CHAPTER-2

2.1 Emergence of Islamic Banking

For an expending economy, a developed and efficient banking system is indispensable. The tremendous development that the world economy has experienced in the last few decades was contributed by several factors. The role of banking is comparable to what an artery system does in the human body.

Despite the outstanding contribution of the conventional banking system (interest-based) several ancient and modern economists are critical about its efficiency level. Specifically, the ineffectiveness of interest rate at a stabilization tool during the period of the great depreciation is a case to note. The world has now been experiencing operation of as many as 230 Islamic banks and financial institutions in more than 30 countries, Muslim and non Muslim.

There are religious as well as economic reasons, which have contributed to the emergence of PLS-banking. The basic intention behind establishing Islamic banks was the desire of Muslims to recognize their financial activities in way that do not contradict the principles of Shariah and enable them to conduct their financial transaction without including into Riba (Ahmad 1992).

On this religious ground, proponents of the PLS-system urge the Islamic community to avoid all transaction that interest, instead of increasing wealth, reduce it Further, muslime economists depreciation and stagflation very often found in the capitalist world as an outcome of the financial system based on interest . While religious exigency, call for avoiding any transaction based on interest, economic exigencies, on the other hand ,provide anew outlook to the role of banking in promoting investment.

2.2What is Islamic Banking?

Islamic banking has been defined in a number of ways. The definition of Islamic banking, as approved by the General Secretariat of the OIC, is stated in the following manner.

“An Islamic bank is a financial institution whose status, rules and procedures expressly state its commitment of the principal of Islamic Shariah and to the banking of the receipt and payment of interest of any of its operations”(Ali& Sarkar 1993 ). It is therefore, natural and indeed, imperative for an Islamic bank to incorporate in its function and practice commercial investment and social activities, as an institution designed to promote the civilized mission of the Islamic economy (Ibid). Ziauddin Ahamed says, Islamic banking is essentially a normative concept and could could defined as conduct of banking in consonance with the ethos of the value system of Islam”

2.3 Objectives 0f Islamic Banking

More specially, the objective of Islamic banking when viewed in the context of its role in the economy are listed as following :

Offer Financial Service: Interest-based banking, which is considered a practice of Riba in financial transaction, is unanimously identified as anti-Islamic.That means all transactions made under conventional banking are unlawful according to Islamic Shariah.

Islamic Banking for Development: Another important objective of Islamic banking is the optimum allocation scarce resources. The foundation of Islamic banking system is that its promotes the investment of financial resources into those projects that are considered to be the most profitable and beneficial to the economy.

Islamic Banking for Equitable Distribution of Resources: Perhaps the must important objective of Islamic banking is to ensure equitable distribution of income and resources among the participating parties: the bank, the depositors and the entrepreneurs.

2.4 Conventional banking

Conventional banking is essentially based on the debtor-creditor relationship between the depositors and the bank.

2.3 Riba and its basic features

The world used by the Quaran concerning “interest is Riba its basic characteristics are:

Its must be related to loan A prefixed amount of money to be paied when due A time is fixed for the repayment and All these elements for repayment are taken as condition for loan .

2.6 Riba and Profit

When money is charged its imposed positive and defines result is Riba on the other hand profit is the gain of uncertain use of trading

By definition, Riba is the premium paid by the borrowed of the lender along with principal amount as a condition for the loan. On the other hand profit is the difference between the value of production.

Riba cannot be negative, it can at best be very low or zero. But profit cab be positive zero or even negative.

From Islanic shariah profit is view, Riba is Haram but profit is Halal.

2.7 Convention and Islamic banking

The function and program modes of Islamic bank based on the principal of Islamic shariah

The investor is assumed of a predetermined rate of interest in contrast It does not deal with Zakath in the modern Islamc banking system Through both of the bank have same target is to maximize profit but

conventional has no restriction on the other hand Islamic bank has the sharia restriction.

The status of conventional bank, in relation to its clients , is that of creditor and debtor

Leading money and getting is back with interest is the fundamental function of the convationalbank .

CHAPTER-3

3.1 An overview of IBBL:

In August 1974, Bangladesh signed the Charter of Islamic Development Bank and

committed itself to reorganize its economic and financial system as per Islamic

Shariah. In January 1981, Late President Ziaur Rahman while addressing the 3rd

Islamic Summit Conference held at Makkah and Taif suggested, "The Islamic

countries should develop a separate banking system of their own in order to facilitate

their and commerce."

This statement of Late Ziaur Rahman indicated favourable attitude of the Government of the People's Republic of Bangladesh towards establishing Islamic banks and financial institutions in the country. Earlier in November 1980, Bangladesh Bank, the country's Central Bank, sent a representative to study the working of several.

In November 1982, a delegation of IDB visited Bangladesh and showed keen interest to participate in establishing a joint venture Islamic bank in the private sector. They found a lot of work hand already been done and Islamic banking was in a ready form for immediate introduction. Two professional bodies Islamic Economics Research Bureau (IERB) and Bangladesh Islamic Banker's Association (BIBA) made significant contributions towards introduction of Islamic banking in the country. They came forward to provide training on Islamic banking to top bankers and economists to fill-up the vacuum of leadership for the future Islamic banks in Bangladesh.

Islamic Bank Bangladesh Led (IBBL) which was incorporated on 13 March 1983 as a Public Company with limited liability under the Companies Act 1913 started functioning with effect from 30 March 1983. IBBL is considered to be the first interest-free bank in South East Asia. It is a joint venture multinational bank with sixty two percent of equity being contributed by the foreign sources. Regarding shareholdings structure of the bank, the local shareholders hold shares in the ratio of thirty-eight to sixty two. In December 1999 the number of its shareholders stood at 6863. Its shares are quoted in the two stock markets of the country namely Dhaka Stock Exchange and Chittagong Stock Exchange. Being in high demand the shares are presently sold at three times higher than the face value. Authorized capital of IBBL in Tk. 300 million as on 31 December, 1999. It has a paid-up capital of Tk. 320.00 million and Reserve Fund of Tk. 930.17 million. The Bank is managed by a 24 member Board of the Directors, among them 8 are foreigners and 16 are local. A-9 member Executive Committee formed by the Board of Directors oversees the efficient operation of the Bank. Besides, a Management Committee looks after the affairs of the Bank. IBBL has also a 10-member Shariah Council consisting of prominent Islamic Scholars and jurists, a reputed banker, a renewed lawyer and an eminent economist. The Council gives decision on different issues confronting the Bank on Shariah matters. They also conduct Shariah inspection of branches on selective basis

so as to ensure that the Shariah principles are implemented a complied with meticulously by the branches of the Bank. IBBL through its steady progress and continued success has, by now, earned the reputation of being one of the leading private sector banks of the country.

3.2 Its Mission

To establish Islamic banking through the introduction of a welfare oriented banking system and also ensure equity and justice in the filed of all economic activities achieve balanced growth and equitable development through diversified investment operations particularly in the priority sectors and less developed area inn the country.

3.3 Its vision

IBBL vision is to always strive achieve superior finance performance be considered a leading Islamic Bank by reputation and performance. IBBL goal is to establish and maintain the modern banking technique. IBBL encourage will try to saving in the form of direct investment. IBBL will also try to encourage investment particularly in project which are more likely to lead to higher employment.

