a) Different modes of Investment under Islamic Shariah
b) Concept, types & Characteristics of different modes of Investments
Sharing Mode of Investment:
MUDARABA
MUSHARAKA
Hire Purchase Under Shirkatul Melk(HPSM)
Buying and Selling Mode:
Bai- Murabaha
Bai-Muajjal
Bai-Salam
Istishna
MUDARABA
What is Mudraba?
Definition of Mudaraba:
Mudaraba is a partnership in profit whereby one party provides capital
and the other party provides skill and labour. The provider of capital
is called “Shahib al-maal” while the provider of skill and labour is
called “Mudarib”.
Types of Mudaraba:
Mudaraba Contracts are generally divided as under:
a) Unrestricted Mudaraba and
b) Restricted Mudaraba
a) Unrestricted Mudaraba:
Unrestricted Mudaraba may be defined as a contract in which the Shahib
al-maal permits the Mudarib to administer the Mudaraba fund without
any restriction.
b) Restricted Mudaraba:
Restricted Mudaraba may be defined as a contract in which the Shahib
al-maal restricts the actions of the Mudarib to a specified period or
to a particular location or to a particular type of business.
Terms and elements of Mudaraba:
Contracting Parties:
There are two contracting parties in Mudaraba:
1. The provider of the capital i.e. ‘Shahib al-maal’ and
2. The Mudarib.
Capital/Shahib al-maal’/
Capital is the amount of money given by the provider of funds i.e.
Shahib al-maal to the Mudarib with the purpose of investing it in the
Mudaraba business.
Profit & Loss:
Profit should be for both Shahib al-maal and Mudarib as per agreed
ratio. Loss should be borne by the Shahib al-maal.
The main features of Mudaraba:
a) There should be two parties: Shahib al-maal(financer/Investor) and businessman is Mudarib (Who provides skill andlabour).
b) There should be written agreement/contract between the Bank
and the businessman which includes nature of business, period/time,
sharing of profit etc.
c) Bank will finance and the businessman will run the business by
providing his labour & skill.
d) The Bank will not interfere in the business.
e) The businessman will appoint employee(s) and he will run the
business independently.
f) The Shahib al-maal /Financier/Investor reserves the right to
check/verify the accounts of the business at any time.
2.MUSHARAKA
MUSHARAKA
Definition of Musharaka:
Musharaka is a contract of partnership between two or more parties in
which all the partners contribute capital, participate in themanagement, share the profit in proportion to their capital or as perpre-agreed ratio and bear the loss, if any, in proportion to theircapital/equity ratio.
Types of Musharaka:
In the context of Islamic Banking financing, Musharaka may be of two types:
Permanent Musharaka
Diminishing Musharaka
1. Permanent Musharaka:
Permanent Musharaka may be defined as contract of partnership business
between the Islamic Bank and its clients in which the Bankparticipates in the equity and share the profit at a pre-agreed ratioor bear the loss, if any, in proportion to the ratio of capital/equitywhere termination period of the contract is not specified. This isalso called continued Musharaka.
2. Diminishing Musharaka:
Diminishing Musharaka is a special form of partnership in which one of
the partners promises to buy the share of the other partner gradually
until the title to the equity is completely transferred to him.
> Contracting Parties:
There are two or more contracting parties known as partners. It is acondition that all the partners should be competent to give or begiven power of attorney.
Capital:
Capital contributed by the partners may be in the equal or unequal and
in the form of cash or cash equivalent, goods & commodities, assets or
properties etc.
Distribution of Profit:
Profit should be distributed among the partners as per their ratio of
capital or as per agreement.
Distribution of Loss:
The loss, if incurred in the business, shall be borne by the partners
exactly according to the ratio of their respective capital.
Some Important Features of Musharaka:
1. Capital should be specific
2. Equal share is not a must
3. Nature of capital may be money or valuables
3. Active participation of partners
4. Ratio of profit prefixed
5. Variation in share of profit permissible
6. Participation and sharing profit & loss
7. Partners retains the ownership and right to management
Difference between Mudaraba and Musharaka:
Mudaraba / Musharaka1. / The capital in mudaraba is the sole responsibility of Shahib al-maal. / 1. / In Musharaka it comes from all the partners.
2. / In Mudaraba, the Shaheb al-maal has no right to participate in the
managemant which is carried out by the Mudarib only. / 2. / In Musharaka, all the partners can participate in the management of
the business and can work for it.
3. / In Mudaraba the loss, if any is suffered by the Shahib al-maal only,because the Mudarib does not invest anything. His loss is his labour and skill. / 3. / In Musharaka, all the partners share the loss to the extent of the
ratio of their investment.
Hire Purchase Musharaka Mutanaqasa (HPMM)/ Hire Purchase Shirkatul Melk (HPSM)
Hire Purchase Musharaka Mutanaqasa (HPMM)/ Hire Purchase Shirkatul Melk (HPSM) means purchasing and acquiring ownership of asset by sharing in equity and paying rents for the rest of the equity held by the Bank or other party.
