INTERNSHIP REPORT on DIFFERENT MODES OF INVESTMENT OF IBBLINTERNSHIP REPORT

ON

DIFFERENT MODES OF INVESTMENT OF IBBL

Prepared for,

Jb. Md Nurul Islam

Senior Vice President

Islami Bank Bangladesh Ltd.

Ramna Branch, Dhaka

Prepared by,

Ahmed-ur Rahim Zubair

Id No: 6-175, Sec: B, 6th Batch

BBA (Major in Finance)

Department of Finance

University of Dhaka

Mohshiu Ahmed Patwary

Id No: 991101, Sec: A

7Th Batch, BBA (Campus) 

Uttara Campus

Asian University of Bangladesh

Rumana Ahmed Rumpa

MBA (Major in HRM)

Id No: 200410656

9th Batch, MBA (Regular)

Uttara Campus

Asian University of Bangladesh

June 29th , 2005 

Acknowledgment

We are deeply indebted to a large number of people for that kind

suggestion and cooperation. First of all we like to give special thanks

to our coordinator Jb. Habibur Rahman, of IBTRA for giving us a

important topic for preparing this report. We profoundly grateful to

Jb. Abul Hossain SVP, IBBL Ramna Br. the former branch manager,

Jb. Md. Nurul Islam SVP IBBL Ramna. Br. current branch manager,

Jb. Manjurul Islam AVP IBBL Ramna Br., Jb. Nabi Newaz Khan PO

GB in charge, Jb. Ahsanullah Mondol PO Investment in charge, Jb.

firoz Alam PO in charge Foreign Exchange of Islami Bank

Bangladesh Ltd. for their supervision, guidance and cooperation. 

This report, with all the interpretation on practical orientation in

bank with the function a mechanism in the field of banking activity,

would not be possible without help and cooperation of the officers

engaged in the Ramna branch of IBBL. They have willingly supplied

all the practical knowledge and interpretation for making this report

so convenient with the purpose of our BBA/MBA program. The

acknowledgement is made especially to Jb. Dawood Khan, Jb. Abul

Hasan, Jb. Sazzad Jahid Khan, Jb. Ahmadullah, Jb. Tayeb Hamidi, Jb.

Rafiqul Islam, Jb. Monirul Alam, Jb. Jahirul Islam, Jb. Jakir Hossain,

Jb. Sariful Alam, Jb. Anwar Hossain, Jb. Abul Khaer, Jb. Khalilur

Rahman, Jb. Babul Hossain Dhali, Jb. Jahid Hossain, Jb. Islamil

Hossain, Jb. Md Mozammel Hossain, Jb. Abdul Mojid Akhand, Jb.

Mujibur Rahman, Jb. Ehsanul Karim, Jb. Nuruzzaman Chowdhury, Jb.

Md. Rahed, Jb. Md. Tofazzal Hossain, Jb. Kazi Arifur Rahman, Jb.

Habibur Rahmen, Jb. Sazzad Hossain, Jb. Mizanur Rahman, Jb. Helal

Uddin, Jb. Aminuzzaman, Jb. Bodiuzzaman, Jb. Jahangir Hossain, Jb.

Idris Miya, Jb. Harunur Rahisd, Jb. Md. Hanif, Jb. Raju Ahmed.

     Finally and most important, we want to know our special

gratitude to Almighty Allah for helping us doing the whole activity.

Prefaces  

Now a day, modern education, internship report is a un separated

part of learning. In any kind of work study regarding business deals

(organization, company, service or bank) what ever it would be we

need information and know how to prepare it. Assignment is one of

the main way to called information and procedures for business

deals.

No doubt, Different modes of investment for banking services

specially Islamic perspective, we are assigning to made a report or

assignment as the paramount study at business practices for our

practical knowledge. The important of BBA/MBA courses are two

coordinated between theory and practice. This assignment will help

us to bridge the gap between theory and practicality. Farther more,

this has also linked up with the student of BBA/ MBA and the

current situation of business world. That is why this task provide us

the great pleasure and in touch with the professionalism. 

Contents

Page

Part-1                                                   1-6

Introduction                                                           

Objective of the study     

Scope & Methodology of the study

Limitation of the study

Objectives of Islami Bank

Special feature of the Bank

Part-2                                                  7-34     

Modes of finance followed by IBBL                                  

Bai- Mechanism

1. Bai- Murabaha

2. Bai-Muazzal

3. Bai-Salam

4. Istisna

Sharing Mechanism

1. Mudarba

2. Musharaka

Ownership Mechanism

1. Hire purchase

2. Leasing

Part-3                                                  35-36

Basic Characteristics of Modes of Finance                              

Part-4                                                  37-39

Financing Plan

Mode-Wise Finance

Sector-Wise Finance

Part-5                                                  40-50

Findings

Conventional Bank vs. Islami Bank

Obstacles of IBBL

Conclusion

INTRODUCTION 

Banking plays an important role in the economy of any country. In

Bangladesh Muslim constituted more than 80% of its population. These

people possess strong faith on Allah and they want to lead their lives as per

the constructions given in the holy Quran and the way shown by the prophet

Hazrat Muhammad (Sm). But no Islamic banking system was developed

here up to 1983 The Traditional banking is fully based on interest it is

commonly meant as commercial banks. But interest is absolutely prohibited

by Islam. As a result the people of Bangladesh have been experiencing such

a non-Islamic and prohibited banking system against their normal values

and faith.

     The present world especially the third world is affected by

unemployment socioeconomic injustice inflation, inequitable distribution of

income and wealth etc. The main aim of traditional banking is to earn profit

by borrowing and lending money in exchange of interest. As a result there is

an unfair competition among the bankers and among the customers.

Under conventional framework a bank borrows to lend and it mobilizes

savings/deposits by borrowing from savers and lends those deposits to

productive interest on deposits and advances respectively. The banks

generally maintain a difference is known as interest-spread which is the

main income of an interest-based bank. In the Islamic banking system the

bank receives no interest. In this case IB receives its entire deposits from

the investment of the clients on the basis of profit-sharing places it to the

actual entrepreneurs on the basis of the profit sharing. So, it is clear that in

case of the traditional banking systems, a fixed percentage of interest,

irrespective of income earned is paid to the depositors. The depositors of IB

are never deprived of excess income, which the bank may make at the end

of year. Not only this traditional bank give fixed interest rate even when

they incur operational loss. The critics of Islamic banking system are of the

opinion that both are found same in terms of deposits mobilization and

advances investment.                  

Banking functions of IBBL is an important aspect in our economy as it has

broken the line of interest based traditional banking system through the

introduction Islamic Shariah based banking. Since its commencement in

1983, it has already gained a good reputation in customers as well as the

masses of people of Bangladesh. Islamic Banking is especially important in

the world countries, which are characterized by unemployment, inequitable

distribution of income and wealth, etc. But there are so many constraints in

our country in functioning the Islamic banking activities. This paper is an

attempt to evaluate the Modes finance of Islamic Bank Bangladesh Ltd.

(IBBL) in terms of productivity and effectiveness. Since it is difficult to

measure the productivity of a bank, especially the interest-free IBBL, as it

does not any visible product. Some specific indicators have been selected

for the purpose of measurement of productivity.

Bangladesh is one of the largest Muslim countries in the world. The people

of this country are deeply committed to Islamic way of life as enshrined in

the holy Qur’an and the Sunnah. Naturally, it remains a deep cru in their

hearts to fashion and design their economic lives in accordance with the

precepts of Islam. The establishment of Islami Bank Bangladesh Limited on

March 13, 1983, is the true reflection of this inner urge of its people, which

started functioning with erect from March 30, 1983. This bank is the first of

its kind in South-East Asia. It is committed to conduct all banking and

investment activities on the basis of interest fee profit-loss sharing system.

In doing so, it has unveiled a new horizon and ushered in a new silver lining

of hope towards materializing a long cherished dream of the people of

Bangladesh for doing their banking transactions in line with what is

prescribed by Islam. With the active co-operation and participation of

Islamic development bank (IDB) and some other Islamic banks, financial

institutions, government bodies and eminent personalities of the middle

east and the gulf countries, Islami Bank Bangladesh Limited has by now

earned the unique position of a leading private commercial bank in

Bangladesh.