3.4 Special Feature of IBBL

All activities are conducted on interest –free system according to Islamic Sharia Principles

Investment is made through different modes as per Islamic sharia Aims to introduce a welfare-oriented banking system Extend socio-economic and financial services to individuals of all

economic backgrounds with strong commitment in rural uplift. Plays a vital role in human resources development and

employement-generations. Portfolio of investment and investment policy have been specially

tailored to achieve balanced growth and equitable development through diversified investment operations.

Ensure shariah compliance through regular effective guidance of powerful and highly esteemed shariah council.

3.3 Investment Mechanism of Islami Bank Bangladesh Limited

Definition of Investment and Investment Mechanism

Investment is the action of deploying funds with the intention and expectation that they will earn a positive return for the owner. The establishment of a factory or the purchase of raw materials and machinery for production purposes are examples in point. The savings of investors in financial assets are invested by the respective company into real assets in the form of the expansion of plant and equipment.

When money is deposited with an Islamic Bank, the Bank, in turn, makes investments in different forms approved by the Islamic Shariah with the intent to earn a profit. Not only a Bank, but also an individual or organization can use Islamic modes of investment to earn profits for wealth maximization. In addition to that, the paid up capital of the shareholders also remains with the bank. Basically, Islamic Bank Bangladesh Limited receives these funds on profit-loss sharing basis & deploys the same in the profitable business.

3.6 Major Investment Mechanisms of IBBL :

The Major Investment Mechanisms of Islami Bank Bangladesh limited is as under:-

3.6.1 Bai-Mechanism

3.6.2 Share- Mechanism

3.6.3 Isarah-Mechanisms

3.6.1 Bai-Mechanism

(A) Bai-Muazzal

(B) Bai-Murabaha

(C) Bai-Salam

(D) Bai-Istisna

3.6.2 Share- Mechanism

(A) Mudaraba

(B) Musaraka

3.6.3 Isarah-Mechanisms

(A) Isarah/ Leasing

(B) Hire purchase

(C) Sirkatul meelk/ Hire purchase under sirkatul meelk.

3.6.1 Bai-Mechanism

(A) Bai-Muazzal

The term Bai-Muazzal means to sell on credit. If a person the Arabic word “Azal” means to keep adjourned, to defer or to conduct repayment on a fixed future date. Bank always sells the commodities adding mark up profit with the purchase price thereof. The difference amount between purchase price & sell price is considered as profit.

Important features of Bai-Muazzal

1. It is permissible in most cases.

2. It is permissible to make the promise binding upon the client to purchase the goods from the bank.

3. It is permissible to take cash/collateral security to guarantee the implementation of the promise.

4. It is also permissible to document the debt resulting from Bai-Muazzal by a Guarantor.

3. Stock and availability of goods is a basic condition for signing a Bai-Muazzal agreement.

6. All goods purchased on behalf of a Bai –Muazzal agreement are the responsibility of the bank until they are delivered to the client.

7. The bank must deliver the goods to the client at the time and place specified in the contract.

8. The bank may sell the goods at a higher price then the purchase price to earn profit.

9. The price is fixed at the time of the agreement and cannot be altered.

Some observations.

The following steps may be taken to ensure the Bai-Muazzal investment is a good proposition for the bank:

1. The bank may meet with the prospective client regarding his investment needs and business experience.

2. The bank may review the client’s past performance and other financing arrangements.

3. The bank may review its current investment policy regarding this type of financing arrangement to ensure the proposal meets bank guidelines.

The following points should receive attention before making any investment decision under Bai-Muazzal.

1. Whether the goods that the client intends to purchase are marketable and have steady demand in the market.

2. Whether the price of the goods is subject to frequent and violent changes.3. Whether the goods are perishable in short or in long-term duration.4. Whether the quality and other specifications of goods as desired by the

client can be ensured.

3.6.1 Bai-Mechanism

(B) Bai-Murabaha

Murabaha Mutlak: - Bai –Murabaha is a sale at a cost plus agreed upon profit. Under this system goods may be delivered to the client against cash payment or deferred payment. In this system, it is not essential to show the purchase price & mark up profit separately, nor is it required to get the client informed of the mark up profit.

Murabaha Mutlak may be of two types:-

(a) Ordinary Bai-Murabaha(b) Bai-Murabaha on order and promise

Basic Features of Bai-Murabaha:(1) It is permissible for the client to offer an order to purchase by the bank

particular goods(2) It is permissible to make the promise binding upon the client to purchase from

the bank.(3) It is permissible to take cash/collateral security to guarantee the

implementation of the promise or to indemnify the damage.(4) It also permissible to document the debt resulting from Bai Murabaha by a

Guarantor.(5) Stock & availability of goods is a basic condition for signing a Bai Murabaha

agreement.(6) The bank must deliver the specified goods to the client on specified date and

specified place of delivery as per contract.(7) The price once fixed as per agreement & deferred can not be further

increased.

Procurement of goods by the bank:Bai-Murabaha is perfectly a legitimate transaction according to Islamic shariah, provided:-

(a) The goods desired by the client are first purchased by the bank & ownership of the bank on the goods is established, i.e. the bank must transform its money into goods.

(b) That after purchase of goods the risk of the same is borne by the bank until the possession of the merchandise has been passed on to the client.

(c) That the specification of goods, delivery dates, time and place as well as other terms of contract are ensured.

In such situation, in order to make the Bai-Murabaha transaction Halal the following procedures shall have to be adopted:

(1) Purchase of goods shall be made only after completion of all the documentation formalities.

(2) Bai-Murabaha goods may be purchased & the bank may take delivery of the same directly from the market

(3) In the case of cash purchase & taking delivery of the goods by the Bank’s Authorized Official.

(4) In the case of purchase of Bai-Murabaha goods by the bank on credit/deferred payment basis, the bank shall execute a “Credit Purchase Agreement”.

(5) In the case of purchase of goods by the agent engaged for the purpose, he will purchase the goods from the genuine producers, sellers or suppliers in the local or outstation market.

Engagement of Buying Agent:

The following Modus Operandi is required to follow while engaging Buying Agent.

(a) The clients first submit the specification of goods which he intends to purchase detailing therein the description, quality, quantity, design, and price.

(b) The bank will engage its buying agent to buy/purchase the goods from the market on behalf of the bank.

(c) The agent after purchase of the goods as per specification & after safe transportation shall deliver the same to the bank or its order against proper acknowledgement.

(d) The bank, being satisfied with the quality, quantity, design, specification.(e) Under no circumstances, the buying agent shall purchase the goods owned

by him.

The conditions of Affecting Bai-Muazzal & Bai-Murabaha:

The Islamic scholars have approved the system of Bai-Muazzal & Bai-Murabaha subject to following terms & conditions:-

(1) The ownership as well as possession of the goods must remain with the bank before selling the same to the client. The bank will have to bear the risk of the goods until the same is delivered to the client.

(2) After procurement of the goods and acquiring ownership thereon, the bank is required to bear the risk of theft, damage and breakage etc. until the same delivered to the client buyer.

