1st Presenters

Usama Abid 13170920-035

INTRODUCTION TO TAKAFUL

Islamic Insurance

INTRODUCTION TO TAKAFUL

Meaning of Takaful

Takaful comes from the Arabic root-word ‘kafala’ means guarantee. Takaful means mutual protection and joint guarantee. Operationally,

takaful refers to participants mutually contributing to a common fund with the purpose of having mutual indemnity in the case of peril or

loss.

Reference by Al Quran

Help (ta’awan) one another in furthering virtue (birr) and Allah consciousness (taqwa) and do not help one another in furthering evil and

enmity”. Al Maidah: verse 2 (5:2).

Reference by Hadith

“Tie the camel first, then submit (tawakkal) to the will of Allah”

TAKAFUL THROUGH TIMETakaful Evolution

• Origins in the First Constitution of Madina.

• It evolved and continued in one form or the other throughout the Abbaside period and even later during the Ottoman empire.

• Serious efforts were made in modern times, in 1970s to come up with an Islamic alternative to the conventional insurance.

• The first Takaful Company was set up in Sudan in 1979, almost simultaneously followed by another one set up in Bahrain.

• The total insurance premium of OIC countries for 2004 was USD 50 Billion; of this, Takaful contribution accounts for 5% (i.e. USD 2.5 Billion). This is expected to increase to USD 15 Billion by 2015.

• Poor Insurance penetration in the Muslim countries (<1% of GDP).

• Average growth rate higher than conventional insurance companies (around 25%).

• Non–Muslims increasingly opting for Takaful products for commercial benefits.

INTRODUCTION TO SUKUK

Islamic Bond

INTRODUCTION TO SUKUK

Definition of Sukuk

Sukuk is the Arabic name for a financial certificate or an Islamic bond. It is not a fixed-income, & not interest-bearing bonds. Arabic forms are

"sakk" (singular) and "sukuk" (plural). Sukuk are securities that comply with the Islamic law and its investment principles, which prohibit the

charging or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-

tradability in the secondary markets.

Meaning of Sukuk

Sukuk refer to securitization, a process in which ownership of the underlying assets is transferred to a large number of investors. Different in nature

from stocks of companies. These are certificates of equal redeemable value representing undivided share in ownership of tangible assets of

particular projects or specific investment activity and services. Details about types of Sukuk as suggested by AAOIFI.

INTRODUCTION TO SUKUK

Key Players in Sukuk Market Originators

• Sukuk originators are mostly governments; also Corporate firms.

• High costs of rating, contract documentation, investment banking and distribution fee.

• Sukuk option is not attractive to most Islamic banks due to high proportion of short term assets.

Investment banks

• Investment banking, underwriting, lead managing and book making services for Sukuk are provided by Islamic banks in cooperation with conventional banks having Islamic windows.

• Subscribers of these Sukuk are mostly central banks, private sector Islamic banks and NBFIs.

• Tightly held resulting in absence of secondary market.

• A wider class of investors essential for active trading.

INTRODUCTION TO Salam

Islamic Agent Agreement

Meaning

The word “Salam” is an Arabic term which means giving (ita), advance (taslif) and leaving.

Collectively which shows the meaning to “advance payment”.

DefinitionBay’ as-Salam or Salam means a contract in which advance cash payment is made for goods to be delivered later on.

The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract.

Terms In salam• Rabb as-salam/ Musallim The Buyer• Muslam Ilaihi The Seller• Ra’s ul-Mal The cash Price• Al-Musallim Fih The Purchase Product• Sighah Ijab (Offer) Qabul (Acceptance)

Origin of Salam During the days of our prophet (PBUH) the groups of farmers

and the traders of Arabia used to export goods to other places

and to import other goods to their homeland, used to get

interest based loans.

By the time the interest was prohibited so they were allowed

to do Salam.

The basic purpose of this sale was to meet the needs of the

small farmers who needed money to grow their crops and to

feed their family up to the time of their harvest and trade.

Origin of Salam A hadith clearly define it:

“Whoever pay money in advance (for fruit) (to be delivered later) hold pay it for known quality, specified measure and weight (of dates or fruit) of course along with the price and time of delivery”

INTRODUCTION TO Gharar

Uncertainty

MeaningGharar (uncertainty) originates from the Arabic verb gharra,

which means to deceive

Definition

• The Arabic word gharar is a fairly broad concept that literally means deceit, fraud, uncertainty, danger, peril, delusion, or hazard that might lead to destruction or loss The word for gambling in Arabic, maysir, comes from the word yasira, which means to be easy and yassara, which means lucky chance or easy success at getting something of value without earning it (Kamali, 2000: 151).