Objective of the study

To understand the prevailing mechanism of modes of finance of Islami

bank.

To study the performance of modes of finance of Islami bank.

To highlight the characteristics of modes of finance of Islami bank.

To highlight the major problem of modes of finance facing by Islami

bank.

To understand the basic difference in relation to conventional bank.

Scope and Methodology of the study

Mode of finance is much talked in the financial literature of economic

development. This topic includes a vast area of financial literature. But this

present study covers only the modes of finance of Islamic Bank, specially

the modes & mechanism of finance of Islami Bank Bangladesh Limited

(IBBL). This study is confined to only this bank other than conventional

bank. 

Limitation of the study

It is very difficult to analyze this issue without proper knowledge

about Islamic banking and economy.

As it is not conventional so it bears some complexity to understand.

Some words are in Arabic terms that make it difficult.

It is time consuming to differentiate & understand interest & profit.

Objectives of Islami bank

It is a golden desire of every Muslim that his social and political lives should

be   in accordance with the divine guides prescribed in the holy Quran and

the Sunnah. In the same tune of aspiration as above, he desires to follow a

purified life in financial and business life. So, the objectives of the Islamic

banking may be derived from the broader objectives of the Islamic

economy. Two quotations may help us understand our objectives.

Ibn al- Qayyim says:” The basis of the Shariah is the wisdom and welfare of

the people in this world as well as the hereafter. This welfare lies in

complete justice, mercy, well-being and wisdom. Anything that departs from

justice to oppression, from mercy to harshness, from welfare to misery and

from wisdom to folly, has nothing to do with the Shariah

Al- Ghazali says, “The very objective of the shariah is to promote the welfare

of the people which lies in safeguarding their faith, their life, their intellect,

their posterity and their property. Whatever ensures the safeguard of these

five serves public interest and is desirable.”

However, M. Umer Chapra, in his book ‘Towards a Just Monetary System

discussed some of the most fundamental characteristics of Islamic money

and banking system. Those are as follows:

1. Broad-based economic well-being with full employment and optimum

rate of economic ground;

2. Socio-economic justice and equitable distribution of income and

wealth;

3. Stability in the value of money to enable the medium of exchange to

be a reliable unit of account, a just standard of deferred payments,

and a stable store or value.

4. Mobilization and investment of savings for economic development in

an equitable manner such that a just return is ensured to all parties

concerned, and

5. Effective rendering of all services normally expected from the banking

system.

Islamic economy including Islamic banking is now entering a new phase

which calls fore more integrative as well as a more critical approach to

meet the present day complex financial needs. Now, the economists are

faced with the challenging task of reviewing the whole situation emerging

at least in three areas.

Firstly, to bring together the works done by different economists into a

comprehensive view of the monetary system of Islam in its fullness, as

against concentrating on specific, sometimes even disjointed, elements of

money and banking.

Secondly, to review critically the different models of Islamic banking

presented over the years in the context of the practice of Islamic banking

with a view to refining the theory as well as improving the practice.

Thirdly, it is essential to put the whole theory and practice of Islamic

banking in the perspective of an Islamic economy and the Islamic moral and

social order. Any element of the Islamic system, however important, cannot

produce the desired results, if it is allowed to operate in isolation. It must

lead to other complementary changes to complete the process.

Special features of the bank

Islami Bank Bangladesh Limited (IBBL) was incorporated on 13.03.1983 as

a public company with limited liability under the companies act, 1913. The

bank started functioning with effect from 30.03.1983 as the first Shariah

based interest-free bank in South-East Asia.

The bank is committed to run all its activities as per Islamic Shariah. IBBL

through its steady progress and continuous success has, by now, earned the

reputation of being one of the leading private sector banks of the country.

The distinguishing features of IBBL are as under:

All it’s activities are conducted on interest-free system according to

Islamic Shariah.

Investment is made through different modes permitted under Islamic

Shariah.

Investment-income of the bank is shared with the Mudaraba

depositors according to a ratio to ensure a reasonably fair rate of

return on their deposits.

Its aims are to introduce a welfare-oriented banking system and also

to establish equity and justice in the field of all economic activities.

It extends Socio-economic and financial services to the poor, helpless

and low-income group of the people for their economic upliftment

particularly in the rural areas.

It plays a vital role in human resource development and employment

generation particularly for the unemployed youths.

Its aim is to achieve balance growth & equitable development of the

country through diversified investment operations particularly in the

priority sectors and in the less developed areas.

Modes of finance followed by IBBLInvestment is the action of deploying funds with the intention and

expectation that they will earn a return for their owners of a fund can

deploy it through real investment or financial investment. When resources

are spent to purchase fixed and current assets for use in a production

process for trading purpose, then it can be termed as real investment. For

example, deposit of money with a bank, purchase of Mudarabah Savings

Bond or share of a company. Financial investments ultimately takes form of

real investment as it is meant for so. Since hoarding is condemned by Islam

and a 2.5 percent annual tax (Zakat) is imposed on savings, the owner of a

fund, if he is unable to make real investment, has no option but to invest his

savings as a financial investment.

Modes of finance followed by Islami bank are exercised under three

principles.

1. Bai- (Buy & Selling) Mechanism

2. Sharing (Profit & Loss) Mechanism

3. Ownership Sharing Mechanism

Modes of finance under three principles can be presented by using chart as

follows-

      

BAI- MURABAHA

Meaning:

The terms 'Bai- Murabaha' have derived from Arabic words Bai and Ribhun.

The word Bai means purchase and sale and the words Ribhun means an

agreed upon profit. Bai-Murabaha means sale on agreed upon profit.

Definition:

Bai-Murabaha may be defined as a contract between a Buyer and a seller

under which the seller sells certain specific goods p0ermissible under

Islamic Shariah and the Law of the land to the Buyer at a cost plus agreed

profit payable on cash or on any fixed future date in lump- sum or by

installments. The profit marked-up may be fixed on lump sum or in

percentage of the cost price of the goods. There are different types of

Murabaha as given bellow:

Types of Murabaha:

In respect of dealing parties Bai-Murabaha may be of two types.

1. Ordinary Bai- Murabaha: 

Ordinary Bai-Murabaha happens between the two parties, i.e., the buyer

and the seller, where the seller as an ordinary trader purchases the goods

from the market without depending on any order and promises to buy the

same from him and sells those to a buyer for cost plus profit, then the sale is

called ordinary Bai-Murabaha. In this case the seller undertakes full risks of

his capital invested on the business with a view to earn profit out of selling

the goods purchased for.

2. Bai-Murabaha on order and promise:  

It occurs between the three parties- the buyer, the seller and the Bank - as

an intermediary trader between the buyer and the seller, where the Bank

upon receipt of order from the buyer with specification and a prior

outstanding promise to buy the goods from the bank, purchases the ordered

goods and sells those to the ordering buyer at a cost plus agreed profit, the

sale is called 'Bai- Murabaha on order or promise', generally known as

Murabaha. In this case, capital with profit is almost secured by promise.

This Murabaha upon order and promise is generally used by the Islami

Banks, which undertakes the purchase of commodities according to the

specification requested by the clients and sale on Bai- Murabaha to the one

who order for the goods and promised to buy those for its cost price plus a

marked-up profit agreed upon previously by the two parties, the Bank and

the client. 

Therefore, it is a sale of goods on profit by which ownership of the goods is

transferred by the Bank to the client but the payment of the sale price (cost

plus profit) by the client is deferred for a fixed period.

To make it more clear, it may be noted here that Islamic Bank is financier to

the client not in the sense that the bank finances the purchase of goods by

the clients as conventional Bank does, rather it is a financier by deferring

the receipt of sale price of the goods sold by the Bank to the client. There is

a chance for happening of a loan and earning of interest under the wrong

practice of Bai-Murabaha.

If the bank does not purchase the goods or does not make any purchase

agreement with seller under this Agreement of Bai-Murabaha that will be a

remittance of the amount on behalf of the client, which shall be nothing but

a loan to him and any profit on this amount shall be nothing but Interest

(Riba that are practiced in the traditional Banking system).