(3) At the time of execution of the sale-purchase agreement the nature, specification, quantity and quality of the goods.

(4) Once the price is fixed under Bai-Murabaha or Bi-Muazzal mode, then no option will be there to change the same.

(5) The process of buying as well as selling in Bai-Murabaha & Bai-Muazzal system is very easy, risk involvement is also comparatively low & good potentiality is there to earn good profit.

3.6.1 Bai-Mechanism

(C) Bai-Salam

Bai-Salam is a term used to define a sale in which the buyer makes advance payment, but the delivery is delayed until some time in the future.

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

(1) The seller receives advance payment in exchange for the obligation to deliver the commodity at some later date.

(2) A Bai-Salam agreement allows the purchase to lock in a price, thus protecting him from price fluctuation.

Steps if Bai-Salam.

(1) Cash sale or sale on credit(2) Delivery and receipt of the commodity

a) The bank may receive the commodityb) The bank may direct the seller to deliver the commodity directly.

(3) The sale contract

Rules of Bai-Salam/the conditions of affecting Bai-Salam

1) It is a condition that the commodity known by both parties to the agreement.2) It is a condition that the quality of the commodity be monitored closely, as

very little variation from specifications in the contract is allowed.3) It is a condition that the commodity is delivered on the due date.

4) It is permissible to draw a Salam sale contract for a total to be delivered increments on different specified future dates.

5) Salam is impermissible on land lots and real estates6) It is a condition that the purchase price in Salam is specified and advanced to

the seller.7) It is a condition in a Salam sale that the due date is known to avoid

confusion, which may lead to a dispute.8) It is a condition that the place of delivery be stated in the contract.9) It is permissible to take a mortgage on Salam debt to guarantee that the seller

satisfies his obligation by delivering the commodity on the due date.

Application of Bai-Salam

Salam sales are frequently used to finance the agricultural industry. Salam sale are also used to finance commercial and industrial activities. In addition, the Salam sale is used by banks to finance craftsmen and small producers, by supplying them with the capital necessary to finance the inputs to production in exchange for the future delivery of products at some future date.

Concluding Remark

The Bai-Salam agreement is a combination of debt and trading. The capital provider has no control over the management of capital provided.

3.6.1 Bai-Mechanism

(D) Bai-Istisna

The bai-istisna is a contract in which the price is paid in advance at the time of the contract and the object of sale is manufactured and delivered later (IDB 1992, P.28). The jurists of the Hanafie School have given various definitions to Istisna’s some of which are: “That it is a contract with a manufacturer to make something” and” It is a contract on a commodity on liability with the provision of work”. Islamic banks can utilize Istisna in two ways.

(1) It is permissible for the bank to buy a commodity on Istisna’s contract then sell it after receipt for cash or deferred payment.

(2) It is also permissible for the bank to enter into a Istisna’s contract in the capacity of seller.

Steps of Bai-Istisna.

Bai-Istisna Contract: The buyer expresses his desire to buy a commodity and brings a request to purchase the commodity to the bank.

Rules if Bai-Istisna.

1) It is a condition in the Istisna contract to clearly define dimensions and specifications of the product being purchased.

2) The Istisna contract is only used for objects that can be manufactured.

3) The object sold in a Istisna contract is a fixed liability debt.4) The maker should supply the materials. If they are supplied by

the buyer, the contract is Ijara and not Istisna.5) Once the contract is drawn the ownership of the asset is

confirmed to the buyer.6) It is not a condition in the Istisna contract to advance the price.7) It is a condition that the time of delivery be specified in the

agreement to avoid confusion.8) It is a condition that the place of delivery be stated in the

contract.

Application of Bai-Istisna.

The Istisna contract allows Islamic banks to finance the public needs and the vital interests of the society to develop the Islamic economy in accordance with Islamic teachings. Finally the Istisna contract is also applied in the construction industry such as apartment buildings, hospitals, schools, and universities to whatever that makes the network for modern life.

3.6.2 Share- Mechanism

(A) Mudaraba

Mudarabah is considered to have the basic investment mechanism of Islamic banking. Islamic banks mobilize as well as deploy its fund through Mudarabah principle. In Mudarabah investment, Islamic banks provide fund as the Sahibul Maal & the entrepreneur as the Mudarib deploy its labor, time, expertise, skill & management to run the concern. If profit is earned, then the same to be distributed between the both parties as per pre-agreed ratio. As per shariah principle, Islamic banks can not intervene in the activities of the entrepreneur/mudarib, but it deserves the right to supervise the performance of the entrepreneur/mudarib as to whether the same is being accomplished as per agreement. In the case of term Mudarabah investment the duration of the enterprise/concern is fixed & on fulfillment of the term/duration, the

agreement expires resulting the termination of the concern as well as distribution of profit as pre-agreed ratio. Entrepreneur/mudarib invests Mudarabah fund in the specific concern/sector/project as per agreement & on fulfillment of the business as well as term the agreement.

Muclarabah principle point-wise analysis on different aspects of the .same is furnish below:

Meaning of Mudarabah:

The term 'Mudarabah' has been derived from one of the meanings of the Arabic word 'Zarbun' which means 'Travel', 'Beating', 'Example', etc'. Thus the word 'Mudarabah' means 'Travel' for undertaking business.

Muclarabah is a partnership in profit whereby one party provides capital & other provides skill and labor'. The provider of capital is called 'Sahibul Maal' while the provider of skill and labor is called 'Mudarib'.

So, Muclarabah may be defined as a contract of partnership where the Sahibul Maal provides capital to the Mudarib for investing it in a commercial enterprise by applying his labor & endeavor.

The practice of Mudarabah was very common in the early age of Islam when the Qura'nic message was being sent down. The holy Qur'an says "And another group of people conduct traveling on the earth in search of God's blessing".

Types of Mudarabah:

Muclarabah contract may be bifurcated into two types:

(01) Restricted Mudarabah:

A restricted Mudarabah is a contract in which the Sahibul Maal imposes any restrictions on the actions of the Mudarib but not in a manner that would unduly constrain the Mudarib in his operations.

Restricted Mudarabah may further be divided into three types:-

(i) Restriction in respect of time period:-

In this type of Mudarabah, the Mudarabah contract includes a clause on duration of the business. After expiry of such period, the Mudarabah shall become void. ,

(ii) Restriction in respect of place or location:-

In this type of Mudarabah, the Mudarabah contract includes a clause on place or location of the business. The Mudarib shall be bound to do the business within the area of such place or location.

(iii) Restriction in respect of business:-

In this type of Mudarabah, the Sahibul Maal restricts the actions of the Mudarib to a particular type of business, as he considers appropriate.

(02) Unrestricted Mudaraba:

An unrestricted Mudaraba (Al Mudaraba Al Mutlaqah) is a contract in which Shahib al-maal permits the Mudarib to administer the Mudaraba capital without any restrictions4. In this case, the Mudarib his a wide range of trade or business freedom on the basis of trust and the business expertise he has acquired. Such unrestricted business freedom must be exercised only in accordance with the interests of the parties and the objectives of the Mudaraba contract. But, if Muclarib wants to have an extraordinary work, which is beyond the normal course of business, lie cannot do so without express permission from Shahib al-maal.