INTRODUCTION TO Ijarah

Leasing Agreement

Ijarah• Ijarah contract is an agreement where in a lessor (mu’ajjir) leases physical asset or property to a

lessee (musta’jir) who receives the benefits associated with ownership of the asset against payment of predetermined. Ijarah is for a known time period called ijarah period.

• It is Islamic term of Fiqh.

• Literally, it means “To give something on the Rent”

That is used into two situations. It means to employ the services of the person on the wages. E.g. A hire the porter at airport to carry

the luggage. Another situation of the ijarah to paying rent for the use of an asset or property defined as “Land” in

Islamic Economics.

INTRODUCTION TO Modarabah

Financing Agreement

Introduction

• A pre-Islamic, Arabic type of finance in which

one individual provides start-up capital to another individual who will do

the actual work. As a financial agreement between financier

and entrepreneur, a one-tiered mudaraba exists; a two-tier mudaraba

modifies this by introducing an intermediary between these

two principals.

Definition

• "Mudarabah" is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called "rabb-ul-mal", while the management and work is an exclusive responsibility of the other, who is called "mudarib.

• A form of partnership where one party provides the funds while the other party provides expertise. The people who bring in money are called "Rab-ul-Maal" while the management and work is an exclusive responsibility of the "Mudarib". The profit sharing ratio is determined at the time of entering into the Mudarabah agreement whereas in case of loss it is borne by the Rab-ul-Mal only. In case of Islamic banks, the depositors are called Rabb-ul-Maal and the bank is called Mudarib

INTRODUCTION TO Musharaka

Islamic Partnership

Introduction

• ‘Musharakah’ is a word of Arabic origin which literally means sharing. In the context of business and trade it means a joint enterprise in which all the partners share the profit or loss of the joint venture. It is an ideal alternative for the interest-based financing with far reaching effects on both production and distribution. In the modern capitalist economy, interest is the sole instrument indiscriminately used in financing of every type. Since Islam has prohibited interest, this instrument cannot be used for providing funds of any kind. Therefore, musharakah can play a vital role in an economy based on Islamic principles. ‘Interest’ predetermines a fixed rate of return on a loan advanced by the financier irrespective of the profit earned or loss suffered by the debtor, while musharakah does not envisage a fixed rate of return.

Definition of Musharakah

• A joint enterprise or partnership structure with profit/loss sharing implications that is used in Islamic finance instead of interest-bearing loans. Musharakah allows each party involved in a business to share in the profits and risks. Instead of charging interest as a creditor, the financier will achieve a return in the form of a portion of the actual profits earned, according to a predetermined ratio. However, unlike a traditional creditor, the financier will also share in any losses.

Definition

• Murabahah is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit thereon. Thus, Murabahah is not a loan given on interest; it is a sale of a commodity for cash/deferred price. The Bai’ Murabahah involves purchase of a commodity by a bank on behalf of a client and its resale to the latter on cost-plus-profit basis. Under this arrangement the bank discloses its cost and profit margin to the client.

• In other words rather than advancing money to a borrower, which is how the system would work in a conventional banking agreement, the bank will buy the goods from a third party and sell those goods on to the customer for a pre-agreed price. Murabahah is a mode of financing as old as Musharakah. Today in Islamic banks world-over 66% of all investment transactions are through Murabahah.

INTRODUCTION TO Murabaha

Sale Agreement

Definition

• Murabahah is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit thereon. Thus, Murabahah is not a loan given on interest; it is a sale of a commodity for cash/deferred price. The Bai’ Murabahah involves purchase of a commodity by a bank on behalf of a client and its resale to the latter on cost-plus-profit basis. Under this arrangement the bank discloses its cost and profit margin to the client.

• In other words rather than advancing money to a borrower, which is how the system would work in a conventional banking agreement, the bank will buy the goods from a third party and sell those goods on to the customer for a pre-agreed price. Murabahah is a mode of financing as old as Musharakah. Today in Islamic banks world-over 66% of all investment transactions are through Murabahah.