Therefore, to make a true practice of Bai-Murabaha, purchase of goods by

the Bank should be for and on behalf of the Bank and the payment of price

of goods by the Bank must be made for and on behalf of the Bank. But on

any way, the payment of price of goods is turned into a payment for and on

behalf of the client or it is paid to the client any profit on it will be Reba

(Interest that is allowed in traditional baking system but not allowed in the

Islami Banking system because Islam prohibits all kind of interest. 

Important Features:

It is permissible for the client to offer an order to purchase particular goods

by the Bank dealing its specification and committing himself to buy the

same from their bank on Murabaha. i.e.,. Cost-plus agreed upon profit.  

It is permissible to make the promise binding upon the client to purchase

from the Bank that is he is to either satisfy the promise or to indemnify the

damages caused by breaking the promise without excuse. 

It is permissible to take cash/collateral security to guarantee the

implementation of the promise or to indemnify the damages. 

It is also permissible to document the debt resulting from Bai-Murabaha by

a Guarantor or a mortgage or both like any other debt is permission.

Mortgage/ Cash Security may be obtained prior to the signing of the

Agreement or at the time of signing the Agreement. 

Stock and availability of goods is a basic condition for signing a Bai-

Murabaha agreement. Therefore, the Bank must purchase the goods as per

specification of the client to acquire ownership of the same before signing

the Bai-Murabaha agreement with the client.

After purchase of goods the Bank must bear the risk of goods until those are

actually sold and delivered to the Client, i.e., after purchase of the goods by

the Bank and before selling of those on Bai-Murabaha to the client buyer,

the bank shall bear the consequences of any damages or defects, unless

there is an agreement with the client releasing the Bank of the defects that

means, if the goods are damaged, bank is liable, of the goods are defective

(defect that id nor included in the release) the bank bears the responsibility.

The bank must deliver the specified goods to the Client on specified date

and at specified place of delivery as per Contract.

The Bank shall sell the goods at a higher price (Cost +Profit) to earn profit.

The cost of goods sold and profit mark-up therewith shall separately and

clearly be mentioned on the Bai- Murabaha agreement. The profit mark-up

may be mentioned in lump sum or in percentage of the purchase/cost price

of the goods. But under no circumstances, the percentage of the

purchase/cost price of goods. But under no circumstances, the percentage

of the profit shall have any relation with time or expressed in relation with

time, such as per month, per annum, etc. 

The price once fixed as per agreement and deferred cannot be further

increased.

It is permissible for the bank to authorize any third party to buy and receive

the goods on Bank's behalf the authorization must be in a separate contract.

These features make Bai-Murabaha identical from all other modes of Islamic

Investment. There are certain steps to accomplish a deal of Bai- Murabaha

as shown below.

Steps of Bai-Murabaha Practiced by Islami Bank:

First Step: 

Submission of proposal: The client's sends a proposal with the

specifications of the commodity for purchasing through the Bank and

requests to make him known the date and method of payment of price, etc.

The Bank sends a quotation valid for a certain period mentioning the cost of

the goods plus profit of the bank.

Second step: 

Signing a promise to purchase:  The client promises to buy the

commodity from the bank on Bai-Murabaha basis (for the cost of the

commodity plus the agreed upon profit)

The Bank studies the request and determines the securities with terms and

conditions for approval.

Third step:

The first sale contract: The bank informs the client of its approval of

purchasing the commodity. The bank may pay the price immediately pr as

per the agreement.

The seller expresses its approval to the sale and sends the invoice.

Fourth step: 

Signing of a Murabaha Sale Contract: The two parties (the bank and

clients) sign the Bai-Murabaha sale contract according to the agreement of

the promise to purchase.

Fifth Step:

Delivery and Receipt of the commodity:

The Bank authorizes the client or his nominee to receive the commodity 

The seller sends the commodity to the place of delivery agreed upon.

The client undertakes the receipt of the commodity in its capacity as legal

representative and notifies the bank of the execution of the proxy.

BAI-MUAJJAL (Deferred sale)

Meaning:

The terms "Bai" and "Muajja" have been derived from Arabic words 'Bai'

and 'Ajal'. The word Bai means purchase and sale and the word 'Ajal' means

a fixed time or a fixed period. "Bai-Muajjal" means sale for which payment is

made at a future fixed date or within a fixed period. In short, it is a sale on

Credit.

Definition:

The Bai-Muajjal may be defined as a contract between a Buyer and a Seller

under which the seller sells certain specific goods (permissible under

Shariah and law of the country), to the Buyer at an agreed fixed price

payable at a certain fixed future date in lump sum or within a fixed period

by fixed installments. The seller may also sell the goods purchased by him

as per order and specification of the buyer.

Bai-Muajjal is treated as a contract between the bank and the client under

which the bank sells to the client certain specific goods, purchased as per

order and specification of the client at an agreed price payable with in a

fixed future date in lump sum or by fixed installments.

Thus it is a credit sale of goods by which ownership of the goods is

transferred by the bank to the client but the payment of sale price by the

client is deferred for a fixed period.

It may be noted here that in case of Bai- Muajjal and Bai-Murabaha, the

Islamic bank is a financier to the client not in the sense that the bank

finances the purchase of goods by the client, rather it is a financier by

deferring the receipt of the sale price of goods, it sells to the client. If the

bank does not purchase the goods or does not make any purchase

agreement with seller but only makes payment of any goods directly

purchased and received by the client from the seller under Bai-Muajjal / Bai-

Murabaha agreement, that will be a remittance/ payment of the amount on

behalf of the client, which shall be nothing but a loan to the client and any

profit on this amount shall be nothing but interest.

There fore, purchase of goods by the bank should be for and on behalf of

the bank and the payment of price of goods by the bank must be made for

and on behalf of the bank. If in any way the payment of price of goods is

turned in to a payment for and on behalf of the client, or it is paid to the

client any profit on it will be Riba. 

There are some important features of Bai- Muajjal as given bellow:

Important Features: 

It is permissible for the Client to offer an order to purchase by the bank

particular goods deciding its specification and committing himself to by the

same from the bank on Bai-Muajjal I.e. deferred payment sale at fixed

price. 

It is permissible to make the promise binding upon the Client to purchase

from the bank, i.e. he is to either satisfy the promise or to indemnify the

damages caused by breaking the promise without excuses. 

It is permissible to take cash/ collateral security to Guarantee the

implementation of the promise or to indemnify the damages. 

It is also permissible to document the debt resulting form Bai-Muajjal by a

Guarantor, or a mortgage or both like any other debt. Mortgage/ Guarantee/

Cash security may be obtained prior to the signing of the Agreement or at

the time of signing the Agreement. 

Stock and availability of goods is a basic condition for signing a Bai- Muajjal

Agreement. Therefore, the Bank must purchase the goods as per

specification of the client to acquire ownership of the same before signing

the Bai-Muajjal Agreement with the Client. 

After purchase of goods the bank must bear the risk of goods until those are

actually delivered to the Client.  

The Bank must deliver the specified goods to the Client on specified date

and at specified place of delivery as per contract. 

The Bank may sell the goods at a higher price than the purchase price to

earn profit. 

The price once fixed as per agreement and deferred cannot be further

increased. 

The Bank may sell the goods at one agreed price, which will include both

the cost price and the profit. Unlike Bai- Murabaha, the bank may not

disclose the cost price and the profit mark- up separately to the Client.  

               

BAI- SALAM

Meaning: 

The terms “Bai” and “Salam” have been derived from Arabic words. The

words “Bai” means “sale and purchase” and the word “Salam” means

“Advance”. “Bai-Salam” means advance sale and purchase.

Definition:

It is a sale in which an advance payment is made by the buyer, but the

delivery is delayed to an agreed date. In the Bai-Salam, a financial

transaction happens in advance in cash as a price of commodity whose

delivery will be in a future date. It means deferred is the commodity sold

(debt in kind) and price of the commodity described is to be aid immediately

in advance. 

The Bai-Salam sales serve the interests of both parties:

1. The seller- gets in advance the money he wants in exchange of his

obligation to deliver the commodity later. He benefit from the Salam sale by

covering his financial needs whether they are personal expenses for

productive activity. 