Rules relating to Mudaraba Contract.

There are two contracting parties in Mudaraba Contract: the provider of the capital i.e. 'Shahib al-maal' and the Muclarib. Both parties should possess the legal capacity to appoint agents and accept agency. The general principle is that a Mudaraba contract is not binding, i.e. each of the contracting parties may terminate it unilaterally except in two cases:

When the Mudarib has already commenced the business, in

(a). Which case the Mudaraba contract becomes binding up to the date of actual or constructive liquidation.

(b). When the contracting parties agree to determine a duration for which the contract will remain in operation. In this case, the Contract cannot be terminated prior to the end of the specified duration, except by mutual consent of the contracting parties.

A Mudaraba contract is one of the trust-based contracts. Therefore, the Muclarib invests Mudaraba capital on trust basis in which case the Mudarib is not liable for losses except in case of breach of trust, such as misconduct, negligence and breach of the terms of Mudaraba contract. In committing any of the above, Mudarib becomes liable for the Mudaraba capital.

Rules relating to Offer and Acceptance.

The wording-"Offer and Acceptance" - by which both the contracting parties express their willingness to conclude a contract and must conform to the following:

The wording should explicitly or implicitly indicate the purpose of the contract.

Acceptance of the offer is contingent on its taking place during the time which both the parties are negotiating agreement to the contract. However, acceptance is not valid

if one party refuses the terms of the offer or leaves the place where the negotiation of the contract is being made before the deal is concluded'.

Contract is permissible by verbal utterance or in writing and signing it. It is also permissible through correspondence or by the use of modern communication means, e.g., Telex, Fax, E-mail or Internet.

Rules relating to Capital.

This is the amount of money given by the provider of funds i.e. Sahib al-maal to the Mudarib with the purpose of investing it in the Muclarabah activity. The following conditions, in this respect, should be satisfied;

The capital of Muclarabah should be provided in the from of cash. However, it may be presented in the from of tangible assets, in which cash the value of the assets is the contribution to the mullarabdh capital. The valuation of the assets may be conducted by experts or as agreed upon by the contracting parties.

The capital of Mudarabah should be clearly known to the contracting parties and defined in terms of quality and quantity in a manner that eliminates any possibility of uncertainty or ambiguity.

It is not permissible to use a debt owed by the Muclarib or another party to Shahib al-maal as capital in a Mudarabah contract.

The Mudarabah capital must be, either wholly or partially as per contract according to the nature of the business, put at the disposal of the Mudarib or the Muclarib must have free access to and control over the capital.

Rules relating to profit and Loss.

Profit is the amount earned in excess of capital. It is the end objective of Mudarabah contract. The following conditions should be satisfied relating to profit:

It should be for both the parties, and no party should have possession thereof without the other. The mechanism for distribution of profit must clearly be expressed To eliminate uncertainty and any possibility of dispute. The Distribution of profit must be on the basis of an agreed percentage of the profit and not on the basis of a lump sum or a percentage of the Capital.

The parties should agree on the ratio of profit distribution when the contract is concluded. However, it is permissible to change the ratio of distribution of profit at any subsequent time.

No profit can be recognized or claimed unless the capital of the Mudarabah is maintained intact. Whenever a Mudarabah operation incurs losses, such losses stand to be compensated by the profits of future operations of the Mudarabah, if it is a continuous one. Such loss (losses) brought forward should be set against the future

profits, if any. If the Muclarabah is not continuous one and there is any loss then it will not carry forwarded to another Mudarabah Deal / Contract of the Clients. The distribution of profit depends on the final result of the operations at the time of liquidation of the Mudarabah contract. If losses are greater than profits at the time of liquidation, the balance (net loss) must be deducted from the capital. In this case, as the Mudarib is a trustee lie is not liable for the amount of this loss, unless there is negligence or misconduct on his part. If the total Mudarabah expenses are equal to the total Mudarabah revenues, the Sahib al-maal will receive his capital back without either profit or loss, and the Mudarib is also not entitled to share any profit. But,

If there is profit i.e. excess of revenues over expenses and is realized it must be distributed between the parties as per the agreement.

The Mudarib is entitled to a share of profit as soon as it is clear that the operations of the Mudarabah have led to the realization of a profit. However, this entitlement is not absolute, as it is subject to the retention of interim profits for the protection of the capital.

The Sahib al-mall bears all losses incurred from the Mudarabah, and the Mudarib shall not bear any portion thereof unless it arises from his breach of trust. Periodic losses incurred in the course of a continuous Mudarabah shall be set off against previously earned profits that have not been distributed between both parties, if any.

Rules regarding Roles of Sahib al-maal.

In Mudarabah, Sahib al-rnaal provides the capital and Mudarib Undertake the management. Therefore, the Sahib al-maal should hand over the agreed capital to Mudarib and leaves everything to Mudarib with no interference from his side but he has the authority to:

A) Oversee the Mudarib's activities and

B) Work with Muclarib, if the Mudarib consents.

Rules relating to Duties and Powers of Mudarib:

The Mudarib should employ his best efforts to accomplish the objectives of the Muclarabah contract. He should assure the Sahib al-Maal that his capital is in good hands that will act to find the best ways of investing it in a permissible manner. The Mudarib acts as:

(a).Trustee to look after the investment responsibly, except in case of nature calamities.

(b).Wakeel (Agent) to purchase from the funds provided by Shahib al-maal.

(c).Shareek (partner) for Sharing in any profit,

(d).Zamin (Liable) to provide for the loss suffered by the Mudarabah due to

Any act on his part.

(e).Ajeer (Employee) when the Mudarabah gets Fasid due to any reason, the Mudarib is entitled to only the salary, Ujrate-Misl. In case of toss or profit whatever may be the case the Mudarib is entitled the Ujrat-e-Misl only. He (Client) is not entitled to the profit of the Mudarabah business.

If a Mudarabah contract is concluded on an unrestricted basis, the Muclarib is permitted, in general, to do what an entrepreneur do in his field of activity, including the following&

Iv. Attending to all permissible investment or trading fields that are feasible and in which lie believes that his expertise and technical and professional skills are likely to give him the ability to compete effectively.

V. Carrying out the work himself or appointing another person to carry out some work, if necessary, such as buying a Commodity or marketing it for him.

Vi. Choosing as far as possible appropriate places and markets that is seemingly free of risks.

Vii. Safeguarding the Muclarabah funds or depositing them in the custody of a trustworthy person whenever appropriate.

Viii. Selling and buying on a deferred payment basis.

Rules relating to violation on the part of the Mudarib:

If the Mudarib violates the terms or purposes of the contract or the restrictions placed on him by Sahib al-maal, he is guilty of misconduct and his status as a holder of the funds on trust changes into that of a guarantor, i.e., the nature of the possession of the funds changes from a Mudarabah to a debt due from the Mudarib.

Rules relating to guarantee in Mudarabah:

The Sahib al-Maal is permitted to obtain adequate and enforceable guarantees from the Muclarib or from any third party on behalf of the Mudarib. This is circumscribed with a condition that the Sahib-al-maal will not enforce these guarantees except in cases of misconduct, negligence or breach of contract on the part of Mudarib.