It is a synthesis of three contracts:
1. Musharaka Mutanaqasa or Shirkat or Shirkatul Melk.
2. Ijarah
3. Sale
Under this mode, the Bank and the customer on contract basis jointly purchase vehicles, machineries, building, apartment etc. The customer uses the portion of the assets owned by the bank on rental basis and acquires the ownership of the same assets by way of paying banks portion of the equity on the assets on installments together with its rents as agreed upon.
Key Features of HPSM:
An agreement is executed between Hiree (Bank) and Hirer (Customer) stipulating the actual prices, monthly rents, price of the bank’s portion of the asset, payment schedule and installment amount and the nature of the security etc.
Bank rents out its own portion of the asset to the customer under the terms & conditions of agreement and the customer.
In Hire Purchase under Musharaka Mutanaqasa 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, jointly or in the name of any third party, clearly mentioning the same in the Hire Purchase Musharaka Mutanaqasa Agreement.
The customer (Hirer) pays off bank’s portion of equity in installments as per the terms and conditions of the agreement.
As the ownership of hired portion of the asset lies with the Hiree (Bank) and rent is paid by the Hirer (Customer) against the specific benefit, the rent is not considered as price or part of price of the asset.
In the HPSM agreement Hiree does not sell or Hirer does not purchase the asset but they promise to sell and purchase the same part by part only.
Ownership of asset transfer to sole owner from joint ownership.
The customer acquires full ownership of the asset after payment of the entire dues of the bank.
Bank will not share the loss of business as this is not the mode of sharing profit or loss.
Even though if a loss is incurred due to Act of Allah, the loss may be shared as per agreed ratio.
Fixation of Rent:
Rent will be fixed as per agreement between Bank and Customer.
Rent on rent cannot be charged.
Rent will be paid from the date only upon the asset is in usable condition.
Any default of paying rent will increase the total rent.
Charging of rent on grace period is highly objectionable as the asset is notgenerating income.
Rent may be charged in gestation period if the asset is delivered in useable condition.
Bank may recover the loss of gestation period by increasing the rate of rent for the remaining period or by revaluing the asset of the completion of the grace period.
The amount of rent will be decreasing proportionately with the decrease of hirer’s ownership and increase of hirer’s ownership on asset as per Diminishing Balance Method.
Differences among Ijara, Hire Purchase and Hire Purchase Musharaka Mutanaqasa (HPMM)/ Hire Purchase Shirkatul Melk (HPSM)
- HPMM is not only hire purchase but also it is the sharing of ownership.
- As HPMM/HPSM is sharing of ownership it differs with the conception of single ownership of asset purchase like Ijara.
- HPMM/HPSM is the sharing of ownership on asset not sharing of profit or loss like Musharaka.
- HPMM/HPSM is not diminishing Musharaka as the mentioned method implies the sharing of ownership not sharing of profit.
- The question of sharing of loss will only arises out from ownership risk.
- This ownership of risk will arise out only under act of Allah.
Buying and Selling Mode:
> Bai Murabaha mode of investment:
The term “Bai-Murabaha” have been derive from Arabic words ‘Bai’ and ‘Ribhun’. The word ‘Bai’ means purchase and sale and the word ‘ribhun’ means an agreed upon profit. ‘Bai-Murabaha’ means sale on agreed upon profit.
Bai-Murabaha may be define as a contract between a Buyer and Seller Under which the seller sells certain specific goods permissible underIslamic shariah and the Law of land to the Buyer at a cost plus agreed profit payable in cash or on any fixed future date in lump sum or by installments.
Important Features of Bai-Murabaha:
> To offer an order by the client to the bank.
> To make the promise binding upon the client to prophase from the bank and also to indemnity the damages caused by breaking the promise.
> To take security in the form of cash/kind/collaterals.
> To document the debts resulting from Bai-Murabaha.
> Stock and availability of goods is a basic conditi9on.
> Bank must bear the risk until delivery of goods to the client.
> Bank may sell it at a higher price.
> Price once fixed cannot be changed.
Bai-Muajjal mode of investment:
The term ‘Bai’ and the ‘Muajjal’ havebeen derive from Arabic words ‘Bai’ and ‘Ajalu’. The word ‘Bai’ meanspurchase and sale and the word ‘Ajalu’ means a fixed time or fixedperiod. ‘Bai-muajjal’ means sale for which payment is made at a futurefixed date or within a fixed period. In short, it is a sale on credit.
Bai Muajjal may be defined as a contract between a buyer and a sellerunderwhich the seller sells certain goods permissible under IslamicShariah and the Law of the country to the buyer at an agreed fixedprice payable at a certain fixed future date in lump sum or within afixed period by fixed installment. The seller may also sell goodspurchase by himas per order and specification of the buyer.
Important Features of Bai-Muajjal:
It is permissible for the client to offer an order to purchase by the Bank particular goods deciding its specification and committinghimself to buy the same from the bank on Bai-muajjal i.e. defferedpayment sale at fixed price.