2. The purchaser-heretic is the financing bank. The bank gets the

commodity it is planning to trade on in the time it decides. Because the

commodity becomes the liability of the seller who meet his obligation. The

bank will also benefit from the cheap prices for usually salam sale is

cheaper than a cash sale. This way the bank will be secured against the

fluctuations of prices. 

The bank can sell on parallel salam commodity in the same kind as it has

previously purchased on first salam without making one contract depend on

the other. The bank also has the option of waiting to receive the commodity

and then sell it for cash or deferred payment.

Important feature: 

Bai-Salam is a mode of finance allowed by Islamic Shariah in which

commodity or product can be sold without having the said commodity or

product either in existence or physical possession of the seller. If the

commodity are ready for sale Bai-Salam is not allowed in Shariah. Then the

sale may be done either in Bai-Murabaha or Bai-Muajjal mode of finance. 

Practical Steps of the Salam Sale:

1.Cash sale or sale on Credit- The Bank pays the price in the contract

meeting so that the seller makes use of it and covers his financial needs.

The seller abides the delivery of the commodity on the specific due date.  

2.Delivery and receipt of the commodity on the specific due Date:

The bank there is several options at the disposal of the bank to choose one

of them.

a) The bank receives the commodity on the specific due date, and either for

cash or on credit.

b) The bank can authorize the seller to sell the commodity on its behalf as

against fees (or without fees). 

c) Direct the seller to deliver the commodity to a third part (the Buyer)

according to pervious promise of purchase, that is at an emphatic demand

of purchase.

3. The sale Contract: The bank agrees to sell the commodity for cash or a

deferred price higher than the salam purchase price. The buyer agrees to

purchase and to pay the price according to the agreement.

Rules of Bai-Salam

1. Commodity Should be Known: It is a condition that the commodity

should be known Ignorance about the commodity leads to dispute which

invalidates the contract.

2. Monitoring By Specification: It is a condition that the commodity can

be monitored by specification to the maximum possible degree, only

negligible variation is tolerated If the commodity cannot Be monitored by

specification salam is impermissible, because of ignorance that leads to

dispute. 

3. Availability of Goods for Delivery: It is a condition that the commodity

is possible to deliver when it is due. That is the probability of its existence

at the time of delivery is deemed to be high, if the contrary is the case,

salam, is impermissible. 

4.Salam n the Whole to be Possessed Partly: It is permissible to draw a

salam sale contract on one whole thing but to be possessed at different

times in specific parts. 

5. Commodity a Liability Debt on the Seller: It is a condition that the

commodity is a liability debt, The seller is obliged to deliver the commodity

when it is due, according to the specification stipulated in the contract

without abiding as to whether it is the product of his factory or the produce

of his private firm or from others.

6. Salam on Existing Goods: Salam sale is impermissible on existing

commodities because damage and deterioration cannot be assured before

delivery on the due date. Delivery may become impossible, anything which

is risky and elevator. 

7. Salam on Land and Real Estates salam: Is impermissible on Land lots

and real estates because the description or the real estate entails the

location. If the location is determined then it is specified, which contradicts

what the jurists agreed upon, that salam is a liability debt. 

8. Salam on Special Item: Salam is permissible on a commodity of a

specific locality if it is assured that it is almost always available in that

locality and it rarely becomes unavailable.

9.Advance Payment: It is a condition that the purchase price in salam is

specified and advanced to the seller at the contract meeting. 

10. Date of Delivery Known: It is a condition in salam sale that the due

date is known to avoid ignorance which leads to dispute.

11.Delivery mechanism Specified: It is a condition that the place of

delivery is started in the contract if the commodity needs loading or

transportation expenses.

12. Provision for Mortgage: It is permissible to take mortgage and

guarantor on salam debt to guarantee that the seller satisfies his obligation

by delivering the commodity sold, which is a liability on the due date.

13.Parallel Salam Contract: It is impermissible for the buyer of a salam

commodity to sell it before receiving it .It is known that the Salam

commodity is a liability debt ob the seller and not an existing commodity.

Instead of that, it is permissible for the buyer to draw a parallel salam

contract without connecting it to the first salam contract.

ISTISNA'A SALE

Definition:

Instisna'a sale is a contracting which the price is paid in advance at the time

of contract and the object of sales manufactured and delivered later A

manufacturer, artist or craftsman may take orders, with or without advance

payment, to make articles himself or hire labor to do so.

The majority of the jurists consider Istisna's as one of the divisions of Salam,

Therefore, It is subsumed under the definition of Salam, But the Hanafie

school of jurisprudence makes Istisna's as an independent and distinct

contract, The jurists of the Hanafie school have given various definitions to

Istisna'a some of which are "That it is a contract with a manufacturer to

make the something" and It is a contract on a commodity on liability with

the provision of work" The purchasers called Mustasnia  contractor and the

seller is called "sania" maker manufacturer and the thing is called

'masnooa' manufactured, built, made. 

Islami Bank can utilize Istisna'a in two ways.

1. It is permissible for the bank to buy a commodity on Istisna'a contract

then sell it after receipt for cash installed or deferred price.

2.It is also permissible for the bank to enter into Istisna'a contract in the

capacity of seller to the who demand a purchase of a particular commodity

and then straw a parallel istisna'a Contracting the capacity of a buyer with

another partition cake manufacture the -commodity agreed upon in the first

contract. 

The first Istisna'a can be immediate or deferred ( the payment) The payment

in the second Istisna'a can be each or deferred stated blow are the practical

steps which the bank applies the modes of Istisna'a sale, parallel Istisna'a

with reference to the non-existence of any legal relation or financial

obligation between.

1. The purchaser requesting Istisna'a (the end use) in the first contract,

and 

2..The (maker), manufacturer, (the builder), (the seller) who manufactures

the article in accordance to the parallel Istisna'a contract. 

So any disagreements that may arise are settled under each contract

separately according to the provision therein. 

Rules For Istisna'a Sale:

1. It is a condition in the Istisna'a contract to stare in the clearest of terms

the type dimensions and all the specification required, because it id a

condition in all commutative contract the sold commodity must be known to

avoid ignorance which leads to dispute.

2 Istisna'a contract is valid for objects that can be made. It is invalid for

corn, wheat, barley or fruit and all natural products whose sale on liability

are a salam and not Istisna'a.

3 The object sold in Istisna'a is a fixed liability debt therefore it is

permissible to be a valuable asset made according to special specification-

nothing like it-as the customer wishes with the provision that to can be

monitored buy description. For this feature Istisna'a is different from the

salam, which is permissible only in similar assets.

4. The materials should be supplied by the maker. If they are supplied by

the buyer, the contract is Ijara and not Istisna'a

5 The Istisna'a is not confined to what the seller makes after he contract,

nut the maker will be satisfying his obligation if he brings in an article

conforming to all the specifications. Whether it is his make before the

contact or the make of some one else. The specifications demanded by the

buyer are the most important as the commodity subject of contract is a

liability debt.

6. The Istisna'a contract is a binding to the two parties, and no party has the

right to retract, only if the commodity does not conform to the specifications

demanded, can the buyer have the option. 

7. Once the contract is drawn the ownership of the asset is affirmed to the

buyer and the ownership of the price is affirmed to the maker.

8.It is not a condition in the Istisna'a contract to advance the price. Usually

part of the price is paid in advance and the reminder will be withheld to the

time of delivery and receipt of the commodity.

9. It is a condition that the period of delivery is specified whether it is short

or long so as to avoid ignorance which leads to conflict between the two

parties.

10. It is condition that the period of delivery is started of the commodity

needs loading or transportation expenses.

11. The buyer may stipulate in the Istisna'a contract that the commodity

shall be manufactured or produced by a specific manufacturer, or

manufactured from specific materials. This is nor permitted in the case of

salam sale.