Rules regarding Mudarabah Expenses:

The Mudarib shares profit of the Muclarabah business as per agreed ratio with Sahib at-maal but his expenses like meals, clothing, conveyance and medical are not borne by Muclarabah.

All expenses wl-dcli are incidental to the Mudarabah's function like wages of employees/workers or commission in buying/selling etc. Have to be paid by the Mudarabah. However, all expenses will be included in the cost of commodities, which the Mudarib is selling.

If the Muclarabah becomes void due to any reason, the Muclarib's status will be just like in employee. In this situation the Mudarib

(a) Will not be entitled to any expenses like meal, conveyance, clothing, medicine etc. Regarding his visit in the city.

(b) Will not be sharing any profit & get ordinary pay for his job.

Rules relating to liquidation/termination of Mudarabah Contract:

A Mudarabah contract can be liquidated/terminated in the following manner:

(a) Being a non-binding contract, it can be liquidated by unilateral termination of the contract by one of the parties.

(b) With the mutual consent of both t he parties.

(c) On the date of maturity, if the two parties had earlier agreed to set a limit for it.

(d) When the funds of Mudarabah contract have been exhausted or have suffered losses.

(e) The death of Muclarib or liquidation of the institution that functions is Muclarib.

Difference between Musharaka & Mudarabah:

(i) The capitals in Musharaka come from all the partners, while in Mudarabah, it is the sole responsibility of the Sahibul Maal.

(ii) In Musharaka all the partners can participate in the management of the business & cab work for it, while in Muclarabah, the Sahibul Mail has no right to participate in the management, w1uch is carried out by the Mudarib only.

(iii) In MU3haraka all the partners share the loss to the extent of the ratio of their investment while in Mudarabah the loss, if any, is borne by the Sahibul Maal only,

because the Muclarib does not invest anything. His loss is restricted to the fact that his labor so deployed has gone in vain & his work has not brought any fruit to him. However, this principle is subject to a condition that the Mudarib has worked with due diligence which is normally required for the business of that type. If lie has worked with negligence or has committed dishonesty, he shall be liable for the loss cause by his negligence or misconduct.

(iv) The Liability of the partners in Musharaka is normally limited. Therefore, if the liabilities of the business exceed its assets & the business goes in liquidation, all the exceeding liabilities shall be borne pro rata by all the partners. However, if all the partners have agreed that no partner shall incur any debt during the course of business, then the exceeding liabilities shall be borne by that partner alone who has incurred a debt on the business in violation of the aforesaid condition. Contrary to this is the case of Mudarabah. Here the liability of Sahibul Maal is limited to his investment, unless he has permitted the Mudarib to incur debts on his behalf.

(v) In Musharaka, as soon as the partners mix up their capital in a joint pool, all the assets of the Musharaka become jointly owned by all of them according to the proportion of their respective capital. Therefore, each one of them can benefit from the appreciation in the value of the assets, even if profit has not accrued through sales. In the case of Mudarabah it is different. Here the Sahibul Maal solely owns all the goods purchased by the Muclarib, & the Mudarib can earn his share in the profit only in case he sells the goods profitably. Therefore, lie is not entitled to claim his share in the assets themselves, even their value has incurred.

3.6.2 Share- Mechanism

(B) Musaraka

Musharaka may be defined as a contract of partnership between two or more individuals or bodies in which all the partners contribute capital, participate in the management, share the profit in proportion to their capital or is per pre-agreed ratio and bear the loss, if my, in proportion to their capital/equity ratio. As per this definition the Bank may take part in a business with its Client(s), where both the Client and Bank provide capital in fixed proportions, take part in the Management of business and share the profit in proportion to their Respective capital ratio or at pre-agreed ratio and bear the loss, if any, in proportion to their respective capital/equity ratio.

Basic Feature of Musharaka:

Musharaka is the second basic investment mechanism of Islamic Banking. The Arabic term Musharaka has been derived from the word "Shirkat". The very word "Shirkat" means "partnership". Musharaka is a partnership concern wherein two or more persons/firms invest capital with a view to earning profit. In doing so they take part in the management activities & undertake to earn/sustain profit/loss. The profit so earned

in the enterprise to be distributed between/among the partners as per pre-agreed ratio. In the case of sustaining any loss, the entire amount of the same to be borne by the partners as per their capital ratio,

In the Musharaka investment mechanism the Bank as well as the client provide required capital. As stated above the term Musharaka has been derived from Arabic word 'Shirk" which means partnership. No specific rule is there regarding capital participation of the parties. The capital participation may be equal or unequal. Both the parties’ i.e., Bank as well as the client can take part in the management activities. Provision is also there to empower one party to lake part in the management activities on behalf of another party is the trusty or agent thereof. The profit so earned in the enterprise to be distributed between/among the partners as per pre-agreed ratio. In the case of sustaining any loss, the entire amount of the same to be borne by the partners as per their capital ratio.

Types of Musharaka:

Musharaka, in the context of Islamic modes of financing, may be of two types:

1. Permanent Musharaka

2. Diminishing Musharaka.

(i) Permanent Musharaka:

In this type of Musharaka, the Bank participates in the equity of a company either in equal or unequal ratio and shares the annual profit at a pre-agreed ratio or bear the loss, if any, in proportion to the ratio of equity where termination period of the contract is not specified. This is also called continued Musharaka. Though such type of Musharaka is originally intended to continue up to the dissolution of the enterprise/company, but one can sell his share of equity before dissolution.

Islamic Banks can use this mode of permanent Musharaka to finance their Clients to establish a new income generating project / enterprise or to participate in an existing one where the Bank will own a share in the capital permanently and also share the profit as per agreed upon ratio or bear the loss as per equity participation ratio. Though the Bank has got the right to participate in the management, yet may not take the responsibility of management but can supervise and follow up. This type of Musharaka is preferable for the Bank to finance the big and long-term projects. However, Bank may use this mode in financing small enterprise/client also.

(ii) Diminishing Musharaka: -

This is a special type of Musharaka where the share of capital or ownership of the assets/property of the Bank gradually reduces and goes to the account of the Client with the payment of share value by the Client in addition to share in profit as per agreement. Under this concept of Musharaka, a Bank and its Client participate either in the joint ownership of an assets/property/equipment or in a joint commercial enterprise. The share capital of the Bank is divided into a number of units and the Client undertakes to purchase the units of share capital of the Bank one by one periodically and thus the share capital of Client increases till all the units of the Bank's shares are purchased by him (the Client) so as to make him the sole owner of the assetsjproperty/equiprnent or the commercial enterprise as the case may be.

This type of Musharaka is suitable for the finance of the assets/property having regular income. It encourages the Client, as he becomes the owner of the entire assets/property after a certain period.

Islamic Banks can apply this mode of Dimmishung Musharaki in the following way:

(i) The client can participate in the Musharaka, with a provision in the contract that the Bank will sell its shires to [lie client gradually or at a time & the ciient shall undertake to purchase the dame.

