Introduction and Brief Perspective of Islamic Banking Mechanism of Ijarah & Murabahah in Islamic Economics Uses of Takaful in Ijarah & Murabahah Transactions

Presented by :

Zubair MughalCEO – AlHuda Centre of Islamic Banking & EconomicsSenior Manager ( Punjab ) Takaful Pakistan Limited.

zubair.mughal@alhudacibe.comZubair.mughal@takaful.com.pk

Industry Progress in Pakistan

In 2001, the industry comprised of just two players

Currently there are 6 full fledged Islamic Banks, while

11 Banks have set up Islamic Banking Divisions (IBDs)

Year 2001

•Meezan Bank•Al Baraka •Meezan Bank

•Al Baraka•MCB•Alfalah•SCB•Bank AlHabib•Habib AG Zur.•Metropolitan•Bank of Khyber•Soneri Bank

2002 2003

•Meezan Bank•Al Baraka•MCB

•Meezan Bank•Al Baraka•MCB•Alfalah

2 10

2006 - 07

•Meezan Bank•Al Baraka•MCB•Alfalah•SCB•Bank AlHabib•HMB•Bank of Khyber•Soneri Bank•HBL•Bank Islami•DIB•Emirates Int’l•First Dawood•NBP•ABN AMRO•Askari

2004 - 05

1143

Industry Progress in Pakistan

Industry Progress in Pakistan

Industry Progress in Pakistan

Islamic products and services offered by 300+ Financial Institutions around the world

.United States: 20- Al Manzil Financial Services- American Finance House- Failaka Investments- HSBC - Ameen Housing Cooperative

Germany:4- Bank Sepah- Commerz Bank- Deutsche BankSwitzerland: 6

UK: 26- HSBC Amanah Finance - Al Baraka International Ltd- Takafol UK Ltd- The Halal Mutual Investment Company- J Aron & Co Ltd (Goldman Sachs)

Bahrain: 26 - Bahrain Islamic Bank- Al Baraka- ABC Islamic Bank - CitiIslamic Investment Bank

Malaysia: 492 - Pure Islamic Banks (Bank Islam, Bank Muamalat)Rest - conventional banks

Saudi Arabia: 17- Al Rajhi - SAMBA- Saudi Hollandi - Riyadh Bank

UAE: 13- Dubai Islamic Bank- Abu Dhabi Islamic Bank- HSBC Amanah

Qatar: 4- Qatar Islamic Bank- Qatar International Islamic

Kuwait: 9- Kuwait Finance House

Iran: 8

Egypt: 12- Alwatany Bank of Egypt- Egyptian Saudi Finance

Indonesia: 4

Sudan: 9

Pakistan: 21India: 3Bangladesh:9

Turkey: 7- Faisal Finance Institution- Ihlas Finance House

Yemen: 5

Important Elements of Islamic Economics Related to Islamic Finance.

Bai ( Sale & Purchase ) Ijarah Basic Mode of Financing ( Musharkah &

Modarabah) Takaful ( Islamic Insurance ) Sukuk ( Islamic Bonds ) Qard Zakat & Ushar

Basic Rules of Bai

Existence of Product/Commodity

Ownership of Product/Commodity

Possession of Product/Commodity Unconditional basis

Product have value/Price.

Basic Rules of Bai Bai on Such product which is permissible in

Islam.

Product Must be Identify, clear with all demanding Qualities.

Not based on any incident, struggle etc

Price must be clearly identified.

Bai (Buying & Selling)

Basic Kinds of Bai

Kinds of Bai

Bai Musawamah Bai Murabaha Bai Surf Bai Salam Bai Istisna’ Bai Urboon

Basic Kinds of Bai

Bai Eenna Bai Touliya Bai Wadhia Bai Tawaruq

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’ Tawaruq

Murabahah

Basically, it’s not a mode of financing but a source to avoid interest Dealing

It’s not a type of loan, but a deal (Bai) Murabahah can be used as source of

financing when client needs funds to purchase any product/Machinery etc.

Murabahah

Sharing of Risk of loss differentiate Murabahah from the interest category

Product Must be bought from third party for avoid buy back transaction

Roll over is not Valid in Murabahah If actual cost can not be identified

then Murabahah deal not possible.

Bai

Important NoteFollowing 3 Basic Rules of Bai are

exceptional for Salam & Istisna’

Existence of Product/Commodity Ownership of Product/Commodity Possession of Product/Commodity

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.

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.

Bai

Differences Between Istisna and Salam

Differences Between Istisna and Salam

Istisna deal with manufacturing items, but Salam could or could not be manufacutred, but salam ideal of agriculture sector.

In salam advance payment is necessary, but in Istisna’ its not.

Differences Between Istisna and Salam

Date, time of delivery the necessary part of Bai Salam, But in Istisna, it is not the part of the deal.

In Bai salam, it can be cancelled one sided, but in Istisna, it could be cancelled, if production is not started yet.

Type of Bai according to Quality

Bai Salah Bai Fasid Bai Batil Bai Maqoof

Type of Bai according to Quality

Bai Majool Bai Muqayaddah Bai Mu’ajal

Takaful

and its Uses in Ijarah & Murabaha

Introduction

“Takaful” is the Sharia Compliant brand

name for the Islamic alternative to conventional insurance. Its based on the principle of Ta’awan or mutual assistance. It provides mutual protection and joint risk sharing in the event of a loss by one of its member

Why Insurance ?

Is Some thing wrong with Concept ?

Risk Aversion Assuring others Risk sharing

From the Holly Quran

The need for insurance is shown in the following verse of The Quran.

“ Those of you who die and leave widows should bequeath for their widows a year’s maintenance and residence” (2.240)

From the Hadiths By Anas-bin-Malik, One day Prophet

Muhammad(PBUH) notced a bedouin leaving his Camel without tying it. He asked the bedouin, “Why don’t you tie down your camel”? The Bedouin answered, “ I put my trust in Allah (SWT)”. The Prophet (PBUH) then said,” Tie your camel first, then put your trust in Allah(SWT)” <Tirmidhi>

What wrong with practice ?

The contract between the insurer & the insured is technically wrong from the sharia perspective because of

Gharar (Uncertainty)) Gambling (Qamar & Maisir) Interest (Riba)

InvestmentIncome

Operational Cost of Takaful

/ ReTakaful

Claims &Reserves Surplus

(Balance)

P A R T I C I P A N T S’ T A K A F U L F U N D (P.T.F.)

Mudarib’s Share of PTF’s

Investment Income

Wakalah Fee

InvestmentIncome

Management Expense of

the Company

Profit/Loss

S H A R E H O L D E R S’ F U N D (S.H.F.)

Participant

WAQF

Takaful Operator

Share Holder

Wakala-Waqf Model

Investment by the Company

Takaful Cover for Ijarah & Murabaha

General Takaful – offers all kinds of risk coverage In Ijarah &

Murabahah. It is normally divided into following classes:

Motor, Plant & Machinery etc Takaful in Ijarah Marine Takaful in Ijarah & Murabahah Credit Risk Takaful in Ijarah & Murabahah. Execution Risk of Murabaha Fire Takaful in Ijarah & Murabahaha Miscellaneous