MUDARABAH

Definition: 

It refers to a contact between two parties in which one party supplies

capital to the other party for the carrying on of some trade on the condition

that the resulting profits be distributed in a mutually agreed proportion

while all loss is borne by the provider of the capital. Mudarabah is also

known a Qirad and Muqaradah

Mudaraba is a contract of those who have capital with those who have

expertise Where the first party provides capital and the other party provides

the expertise with the purpose of earring "halal" (Lawful) profit which will

be devised between them in ration agreed upon. This mode serves the

business interest of the capital owner and the mudharib (agent).

The capital owner may not have the opportunity or the experience to make

turn over capital and trade with it. On the other hand, the agent (the

Mubarib) 

May not have the adequate capital to put to materialize his experience, such

lackings of both parties bring them into a contract of Mudarabah. It had

certain steps to be followed. The following is the steps of the Mudarabah

contract.

Steps of Mudarabah

1. Establishing a Mudharabah Project: The bank- the bank provides the

capital as a capital owner.

The Mudharib- provides the effort and expertise for the investment of

capital in exchange of a share in profit agreed upon.

2.The Results of Mudharabah: The two parties calculate the earrings and

divide the profits at the end of Mudharabah; this can be done periodically in

accordance with the agreement along with observance to legal rules.

3.Payment of Mudharabah Capital: The banks recovers the Mudharabah

capital it contributed before dividing the profits between the two parties

because profit is protection to capital in case of agreement to distribute

profits periodically before the final settlement it must be on account until

the security of capital is assured. 

4.Distribution of wealth resulting from Mudharabah: In case of loss,

the capital owner (the bank) bears the loss. In the event of profits, they are

divided between the two parties in accordance wit the agreement between

them with observance to the principle "profit is protection to capital"

There are some legal rules for Mudharabah Mode of Finance, which are as

follows.

Rules of Mudharabah:

1. Capital Must be Specific: It is a condition in Mudharabah that capital

must be specific or its return to owner, so its amount must be known at the

contract, and because the uncertainty about the amount of capital

necessarily leads to uncertainty about the amount of profit, which

represents an increment to capital.

2.Capital Must be in Currency: it is a condition that capital must be a

currency in circulation. However, It can be merchandise only in condition

that it is evaluated at the contract and the agreed upon value becomes the

capital of Mudharabah. 

3.Capital Not a Liability debt on Mudarib: It is a condition that in

capital must not be a liability debt on the Mudharib, because the Mudharib

is a trustee and in respect to the debt, it is a guarantor who can only be

absolved after payment. 

4.Mixing of Private Capital Permissible: It is permissible for a mudharib

to mix its private capital with the capital of the Mudharabah, thus it

becomes a partner, as well, and its disposal of capital on the basis of

Mudharabah is permissible. 

5.Delivery of Capital to Mudarib: It is a condition that the capital of

Mudharabah must be delivered to the   mudharib because not delivering it

imposes constrictions on the withhold  it imposes constrictions on the

mudharib and restricts its power disposal. Some of the jurists permit the

capital owner to withhold capital and release it gradually according to the

needs of the mudharib since Mudharabah adjudges unrestricted disposal

but not deliver. 

6. Imposition of Restriction on Mudarib: It is permissible to impose

restrictions on the mudharib if the restriction is beneficial and dose not

constitute a constriction on the agent to attain the profit required and is not

counterproductive to the purpose of the Mudharaba if the mudharib violates

the restriction contravenes the beneficial condition, it becomes a usurper

and guarantees capital to the capital owner.

7.Hiring Helping Hands By Mudarib:  It is permissible for the Mudharib

to hire assistance in difficult work, which it is unable to do by itself.

Recourse shall be made to prevailing custom to determine that. 

8.Disposal of the Mudharib: The disposal of the Mudharib is confined to

what is conducive to the Mudharabah. It must lend or donate nothing of the

Mudharabah capital It is also not allowed to purchase, for Mudharabah with

more than its capital, nor is it allowed to go into partnership with others

using the Mudharabah capital. All of the above is permissible if the capital

owner consents and authorizes the agent to use its discretion. 

9. No Security or Guarantee Except Negligence: No security on the

Mudharib shall be stated in the Mudharabah contract except in case of

negligence or trespass because the mudharib is a trustee on what is in its

hold, capital is judged as a deposit. It is permissible to take a surety

mortgage from the mudharib to guarantee the payment in case of

negligence or trespass or violation of conditions, but it is impermissible to

take that as a guarantee to capital or profit, because it is impermissible for

the Mudharib to guarantee 

Capital nor profit. 

10. Profit Sharing as per Agreed Ratio: It is a condition that profit

should be specific because it the subject of the contract and being unknown

abrogates the contract. The contraction parties should stipulate in the

contract the profit shares (in percentage) for each one. It is impermissible

to stipulate a lump sum as profit to either party so as not to lead to the

termination of profit by one of them. Profit in Mudharabah is distributed

according to the agreement of the two contraction parties. They may agree

on specific rations, be more or less. 

11.Loss to be Borne by the Owner of the Capital : It is a condition that

the capital owner bears alone the loss (the Mudharib bears nothing of it )

because loss is a decrease in capital and capital belongs to the owner.

12. Profit is Protection to Capital: The Mudharib shall collect its share of

the profit only after obtaining the permission of the capital owner. Also the

Mudharib is entitled to collect its share of profit only after capital is

recovered , because the principle says "profit is protection to capital" In

case of temporary division of profit before the final settlement, and the

Mudharabah is contenting, the loss incurred later shall be made good from

the profit distributed.

13. Recovery of Capital: The ownership of the mudharib becomes secure

after the liquidation of the Mudharabah and the capital owner recovered its

capital. Some of the Jurists hold the view that auditing is like division and

possession. If two parties reach a final settlement after the liquidation of the

assets and leave the Mudharabah, it is considered to be a new mudharabah

and neither one makes good the loss of the other.

14.Not a Binding Contract: Mudharabah is terminated if one of the two

parties rescinds it because it is an optional not a binding contract. Some of

the jurists hold the view that Mudharabah is binding and it cannot be

rescinded if the Mudharib commences work.

MUSHARAKA (Partnership)

Meaning and definition:

The word Musharaka is derived from the Arabic word Sharikah meaning

partnership. Islamic jurists point out that the legality and legality and

permissibility of Musharakah is based on the injunctions of the Holy Qura'n,

Sunnah, and Ijma (consensus) of the scholars. It may be noted that Islamic

Banks are inclined to use various forms of Shariakt- al -Inan because of its

built on flexibility. At an Islamic bank, a typical Musharakah transaction

may be conducted ob the following manner.

One two or more entrepreneurs approach an Islamic Bank for the finance

required for a project. The bank along with other partners provides

complete finance. All partners, including the bank have the right to

participate in the project. They can also waive this right. The profits are to

be distributed according to an agreed ratio, which need not be the same as

the different partners have provided the finance for the project Musharakah

may be of two types: 

1.Permanent and 

2. Diminishing Musharaka which have been discussed below.

a. Permanent Musharakah:

in this case the bank participates in the equity of a company and receives an

annual share of the profits on a pre-rate basis. The period of termination of

the contract is not specified. This financing technique is also referred to as

continued Musharakah.

b. Diminishing Musharakah:

Digressive or Diminishing Muaharakah is a special form of Musharakah

which ultimately culminates in the ownership of the asset or the project by

the client. It operates in the following manner.

The bank participates as a financial partner, in full or in part, in a project

with a given income forecast. An agreement is signed by the partner and

the bank through which the bank receives a share of the profit as a partner.

However, the agreement also provides payment of a portion of the net

income of the net income of the project as repayment of the principal

financed by the bank. The partner is entitled to keep the rest. In this way,

the full owner.

Definition of permanent Musharakah.

The contributions of the partners under this mode may be equal or unequal

ratios of capital to establish a new income-generating project or to

participate in an established one, whereby each participant owns a share in

the capital structure permanently and deserves his share of the profit

income. Such a partnership originally is intended to continue up to the

dissolution of the company. But one can sell his share in the capital to

withdraw from the project. 

The Islamic Banks can use the mode of Permanent Musharakah in many

income-generating projects. They can finance their customers, for an

intended projects, with pare of the capital required for the project in

exchange of a share of the output as they may agree upon. They can also

mostly leave the responsibility of management of the customer- partner and

retain the right of super vision and follow up.