(ii) The Bank can participate in the Musharaka with a provision in the

Contract that the client shall purchase a certain number of shares owned by the Bank each year thus the shares owned by the Bank is reduced until the client becornes sole owner of the property. In this case the shares of the Bank are divided into a number of units.

Shariah Rules for Musharaka:

(i) Capital contribution of the partners may be equal or unequal.

(ii) Capital can be contributed either in cash or in the form of commodities/assets/property/equipment.Inlatercase,theagreeduponvalueoftliecomm.odities/assets/property/e quipment shall determine the share of the partner in the capital.

(iii) The capital contributed by the partners constitutes equity & Comprises a single fund.

(iv) Musharaka is based on the principal of Alghurm-bil-ghuntn (the entitlement to return is related to exposure to risk). So, no partner can guarantee the capital of others. However, a partner may request another partner to provide a guarantee against the latter's negligence or misconduct or violation of contract.

Rules relating to Power of Attorney & disposition of funds:

Every partner has the right to dispose of the musharaka assets in the normal course of business provided lie does so with due care to the interest of the partner & without misconduct or violation. However, a partner is not allowed to disburse or invest the funds for his personal purposes.

Rules relating to Management:

The normal principle of Musharaka is that every partner has a right to take part in the management and to work for it. However, if the partners agree, the management may be carried out by one or more of them.

If all the partners agree to work for the Musharaka venture, each of them shall be treated as the agent of the other in all the matters of the business subject to the Musharaka contract and any work done hy any of them in the normal course of business shall be deemed to be authorized by all the partners. This is regulated by a number of juristic rules, the most significant of which are:

A. Agency in the work:

Each partner carries out work in the Musharaka on behalf of Himself and as an agent for his partners. This is governed by The general rules of agency contract in Islamic jurisprudence. Some of these rules are related to the principal and others are Related to the agent and some are related to the things whichm Are the subject of agency. All these matters should be made clear in the Musharaka contract.

B. Scope of the work:

This related to the specification of the scope of each partner's Work in the Mushiraka in relation to its objectives and Activities. The partner should perform the agreed upon work Without negligence or misconduct or violation. The work Includes management of the business.

C. Appointment of workers:

The partners may appoint workers to perform the task which are not within the scope of their individual work, and the cost Of such work will be borne by the partnership concern. However, if a partner employs a worker to do some of the Takes which were originally assigned to him, the resulting costs Will be borne by him since the partnership contract is based on Both funds and work, and the earned profits are the outcome Of both these elements. Appointment of workers is conditional Upon a

genuine requirement for their services and that they Should receive remuneration in accordance with this.

D. Borrowing, lending, grants and charitable donations:

The partner may not borrow money ou account of the Musharaka or lend money to a third party from the funds of the Musharaka, donate or grant money except after securing the consent of other partners.

Rules for Distribution of profit:

Profit should be quantifiable. If it is not, there may be a dispute at the time of profit allocation or liquidation of the partnership. The ratio of sharing profit by each partner shall have to be determined on the basis of actual profit accrued to the business and not on the ratio of the capital invested by him or not to fix ,I ulop sum amount for any partner. If it is agreed that a specified partner will get 1% of his investment or Tk.30, 000/per year as his share of profit, the Musharaka is invalid.

If it is agreed that each partner will get certain percentage of profit based on capital ratio, whether they are sleeping or active, it is permissible.

If a partner is active, his profit sharing ratio could be more than his capital ratio irrespective of whether the other partner is working or not.

If all the partners are active, the share of profit can differ from the ratio of their capital.

Rules for Distribution of loss:

The loss, incurred in the business, shall be borne by the partners exactly according to the ratio of their respective capital. All the Muslim Scholars are unanimous on this principle. Any condition contrary to this shall render the contract void.

Rules of Termination:

If the purpose of forming the Musharaka has been achieved then it can be terminated. Every partner has the right to terminate the Musharaka at any time after giving a notice to others as per terms of contract. On terminating the Musharaka, if the assets are liquidated, these will be distributed on pro-rata basis among the partners. However, if this is not the case, the partners may agree either:

A) To liquidate the assets or

B) Distribute the assets as they are.

In case of a dispute between partners whether to seek liquidation of

Assets or to distribute non-liquid assets, the distribution of non

Liquid assets will be preferred. But if the assets are in a from that cannot be distributed such as machinery, then it will be sold and the sale-proceeds shall be distributed.

In case of death of any partner or any partner becoming insane or incapable of effecting commercial transaction, the Musharaka stands Wrininated.

Termination of Musharaka without closing the business:

If any partner wants termination of the Musharaka, while the other partner or partners likes / like to continue with the business, this can be done by mutual agreement. The partners who want to run the business may purchase the share of the partner who wants to terminate his Musharaka, because the termination of Musharaka with one partner dose not imply its termination between the other partners.

However, in this case, the price of the share of the leaving partner must be determined by mutual consent.

Compensation:

Musliaraki Agreement may include a clause to the effect that if any partner violates any rules of Musharaki or any terms & conditions of Musharaka Agreement, the business or other partners will have the i ight to impose compensation on him as determined by the Review Committee of the Bank.

(c) Investment in Share: Islamic Banks can deploy its fund in purchasing the shares of different Government or Non-Government Companies or in joint Stock Companies.

Islamic Banks can establish different Companies or Joint Stock Companies through its own initiative towards purchasing the share thereof. This system of investment is considered to be a unique one. The traditional Banks generally deploy its fund in purchasing interest based Securities, Bond, Share, Debenture etc. But it is not possible for Islan-dc Banks to purchase these interest-based securities. So Islamic Banks are to adopt pre-cautionary measures in selecting the interest free Companies to deploy its

fund in purchasing the share thereof. By purchasing the share of a selected Company Islamic Bank can take part in the management activities thereof. Side by side it can compete in the election to become Director of the Company.

(d) Direct Investment: Islamic Banks can invest directly without participation of third party in any trade, commerce, agriculture or industry. In this connection all the works relating to appraisal, establishment & management of a project are to be accomplish by the Bank alone. The entire capital of the project is to be deployed by the Bank alone & the ownership of the same remains in the name of the Bank. The profit or loss of such type of project is to be borne by the Bank itself. Under this system the Bank is to procure the goods/ raw material from the market towar~s dispose off the same with profit.

3.6.3 Isarah-Mechanisms

(A) Isarah/ Leasing

The term Ijarah has been derived from the Arabic works Ajir and Ujrat 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 Hire 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 Hire. It is a hire agreement under which a certain asset is hired out by the Hire to a Hirer against fixed rent or rentals for a specified period.

Ijarah is a system in which a non-fungible type of goods is produced & the same is let out to someone on rental basis to enjoy the utility thereof. The recipient of Ijarah enjoys benefit through using the goods & pays rent in exchange thereof. On the other hand the provider of Ijarah realizes his capital expenses from the rent & thereby earns profit. This system is more or less well known in all societies. Land, vehicle, apartment, ship, machinery etc. Are such type of goods, wl-dch can be lot out on rental basis. The system of Ijara is allowed in Islamic Shariah.

Types of Ijarah:

Ijarah may be of 2 (Two) types:

(1) Irrevocable Ijarah.