It is permissible to make the promise binding upon the client topurchase from the Bank, that is, he is either satisfy the promise orto identify the damages caused by breaking the promise without excuse.
It is permissible to take cash/collateral security to Guaranteethe implementation of the promise or to identify the damages.
It is also permissible to document the debt resulting fromBai-Muajjal bu a Guarantor, or a mortgage.
Stocks and availability of goods is a basic condition for signinga Bai-Muajjal Agreement. Therefore, the Bank must purchase the goodsas per specification of the Client of goods to acquire ownership ofthe same before signing the Bai-Muajjal Agreement with the client.
After purchase of goods the Bank bust bear the risk of goods untilthose are actually delivered to the Client.
The Bank must deliver the specified goods to the Client onspecific date and at specific place of delivery as per Contract.
The Bank may sell the goods at a higher price than the purchaseprice to earn profit.
The price once fixed as per agreement and deferred cannot befurther increased.
The Bank may sell the goods at one agreed price which will includeboth the cost price and the profit. Unlike Bai-Murabaha, the Bank maynot disclose the cost price and the profit mark-up separately to theClient.
Difference between Murabaha and Bai-Muazzal:
1. / Bank sell it at a higher price an spot payment or as any future date. / 1. / Bank sell it at a higher price but payment will be deffered.
2. / Bank must bear the risk until delivery of goods to the client. / 2. / Client bear the risk of goods as the Possession of goods are in
party control.
3. / Possession of goods under bank’s control. / 3. / Possession of goods under party’s control.
4. / Cost of the goods sold and the amount of profit should be mentioned in the Murabha Agreement. / n Bai-Muazzal mode any selling price of goods should be mentioned in the Bai-Muazzal agreement
5. / Pledge of goods by the bank. / 5. / Goods to be hypothecated by the bank.
INVESTMENT MODES: MUDARABA, MUDHARAKA, BAI-SALAM AND ISTISNA’A
Investment:
Investment is the action of Deploying Funds with the intention and
expectation that they will earn a positive return for the owner.
Funds may be invested in either real assets or financial assets. When
resources are spent to purchase fixed and real assets. For example,
the establishment of a factory or the purchase of raw materials and
machinery for production purposes. On the other hand, the purchase of
a legal right to receive income in the form of capital gains or
dividends would be indicative of financial investment. Specific
example of financial investment are, deposits of money in a bank
account, the purchase of Mudaraba bonds.
There are different modes of investment under the Islamic Shari’ah
which can be classified into three categories:
1. Trading or Bai(‡Kbv-‡ePv) mode (Bai-Muazzal, Bai-Murabaha,
Bai-Salam, Istisna’a)
2.Partnership or Share(Askx`vix) mode (Mudaraba, Musharaka)
3.Leasing/Izara(fvov) mode (Hire purchase, Izara-Bil-Baia, Leasing)
Bai Murabaha mode of investment:
The term “Bai-Murabaha” have been derive from Arabic words ‘Bai’ and
‘Ribhun’. The word ‘Bai’ means purchase and sale and the word ‘ribhun’
means an agreed upon profit. ‘Bai-Murabaha’ means sale on agreed upon
profit.
Bai-Murabaha may be define as a contract between a Buyer and Seller
Under which the seller sells certain specific goods permissible under
Islamic shariah and the Law of land to the Buyer at a cost plus agreed
profit payable in cash or on any fixed future date in limp sum or by
installments.
Important Features of Bai-Murabaha:
To offer an order by the client to the bank.
To make the promise binding upon the client to prophase from the
bank and also to indemnity the damages caused by breaking the promise.
To take security in the form of cash/kind/collaterals.
To document the debts resulting from Bai-Murabaha.
Stock and availability of goods is a basic conditi9on.
Bank must bear the risk until delivery of goods to the client.
Bank may sell it at a higher price.
Price once fixed cannot be changed.
Bai-Muajjal mode of investment: the term ‘Bai’ and the ‘Muajjal’ have
been derive from Arabic words ‘Bai’ and ‘Ajalu’. The word ‘Bai’ means
purchase and sale and the word ‘Ajalu’ means a fixed time or 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.
Bai Muajjal may be defined as a contract between a buyer and a seller
under which the seller sells certain goods permissible under Islamic
Sharia and the 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 installment. The seller may also sell goods
purchase by himas per order and specification of the buyer.
Important Features of Bai-Muajjal:
It is permissible for the client to offer an order to purchase by
the Bank particula goods deciding its specification and committing
himself to buy the same from the bank on Bai-muajjal i.e. deffered
payment sale at fixed price.
It is permissible to make the promise binding upon the client to
purchase from the Bank, that is, he is either satisfy the promise or
to identify 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 identify the damages.
It is also permissible to document the debt resulting from
Bai-Muajjal bu a Guarantor, or a mortgage.
Stocks 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 of goods to acquire ownership of
the same before signing the Bai-Muajjal Agreement with the client.
After purchase of goods the Bank bust bear the risk of goods until
those are actually delivered to the Client.
The Bank must deliver the specified goods to the Client on