It follows from the above discussion   that there are three steps of

permanent Musharakah which are given below.

One- partnership in Capital

The bank tenders part of the capital required in its capacity as a partner

and authorizes the customer partner to manage the project.

The partner tenders part of the capital required for the project and be a

trustee on what he holds from the bank funds.

Two-Results of the projects

The work in the project is for the growth of capital. The project may achieve

positive or negative results. 

Three-The Distribution of wealth accrued from the project.

In case of loss, each partner bears part of the loss proportionate to its share

in capital. In case of earning profits, they are divided between the two

parties (the bank and the partner) in accordance with the agreement.

Rules For Permanent Musharakah:

1. Capital Should be Specific: It is a condition that the capital of the

company is specific, existent and under disposal. It is invalid to establish a

company on non-existent fund of debt, for the purpose of profit,

2. Share of Equity: It is not a condition that partners have equal shares in

capital, though variation in shares is permissible. It is subject to

agreement. 

3.Nature of Capital: It is a condition that the capital of the company is

money and valuables. Some of the jurists permit participating with

merchandise on condition it is evaluated in the contract and the value

agreed upon becomes the capital of the company.

4.Active Participation of Partners: It is impermissible to impose

conditions forbidding one of the partners from work, because the company

is build on and each partner implicitly permits and gives power of attorney

to the other partner to dispose of and work wit capital but it is permissible

for one partner to singly work in the company by mandate of other partners.

5.No Security for Profit: A partner is a trustee on the funds in his hand

from the company and he guarantees only in case of trespass or negligence

and it is permissible to take a mortgage or a guarantee against trespass and

negligence but it is impermissible to take security or profit or capital.

6. Ratio of Profit Prefixed: It is a condition that profit for each partner

must be known to avoid uncertainty and it must be a prorate ratio to all

partners and must not be a lump sum, because this contravene the

requirement of partnership.

7. Variation in Share of Profit Permissible: In Principe, profit must be

divided among partners in ratios proportionate to their shares in capital but

some of the jurists permit variation in profit shares whereupon it is

determined by agreement for one of the partners may be more dexterous

and more diligent and may not agree to parity ,so variation in profit

becomes necessary.

   8. Not a binding contract:  In principle, partnership is a permissible

and not a binding contract, so it is admissible for any partner to rescind the

contract whenever it wishes provided that this occurs with the knowledge of

the other partner or partners, because rescinding the contract without the

knowledge of other partners prejudices their interests. Some of the jurists

are of the view that the partnership contract is binding  up to the liquidation

of capital or the accomplishment of the job accepted at the contract.

Application of permanent Musharakah: 

      Permanent Musharakah is helpful for large amount of investment in

modern economic activities the Islamic banks can use Musharakah to a new

or established firm by using permanent Musharakah as a mode of

investment.  The Islamic banks can make sufficient fund available to the

customer for the long term. The Islamic banks may become active partners

in determining the methods of production cost control, marketing etc. and

to achieve the objectives of the establishment. They can also supervise and

follow up the overall activities of the firm. The Islamic banks can share

profit or loss with the (partners) clients in all situations of the firm.  

  Definition of diminishing Musharakah:

   Diminishing Musharaka is an intention from the very beginning not to stay

in and continue the partnership up to the liquidation of the company. The

Islamic bank can give the other partner the right to purchase portion of the

bank on the ownership [the form for full payment at a time or by installment

basis as per agreement with the partners (the client). 

   

  The bank gradually can relinquish share to the partner, in exchange the

partner pays the price to the bank periodically during a reasonable period

to be agreed upon. after the discharge, the bank withdraws it claims from

the firm and it becomes the property of the partner. Decreasing partnership

is a mode innovated by the Islamic banks. It differs from the partnership.

Those are mentioned below.

  Steps of diminishing partnership 

1. Participation in capital: The bank-tenders part of the capital required

to the project In its capacity as a participant and agrees with the customer

partner on a specific method of selling its share in capital gradually.

The partner-tenders part of the capital required to the project and be a

trustee in what is in its hands of the bank funds.

2. Results of the projects:  The purpose of the work in the project is the

growth of capital. The results of the project may be positive or negative.

3. The distribution of the wealth accrued from the projects: In the

event of loss each partner bears its share in the loss in a ratio proportionate

to its share in capital. In case of earning profits, are detonated between the

two partners (the bank and the customer) in accordance with the

agreement. The shares the sale must be concluded as a separate deal with

no connection to the contract of the company.

4.The Bank sells its Share In Capital: The Bank- expresses its readiness,

its readiness, in accordance with the agreement, to sell a specific

percentage of its share in capital. 

The partner- pays the price of that percentage of capital to the bank and the

ownership is transferred to the partner. 

This process continues up to the end of the partnership of the bank in the

project and that's by gradually transferring the ownership of the project

customer/partner. In this way the bank has its principal returned plus the

profit earned during the partnership advice versa. 

In the first Conference of the Islamic Banks in Dubai, the conferees studied

the topic of partnership ending with ownership  (decreasing partnership)

and they decided that this mode can be applied in one of the following

(ways) forms. 

The First Form: The Bank agrees with the customer on the share of capital

and the conditions of partnership. The Conference has decided that the

bank should sell its shares to the customer after the completion of the

partnership and in an independent contract where the customer has the

same provision.

The Second Form. The band agrees with the customer in participating in

the total or partial capital of a firm of prospective earning son the basis of

the agreement with the right to relating the remainder of the income for the

purpose of paying the principal of what the bank has contributed.

The Third Form. The shares of each partner (the bank and the partner) in

the company are determined as stocks co comprising the total value of the

asset (real estate) Each partner, (the bank and the customer) gets its share

of the earnings accrued from the real property, If the partner so wishes it

can each year purchase a cretin number of the shares owned by the Bank,

The shares possessed by the bank shall be decreasing until the partner

becomes the sole owner of

the real property.

Rules for diminishing Musharakah.

In addition to all the legal rules that apply to the permanent partnership

which also apply to the decreasing partnership, the following matters must

the observed.

1.Participation and Sharing profit and Loss: It is a condition in the

decreasing partnership that it shall not be a mere loan financing operation,

but there must be real determination to participate and all the parties shall

share profit or loss during the period of the partnership.

2.Bank's Ownership and Right to Management: It is a condition that

the bank must completely own its, share in the partnership and must have

its complete right in management and disposal. In case the bank authorizes

its partner to perform the work, the bank shall have the right of supervision

and follow up.

3.Redeeming Bank's Share of Capital: It is impermissible to including

the contract of decreasing partnership a condition that adjudges the partner

to return to the bank the total of its shares in capital in assertions in

addition to profits accruing from that share, because of resemblance to

RIBA ( usury).

4.Bank's Promise to Sell It Share to the Partner: It is permissible for

thee  bank to offer a promise to sell its shares in the company to the partner

if the partner pays the value of  the shares. The sale must be concluded as a

separate deal with no connection to the contract of the company.

Hire purchase Under Shirkatul Melk:

Meaning and Definition:

Hire purchase Under Shirkatul Melk is a special type of contract which has

been developed through practice. Actually, it is a synthesis of three

contracts:

1. Shirkat

2. Ijarah and

3. Sale

There may be defined as follows:

Shirkatul Melk:

Shirkatul means partnership Shirkatul Melk means share in ownership.

When two or more persons supply equity, purchase an asset, own the same

jointly, and share the benefit as per agreement and bear the loss in

proportion to their respective equity, the contract is called Shirkatul Melk

contract.

Ijarah:

The term Ijarah has been derived from the Arabic words ‘Air’ and ‘Uirat’

which means consideration, return, wages or rent. This is really the

exchange value or consideration, return, wages, rent of service of an asset.

Ijarah has been defined as a contract between two parties, the Hiree and

Hirer where the Hirer enjoys or reaps a specific service or benefit against a

specified consideration or rent from the asset owned by the Hiree, it is a

hire agreement under which a certain assert is hired out by the Hiree to a

Hirer against fixed rent or rentals for a specified period.

Element of Ijarah:

a. According to the majority of Fuqaha, there are three general and six

detailed elements of Ijarah.