(2) Revocable Ijarah

(1) Irrevocable Ijarah: Under the agreement of irrevocable Ijara Islamic Bank procures a non-fungible type of goods/property & let it out to the client on mid-term or long-term basis. The ownership of the goods/property remains in the name of the Bank. The client uses the some & enjoys its possession against regular payment of monthly or yearly rent. On expiry of the period of Ijara the Bank likes back the

goods/property or let the same on rent for second time under new Ijara agreement. From the rent the Bank can realize the capital cost.

(2) Revocable Ijarah: Revocable Ijarah is made generally on short term basis. Since the Revocable Ijara is a short term one, the Bank can not realize its total capital cost within the specified period. The Bank is to sell the property/goods to realize its remaining capital cost & to earn profit. In Islamic Shariah no scope is there to earn rent against financial capital, as because, finance looses its entity or transforms into other whenever it is used. And a thin& which looses its entity due to being used, can not be let out on rental basis. In Islamic Shariah, it is permissible to let out a non-fungible type of goods. Because, this type of goods/Lhing docs not loose its entity while being used, rather it is to face risk of damage or breakage. Besides, the owner thereof is to bear the risk relating to buying as well as selling of the goods/property.

Related Terminologies or Elements of Ijarah:

According the majority of Fuqaha, there are three general and six detailed elements of Ijarah:

1. The wording: This includes offer and acceptance

2. Contracting parties: This includes a lessor, the owner oi the property, and a lessee, the party that benefits from the use of the property.

3. Subject matter of the contract: This includes the rent and the benefit.

Rules for Ijarah.

It is condition that the subject (benefit/service) of the contract and the asset (object) should be known comprehensively.

1. It is a condition that the assets to be leased must not be a fungible one (perishable or consumable) which can not be used more that once, or in other words the asset(s) must be a non-fungible one which can be utilized more than once, or the uselbenefit/service of which can be separated from the assets itself.

2. It is a condition that the subject (benefit/service) or the contract must actually and legally be attainable/derivable. It is not permissible to lease something, the handing-over of the possession of which is impossible. If the asset is a jointly owned property, any partner, according to be majority of the jurists, may let his portion of the asset(s) to co-owner(s) or the person(s) other than, the co-owners. However, it is also permissible for a partner to lease his share to the other partner(s),

3. It is a condition that the lessee shall ensure that he will make use of the asset(s) as per provisions of the Agreement or as per customs/norms/practice, if there is no expressed provision.

4. The lease contract is permissible only when the assets and the benefit/service derived frorn it are within the category of 'Halal' or at least'mobah' as per Islamic Shariah.

5. The lessor is under obligation to enable the lessee to the benefit from the assets by putting the possession of the Asset(s) at his disposal in useable condition at the commencement of the lease period.

6. In a lease contract, the period of lease and the rental to be paid in terms of time, place or distance should 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 lease contract.

8. It is a condition that the rental falls due from the date of handing over the asset to lessee and not from the date of contract or use of the assets.

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

3.6.3 Isarah-Mechanisms

(B) Hire purchase

Hire purchase is another type of investment mechanism, which is something similar to that of Ijara mechanism. In this system, the Bank invest in a project or procure any non-fungible type of asset/property & establish ownership thereon, then rent out that project or property to the client against purchase agreement. The client gains the right of possession as well as enjoys the utility of the same subject to regular payment of monthly/yearly rent & principal installment. The amount of rent gradually gets reduced with the adjustment of principal liability. The more the principal is adjusted the more the amount of rent is reduced.

3.6.3 Isarah-Mechanisms

(C) Sirkatul meelk/ Hire purchase under sirkatul meelk.

Hire Purchase under Shirkatul Meelk is a Special type of contract which has been developed through practice. Actually, it is a synthesis of three contracts:

I) Shirkat

Ii) Ijarah and

Iii) Sale

These may be defined as follows:

(1) Shirkat:

Shirkat means partnership. Shirkatul Meelk means share in ownership. When two or more persons supply equity, purchase assets, 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 Meelk contract.

(2) Ijarah:

The term Ijarah has been derived from the Arabic works Ajir and ujrat which means consideration, return, wages or rent. This is really [lie exchange value or consideration, return, wages, rent of service of an ASSET. Ijarah has been defined as a contract between two parties, [lie Hiree and Hirer where the Hirer enjoys or reaps a specific ~ervice or benefit against a specified consideration or rent from the asset owned by the Hiree. 11 is a hire agreement under which a certain asset is hired out by the Hiree to a Hirer against fixed rent or rentals for a specified period.

(3) 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 I to be paid by the buyer.

Thus, in Hire Purchase under Shirkatul Meelk mode both the Bank and the Client supply equity in equal or unequal proportion for purchase of an asset like land, building, machinery, transports 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 lump sum within the hire period or after the expiry of the hire agreement.

Stages of Hire Purchase under Shirkatul Meelk.

Thus Hire Purchase under Shirkatul Meelk Agreement has got three staces:

I. Purchase under joint ownership.

Ii. Hire and

Iii. Sale and/or transfer of ownership to the other partner Hirer.

Types of Sale Contract In Hire Purchase under Shirkatul Meelk

As per procedure of transfer of ownersl-dp and legal title of the part owned by the Bank is transferred to the other partner, the sale contract may be of various forms, some of the major forms are Mentioned below:

(1) Hire Purchase Under shitkatul Meelk Through Gradual Transfer (Sale) Of Legal Title/Ownership Of The Hired Asset Property

Under this type certain 'asset / ;roperty' is purchased with equal or unequal equity participation and owned jointly by the two parties the Bank and the Client. The Bank's share / portion of the asset is hired out to the Client partner against fixed rent / rentals per unit of time for a fixed period with a promise that the Hiree Bank will sell or transfer the ownership of its portion to the Client Hirer gradually part by part in proportion to the consideration paid. So that the Hirer may acquire the full title of the Hiree's portion of the asset on payment of the total price at the end of the hire period. If, for any reason, the hire contract is revoked prior to the payment transfer of full title to the Hirer, the 1-hrer will share that part of the title to the hired property which has been transferred to him against payment made by him and the remaining part will be shared by the Hiree Bank. If any loss arises to the Bank after the sale of Bank's S11,11 C to ihc ptopcrty / asset that shall be recouped from the Client / Client's security.

In our Bank, we shall be following this type of Sale Contract in Hire purchase under Shirkatul Meelk.

(2) Hire Purchase Under Shirkatul Meelk Through Transfer Of Legal Title By Gifts (For No Consideration).

Under this type the portion of asset owned by the Hiree partner is hired out to the Hirer partner with a prior promise that the Hirer, upon settlement of all the rent / rentals / installments by the Hirer, will transfer his ownership / title to the property to the Hirer through gift without any further consideration.

After the expiry of the hire period and payment of all the rent rentals / installments, the title of property may be transferred by a separate gift deed executed by the Hire or, the title may be transferred by issuing a gift deed by the Hire making it consideration on the settlement of all rental installments. In the later case, the legal title is automatically transferred as soon as the hire period expires and the fixed rent installments for rent are settled. The working of the agreement would be: If the agreed upon rental installments are settled within the agreed upon period, ownership of the asset will be transferred to the Hirer as gift.

