the risk.
Possession of sold item must be
transferred to purchaser at once.
The deferred price may be more
than cash but it will be fixed at the
time of sale.
Cont`d…
6
If the commodity is sold on
installments, the seller may put a
condition on the buyer that if he fails
to pay any installment on its due
date, the remaining installments will
become due immediately.
7
In order to secure the payment of
price the seller may ask the buyer to
for a any kind of security. E.g
mortgage or a lien etc.
Cont`d…
8
The buyer can also be asked to
sign a promissory note or a bill of
exchange but the note or the bill
cannot be sold to a third party at a
price different from its face value.
Thanks n bby
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