The wording: this includes offer and acceptance.

Contracting parties: this includes a Hiree, the owner of the property,

and a Hirer, the party that benefits from the use of the property.

Subject matter of the contract: this includes the rent and the benefit.

b. The Hiree: the individual or organization hires/rents out the property of

service is called the Hiree.

c. The Hirer: the individual of organization hires / takes the hire of the

property or service against the consideration, rent/ wages/ remuneration is

called the Hirer.

d. The benefit / asset: the benefit, which is hired/, rented out is called the

benefit.

e. The rent: the consideration either in monetary terms or in kinds fixing

quantity of goods/money to be paid against the benefit of the asset or

service of the asset is called the rent.

Sale:

This is a sale contract between a buyer and a seller under which the

ownership of certain goods or asset is transferred by seller to the buyer

against agreed upon price paid / to be paid by the buyer.

Thus, in Hire Purchase Under Shirkatul Melk made both the bank and the

client supply equity in equal or unequal proportion for purchase of an asset

like land, building, machinery, transport etc. Purchase the asset with that

equity money, own the same jointly, share the benefit as per agreement and

bear the loss in proportion to their respective equity. The share part or

portion of the asset owned by the bank is hired out to the client partner for

a fixed rent per unit of time for a fixed period. Lastly the bank sells and

transfers the ownership of it’s share/ part/ portion to the client against

payment of price fixed for that    part either gradually part by part or in limp

sum with in the hire period or after the expiring of the hire agreement.

Stages of Hire Purchase Under Shirkatul Melk:

Thus Hire Purchase Under Shirkatul Melk agreement has got three stages:

Purchase under joint ownership

Hire and

Sale and transfer of ownership to the other partner Hirer.

Important features:

1. In case of HPSM transaction the asset/ property involved is jointly

purchased by the Hiree (Bank) and the Hirer (Client) the Hiree and the

Hirer become co-owner of the asset under transaction in proportion to their

respective equity participation.

2. In HSPM agreement, the exact ownership of both the Hiree and Hirer

must be recognized.

3. Under this agreement, the Hirer becomes the owner of the benefit of the

asset but not of the asset itself, in accordance with the specific provisions of

the contract, which entitles the Hiree, is entitled fore the rentals.

4. As the ownership of hired portion of the asset lies with the Hiree and rent

is paid by the Hirer against the specific benefit, the rent is not considered

as price or part of price of the asset.

5. In the HPSM agreement the Hiree does not sell or the Hirer does not

purchase the asset but the Hiree promise to sell the asset to the Hirer part

by part only.

6. The promise to transfer legal title by the Hiree and undertakings given by

the Hirer to purchase ownership of the hired asset upon payment part by

part as per stipulations are effected only when it is actually done by a

separate sale contract.

7. As soon as any part of Hiree’s ownership of the asset is transferred to the

Hirer that becomes the property of the Hirer and hire contract for that

share/part and entitlement for rent there of lapses.

8. in HPSM, the shirkatul melk contract is effected from the day the equity

of both partied deposited and the asset is purchased and continues up to

the day on which the full title of Hiree is transferred to the Hirer.

9. Effectiveness of the sale contract depends on the actual sale and transfer

of ownership of the asset by the Hiree to the Hirer.

10. Under this agreement the bank acts as a partner, as a Hiree and at last

as a seller; on the other hand the client acts as a partner, as a Hirer and

lastly as a purchaser.

11. Ownership risk is borne by both the Hiree and Hirer in proportion to

their retained ownership or equity.

12. The Hirer cannot, without obtaining prior written permission of the

Hiree make any changes in the exact item of the hiree, or remove it from its

place of installation and transfer into another location.

13. HPSM transaction facilitates the client to get benefit from the hired

asset in exchange of rental and also to become full owner of the asset by

purchasing it part by part.

14. The Hirer to secure the Bank (the Hiree) will pledges hypothecate or

mortgage his portion or share      in the asset and or any other asset of his

own or third party guarantor to the Bank to fulfill his all

liabilities/commitments including the accrued rental, if any.  

Rules:

1. It is a condition that the subject of the contract and the asset should be

known comprehensively.

2. It is a condition that the asset to be hired must not be a fungible one

which can not be used mire than once or in other words the asset must be a

non-fungible one which can be utilized more than once or the service of

which can be separated from the asset itself.

it is a condition that the subject of the contract must actually and legally be

attainable.

3. It is a condition that the Hirer shall ensure that he will make use of the

asset as per provisions of the Agreement.

4. It is a condition that the Hirer shall ensure that he will make use of the

asset as per provision of the agreement.

5. The hire contract is permissible only when the asset and the benefit

derived from it is with in the category as per Islamic Shariah.

6. In a hire contract, the period of hire and the rental to be paid per unit of

time be clearly stated.

7. Everything that is suitable to be considered a price, in a sale, can be

suitable to be 

considered as rental in a hire contract.

8. It is permissible to advance, defer or install the rental in accordance with

the agreement.

9. It is permissible to make the Hirer to bear the cost of ordinary routine

maintenance, because this cost is normally known and can be considered as

part of the rental.

10. If the hired asset is damaged or destructed by the act of Allah and if the

Hiree offers a substitute with the same specifications agreed upon in the

hire contract the contract does not terminate.

11. Under HPSM agreement, both the Hiree and the Hirer must pay their

respective equity as agreed upon to purchase the demised asset under joint

ownership.

12. Ownership of the asset of both the Hiree and the Hirer should be

recognized as per law of the land.

Basic Characteristics of Modes of Finance

In the process of applying Islamic modes of finance some basic

characteristics have emerged.

The alternative risk sharing modes offered by Islami banks in lieu of interest

are characterized by flexibility. Banks, in conditions of free market, can

choose the most suitable formula set the suitable profit, margin or profit

sharing percentages (according to type of activity, location clientele, pricing

constraints etc.) design specific disbursement or repayment conditions to go

with the formula etc. thus thee actual socioeconomic cost of providing

goods or services to the community is better reflected in Islamic financing.

This has its implications for rational resource allocation for the while

community. Thee banking system can be made to act as a more potent

resource allocater than the traditional one if the state so chooses in

centrally managed or directed economics. More specifically the variety of

modes used enables Islami banking to offer more effectively their services

to the society in these areas.

Taxes and other fiscal resources:

Banks ‘knows better’ the profit margin realized by their partners. They may

be asked to deduct taxes on behalf of the taxing authority at the source.

This would certainly boost tax collection. A similar effect may happen when

banks (in their capacity as co-financiers)

pay customs duties, excise duties etc. directly to the state on behalf of the

‘Musharaka’ operations- there by lessening possibility of tax evasion.

Adaptability to fiscal and monetary regimes by the state:

Islami banks can only trade in assets. If these are regulated then Islami

banks can only extend finance to the available volume. Excess liquidity

cannot go to finance speculative activities, as the banks do not stand to gain

from financing these activities through overdraft arrangements. Islami bank

cannot offer normal overdraft.

Equally if price controls are enforced, Islami bank can help enforce

observance either when purchasing raw materials or selling the products.

This can work more effectively if the whole system is Islamic since the

breachers of the systems will be penalized by not having any finances

extended to them. Compliance would be greater. An incomes and prices

policy becomes more feasible to contemplate if the state machinery can

have such an effective tool to check an unruly business community.

Development:

Because of their readiness to share labor Islami bank is an institutional

standing than traditional banks in assisting development of their

communities. This is especially so, for small industrial and agricultural

sectors that are basically cutoff from normal commercial financing.

Resource Mobilization:

Islami bank’s trading activities and modes avail them of higher profit

margins especially if they were efficient in turning over their activities at a

higher rate. This enables them to offer higher profits for their investment

account holders and enables them, there fore, to draw more of the public

savings into investment accounts.

Inflation:

Islami banking investments are given for financing specific operations in

terms of types of activities, duration and value. Thus there is a direct trade

off between money going out of the bank and goods and services coming

into the banks holds (by way of participation or sales contract). As such,

Islamic finance cannot go to hoarding or monopolistic or market cornering

activities, these activities are prohibited.