(3) Hire Purchase under Shirkatul Meelk through Transfer of Legal Title (Sale) At the End of Hire Period for a Token Consideration

Under this contract the possessio'n of the asset owned by the Hiree is hired out to the hire for a fixed period against fixed rent / rentals and at the end of the hire period the title to the asset is transferred to the Hirer by'a separate sale contract on payment of agreed upon token consideration. The consideration may be equal to the value of the asset or not and it would be sufficient if a mutual agreement is reached on the consideration.

(4) Hire Purchase Under Shirkatul Meelk Through Transfer Of Legal Title (Sale) At The End Of Hire Period For Payment Of A Specified Amount To The Hire By The Hirer.

This agreement includes an ijarah / hire contract and a sale contract.

Under this agreement a specific asset is hired out for a fixed period

Agdinst specific rent mentioning a specific consideration to be paid by the Hirer (buyer) after the expiry of the hire period and upon payment of the agreed upon consideration. The hired asset becomes sold and its title transferred to the Hirer (the buyer). Under the agreement, the hire contract becomes effective firstly and the sale contract will be effective only after the expiry of the hire contract.

(3) Hire Purchase Under shiltul Meelk Through Transfer Of Legal Title (Sale) Prior To The End Of The Hire Term For A Price That Is Equivalent To The Remaining Ijarah / Rental Installments.

This is an ijarah / hire agreement which includes a promise made by the Hire that he will transfer the title of the hired property to the Hirer at any time during the hire period on payment of the remaining ijarah / rental installment, if the Hirer wishes so. Under this system first, the ijarah/hire contract becomes effective and remains so until the legal title is transferred to the Hirer. As soon as the title to the asset is transferred to the Hirer the ijarah/hire contract lapses for the remaining period, because both the benefit and the hired property become the Hirer's property.

Important Features:

(i) In case of I-lire Purchase under Shirkatul Meelk transaction the asset / property involved is jointly purchased by the Hire (Bank) and the I liner (Client) with specified equity participation under a Shirkatul Meelk Contract in which the amount of equity and share in ownership of the asset of each partner (Hire Bank & Hirer Client) are clearly mentioned. Under thisagreement, the Hire and the Hirer become co-owner of the asset under transaction in proportion to their respective equity participation.

(ii) ln Hire Purchase under Shirkatul Meelk Agreement, the exact ownership of both the Hiree (Bank) and Hirer (Client) must be recognized. However, if the partners agree and wish that the asset purchased may be registered in the name of any one of them or in the name of any third party, clearly mentioning the same in the Hire Purchase Shirkatul Meelk Agreement. However, in IBBL, no third party registration shall be allowed.

(iii) The share / part of the purchased asset owned by the Ifiree (Bank) is put at the disposal / possession of the Hirer (Client) keeping the ownership with him (Bank) for a fixed period under a hire agreement in which the amount of rent per unit of time and the benefit for which rent to be paid along with all other agreed upon stipulations are also to be clearly stated. Under this agreement, the Hirer (Client) 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,(Bank) is entitled for the rentals.

(iv) As the ownership of hired portion of the asset lies with the Hiree (Bank) and rent is paid by the Hirer (Chent) against the specific benefit, the rent is not considered as price or part of price of the asset.

(v) ln the Hire Purchase under Shirkatul Meelk Agreement the Hiree (Bank) does not purchase the asset but the Hiree (Bank) promise to sell the asset to the Hirer (Client) part by part only, if the Hirer (Client) pays the cost price / equity / agreed price as fixed for the asset as per stipulations within agreed upon period on which the Hirer also gives undertakings.

(vi) The promise to transfer legal title by the Bree and undertakings given by the Hirer to purchase ownership of the hired asset upon payment part by a separate sale contract.

(vii) As soon as any part of Hiree's (Bank's) ownership of the asset is transferred to the Hirer (Client) that becomes the property of the Hirer and hire contract for that share / part and entitlement for rent thereof lapses.

(viii) In Hire Purchase under Shirkatul Meelk Agreement, the Shirkatul Meelk contract is effected from the day the equity of both parties deposited and the asset is purchased and continues up to the day on which the full title of Hiree (Bank) is transferred to the Hirer (Client).

(ix) The hire contract becomes effective from the day on which the Hiree transfers the possession of the hired asset in good order and usable condition to the Hirer, so that the Hirer may make use of the same as per provisions of the agreement.

(x) Effectiveness of the sale contract depends on the actual sale and transfer of ownership of the asset by the Hiree to the Hirer. It is sold and transferred part by part; it will become effective part by part and with the sale and transfer of ownership of every share / part. The hire contract for that share / part will lapse and the rent will be reduced proportionately. At the end of the hire period when the full title of the asset will be sold out and transferred to the Hirer (Client), the Hirer will become the owner of both the benefit and the asset consequently the hire contract will fully end.

Rules for Hire Purchase under Shirkatul Meel1c.

(i) lt is a condition that the subject (benefit/service) of the contract and the asset (object) should be known comprehensively.

(i) lt is a condition that the asset(s) to be hired must not be a fungible one (Perishable or consumable) which can not be used more than once or in other words, the asset(s) must be a nonfungible one which can be utilized more than once or the use[benefit/service of which can be separated from the asset(s) itself.

(iii) lt is a condition that the subject (benefit/service) of the contract must actually and legally be attainable/derivable. It is not permissible to hire something, the handing-over of the possession of which is impossible. If the asset is a jointly owned property, any partner, according to the majority of the jurists, may let his portion of the asset(s) to coowner(s) or the person(s) other than the co-owner(s). However, it is also permissible for a partner to hire his share to the other partner(s).

(iv) lt is a condition that the Hirer shall ensure that he will make use of the asset(s) as per provisions of the Agreement or as per customs/norms/practice, if there is no expressed provision.

(v) The hire contract is permissible only when the asset(s) and the benefit/service derived from it is within the category of 'Halal' or at least'mobah' as per Islamic Shariah.

(vi) The Hiree is under obligation to enable the Hirer to the benefit from the asset(s) by putting the possession of the asset(s) at his disposal in useable condilion at the commencement of the hire period.

(vii) ln a hire contract, the period of hire and the rental to be paid per unit of time be clearly stated.

(viii) Everything that is suitable to be considered a price, in a sale, can be suitable to be considered as rental in a hire contract.

(ix) It is a condition that the rental falls due from the date of handingover of the asset to Hirer and not from the date of contract or use of the asset.

(x) lt is permissible to advance, defer or install in accordance with the Agreement.

(xi) lt is permissible to review the hire period or the rental or the both, if the Hiree and the Hirer mutually agree to do so.

(xii) The hired asset is a trust in the hands of the Hirer, He will maintain the asset(s) with due produce and shall not be held responsible for the damage or destruction of the asset without transgression, default or negligence, otherwise he must be responsible for the same.

(xiii) The Hiree/owner bears all the costs of legally binding basic repairs & maintenance including the cost of replacement of durable parts on which the permanence and suitability of the hired asset(s) depend or as per Contract.

(xiv) lt 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.