Therefore, the Modes of finance of Islami Bank Bangladesh Limited work to

lessen inflation in a very direct way.

FINANCING PLAN

Pursuant to the investment policy adopted by the bank, a 7-year

perspective-financing plan from 1995-2002 has been drawn up and put into

implementation. This plan aims at diversification of the investment port-folio

by size, sector, geographical area, economic purpose and securities to bring

in phases all sectors of the economy and all types of economic activities and

different economic groups of the society with in the fold of Bank’s

investment operations.

Recently another 5-year plan from 2003-2007 has been adopted by the bank

keeping the same in view, side by side with commercial and industrial

investment operations, many special financing schemes like rural

development scheme, house-hold durable scheme, investment scheme for

doctors, transport investment scheme, small business investment scheme,

small transport investment scheme, micro-enterprise investment scheme

and real estate investment program, targeting different economic groups

have been introduced by the bank as part of their financing plan. 

Mode-Wise Finance: 

(Taka in Million)

Mode-wise finance by IBBL is very high in Bai- Murabaha & Hire- Purchase

and very low in Mudaraba.

Composition of Modes of Finance (2001):

(image placeholder)

Sector-Wise Finance: 

(Taka in Million)

(image placeholder)

Findings

Conventional Bank vs. Islami Bank

The modes of finance followed by Islami bank ensure the investment system

that is permitted by Islamic Shariah. Islami bank’s modes of finance is

mainly based on buying and selling practice, not based on interest. Its other

modes of finances are based on sharing basis and hire purchase under

sirkatul melk. On the other hand the modes of finance follows by

conventional banks are based on interest, which is prohibited by Islam. In

its attitude to interest Islam is un-ambiguous. The Quran prohibits interest

in unequivocal terms. 

Bank lending without interest is a departure from the traditional banking

system we are accustomed to. In principles, they are alike, so they in

function. The banks with or without interest attend to the economic needs

of the community supplying necessary finance for trade, commerce and

industry or individual borrowers. Without interest traditional bank lending

is inconceivable but profit or trading modes in bank lending replace interest

in the Islamic banking. If interest sustains traditional bank lending then

trading modes of bank lending sustains Islamic banking, which is the

experience of IBBL over the last 2 decades. Interest is more or less fixed but

profit/loss is naturally variable. Interest being fixed is secure and return is

assured of profit on the contrary has on such security. Therefore, so long

profit is positive there is the assurance of return. In this case, the difference

between the two banking system vanishes and the positive profit more or

less equates with interest in case of investment made by IBBL the chance of

loss is very low as the bank’s management pattern and selection process of

customers and project for investment is different from conventional bank in

very good sense. Though chance of loss is very low, IBBL can incur loss

because of the unexpected nature of risk. Then what happens to IBBL’s

investment when profit is negative? Herein the efficacy of Islamic banking is

put to test. This leads to actual working off an Islamic bank. The nature of

IBBL is essentially cooperative. The bank shares the profit & loss with the

customer. There is thus a unity of purpose. The relationship between lender

& borrower changes. They are all partners sharing weal & woe together.

They rise and fall together. This essential principle of shirakat (cooperative)

banking enables IBBL to sale smoothly avoiding pitfalls of speculation, un-

economic investment leading to loss or ultimate crush. All are vigilant. All

work out for a common goal and all loopholes are accordingly warded off.

Furthermore IBBL is in a position to avail of the expert services of

technicians, researchers and all persons well versed in particular sectors of

economy or specialized in particular trade, commerce and industry. The

cumulative result of cooperation complemented with the benefit of export

knowledge and guidance are reflected in the elimination of the possibility of

risk of loss.

In case of lending of conventional bank the nature of banking is not

cooperative. It is in the sense that the conventional bank receive a fixed

income or profit in both the situation of borrower (profit or loss) but does

not bear the loss when customer (borrower) become loser in the use of bank

money, not because of his own fault. Thus there is no unity in purpose in

case of conventional bank’s lending (investment). The lender (banker) and

the borrower are not at all partners sharing weal & woe together. They do

not rise and fall together. The absence of cooperative banking among them

leads to speculation, un-economic investment leading to loss or ultimate

crush.

As Islam feels comfort to look at money only as a means of transaction and

nothing else, and as it heats money illusion, IBBL as a bank following

Islamic shariah made investment through utilizing buying & selling modes.

But in case of lending of conventional bank money is considered as the

stimulating force for everything including investment. Money is placed next

to God, which is not acceptable to Islam. To IBBL as an Islamic bank money

is considered as servant and not as master. IBBL consider money only as a

means of transaction.

Moreover all the investment scheme of interest based traditional bank is

based towards interest or profit, but a good number of investment schemes

of IBBL are oriented towards the benefit & development of the deprived,

poor section of people or the service holder with limited income. IBBL only

invest in that section which is beneficial to the society. It does not invest in

those sections, which is harmful to society even though the profit is higher

in that section. This characteristic of investment of IBBL is absolutely

absence in the investment undertaken by the conventional banks.

Obstacles

The process of establishment of Modes of Finance by Islami Bank

Bangladesh Limited in Bangladesh has not been without obstacles. Despite

tremendous popular support IBBL       in Bangladesh could not yet achieve

the desired level of success. There are many reasons for this, but the direct

ones are:

Legal frame- work for Islami Bank

Default by fund users and income loss on overdue investment

Manpower for Islami Bank

Government securities and Islamic Money Market

Legal frame- work for Islami Bank

The absence of necessary legal framework is one constraining factor for

Islami Bank. All the financial and commercial law of the country is interest

oriented. Even the tax structure has a bias towards loan financing. Interest

–cost on borrowed funds is exempted from taxed where as dividend paid on

funds mobilized as equity is subject to tax at varying rates ranging up to

50%. Under IBBL the loan mechanics are required to be replaced by

Shariah laws like Musharaka, Mudaraba, etc. Though the Banking

Companies Act, 1991 has validated their mechanics it does not have

comprehensive provisions to define the right and obligation of the parties to

such transactions.

Default by fund users and income loss on overdue investment

The absence of special legal provisions for Islami Bank has given certain

undue advantages to unscrupulous clients. They avail of bank facilities

under Bai-Muajjal and Murabaha mechanics only to default causing income

loss to the financier bank. Suitable legal provisions could have avoided this

income loss on overdue investments.

Manpower for Islami Bank

Most importantly for smooth implementation and successful replication of

modes of finance of Islami banking, a band of people is needed having a

different type of knowledge, skill and orientation. Such people are needed

for Islami bank as well as for link institutions. The people working in the

Islami bank and in the link institutions will have to have diverse but

complementary expertise and should have commitment for the cause. 

Government securities and Islamic Money Market

All the governmental approved securities in Bangladesh are interest

bearing. Naturally the Islami bank, which is committed to avoid interest,

cannot invest the permissible part of their statutory liquidity reserve and

overnight surpluses in those securities.

As a result they deposit their entire reserve in cash with Bangladesh Bank.

Similarly, the overnight surpluses also remain un-invested. But the

conventional banks of the country do not suffer from this limitation. They

receive interest on part of their credit balance kept with Bangladesh Bank

as SLR. Besides, they invest a part of their liquidity reserves in Govt.

securities, which yield then around 8.5% per annum.

Conclusion

Islami Bank Bangladesh limited has made a revolution in the conventional

banking especially in the field of bank investment. IBBL became successful

in proving that bank investment (lending) can be made properly, profitably

following profit & loss sharing concept with abolishing interest, and which

is also beneficial to human being & society. And these all characteristics of

bank investment are absolutely absent in case of conventional bank.

Banking without interest seems feasible as far as it goes. But it still awaits a

fair trial without which it will be dogmatic to pass any judgment on it.

Practical experience is therefore no guide as to its success or failure. The

rate of return can fall to zero as envisaged in Islam only in an ideal society

in which future can be perfectly fore-seen and social security prevails from

cradle to grave. In this case even on single country can unilaterally work

out the system because of closer international ties and inter- dependence.

Therefore, such a system pre-supposes an international community imbibed

with a sense of cooperation and universal brotherhood and sprit of Islam.  

Strictly Business

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