Islamic Banking Modes
Islamic Banking Modes is really helpful for the customer against interest based banking arena.
Islamic banks do not directly deal in money. They run business with money.
The funds of Islamic banks are mainly invested in the following modes:
1) Mudaraba;
2) Musharaka;
3) Bai-Murabaha (Murabaha to the purchase orders);
4) Bai-Muajjal;
5) Salam and parallel Salam;
6) Istisna and parallel Istisna;
7) Ijara;
8) Ijarah Muntahia Bittamleek (Hire Purchase);
9) Hire Purchase Musharaka Mutanaqisa (HPMM);
10) Direct Investment;
11) Investment Auctioning etc.
12) Quard
13) Quard Hassan etc.
1.Mudaraba:
Mudaraba
is a shared venture between labour and capital. Here Bank provides with
entire capital and the investment client conducts the business. The
Bank, provider of capital, is called Sahib-Al-Maal and the client is
called Mudarib.
The profit is to be distributed between the Bank
and the investment client at a predetermined ratio while the bank has to
bear the entire loss, if any.
2. Musharaka:
Musharaka
means partnership business. Every partner has to provide more or less
equity funds in this partnership business. Both the Bank and the
investment client reserve the right to share in the management of the
business. But the Bank may opt to permit the investment client to
operate the whole business. In practice, the investment client normally
conducts the business. The profit is divided between the bank and the
investment client at a predetermined ratio. Loss, if any, is to be borne
by the bank and the investment client according to capital ratio.
3. Bai-Murabaha:
Contractual
buying and selling at a mark-up profit is called Murabaha. In this
case, the client requests the Bank to purchase certain goods for him.
The Bank purchases the goods as per specification and requirement of the
client. The client receives the goods on payment of the price which
includes mark-up
profit as per contract. Under this mode of investment the purchase/ cost price and profit are to be disclosed separately.
4.Bai-Muajjal:
Meaning:
“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.
It
is a contract between a buyer and a seller under which the seller
sellscertain specific goods (permissible under Shariah and Law of the
Country), to the buyer at an agreed fixed price payable at a certain
fixed future date in lump sum or within a fixed period by fixed
installments. The seller may also sell the goods purchased by him as per
order and specification of the buyer. In Bank’s perspective,
Bai-Muajjal is treated as a contract between the Bank and the Client
under which the bank sells to the Client certain specified goods,
purchased as per order and specification of the Client at an agreed
price payable within a fixed future date in lump sum or by fixed
installments.
5. Salam and Parallel Salam:
Salam
means advance purchase. It is a mode of business under which the buyer
pays the price of the goods in advance on the condition that the goods
would be supplied / delivered at a particular future time. The seller
supplies the goods within the fixed time.
Parallel Salam:
Parallel
Salam is a Salam contract whereby the seller depends, for executing his
obligation, on receiving what is due to him – in his capacity as
purchaser from a sale in a previous Salam contract, without making the
execution of the second Salam contract dependent on the execution of the
first one. The following conditions are essential in the contracts of
Murabaha, Bai-Muajjal and Salam. The respective contracts must include
the following aspects regarding the goods:
* Number/Quantity
* Quality
* Sample
* Price and amount of profit
* Date of supply/time limit * Place of supply
* Who will bear the cost of supply?
* Timeframe for payment in case of Bai-Murabaha and Bai-Muajjal.
6. Istisna and parallel Istisna:
A
contract executed between a buyer and a seller under which the seller
pledges to manufacture and supply certain goods according to
specification of the buyer is called Istisna. An Istisna agreement is
executed when a manufacturer or a factory owner accepts aproposal placed
to him by a person or an Institution to produce/manufacture certain
goods for the latter at a certain negotiated price. Here, the person
giving the order is called Mustasni, the receiver of the order is called
Sani and the goods manufactured as per order is called Masnu. An order
placedfor manufacturing or producing those goods which under prevailing
customs and practice are produced or manufactured will be treated as
Istisna contract.
Conditions & characteristics of Istisna are enumerated below:
a)
The concerned Agreement must contain the details, such as, the type,
class, quantity and features of the goods to be produced, so that no
misunderstanding is created later on.
b) The price has to be settled; payment time/schedule and modes thereof is to be predetermined.
c) When, where and on whose cost the goods to be supplied has to be clearly mentioned.
d)
If agreed by both parties, payment may be made in advance to the seller
in part or in full or may be deferred to be paid in due course/
agreed time.
e) Generally timeframe is not mandatory for supplying the goods under
Istisna agreement. It may be executed without determining timeframe. But
in case of bank, timeframe for supplying goods must be determined to avoid any dispute in future.
f)
Condition for imposing stipulated compensation/penalty may be included
in the Istisna agreement against the party who breaches the terms of the
agreement causing the other party to suffer. But no
compensation/penalty would be imposed on any party if it happens for any
valid reason or unavoidable circumstances.
g) As per opinion of the contemporary jurists, the compensation in case of
Istisna may be treated as legal income. Parallel Istisna:
If
it is not stipulated in the contract that the seller himself would
produce/provide thegoods or services, then the seller can enter into
another contract with third party for getting the goods or services
produced/ provided by the third party. Such a contract is called
Parallel Istisna. This may be treated as a sub-contract.
The main features of this contract are:
i)
The original Istisna contract remains valid even if the Parallel
Istisna contract fails and the seller will be legally liable to
produce/ provide the goods or services mentioned in the Istisna
contract.
ii) Istisna and Parallel Istisna contracts are treated as two separate contracts.
iii) The seller under the Istisna contract will remain liable for failure of the sub-contract.
7. Ijara :
The mode under which any asset owned by the bank, by creation,
acquirement / or building-up is rented out is called Ijara or leasing.
In this mode,the leasee pays the Bank rents at a determined rate for
using the assets/properties and returns the same to the Bank at the
expiry of the agreement. The Bank retainsabsolute ownership of the
assets/properties in such a case. However, at the end of the leased
period, the asset may be sold to the client at an agreed price.
8. Ijarah Muntahia Bittamleak (Hire-Purchase):
Under
this mode, the bank purchases vehicles, machineries and
instruments, building, apartment etc. and allowed clients to use those
on payment of fixed rents in installments with the ultimate objective to
sell the asset to the client at the end of the rental period . The
client acquires the ownership/ title of the assets/ properties subject
to full payment/ adjustment of all the installments.
9. Hire-purchase Musharaka Mutanaqasa (HPMM):
Hire-purchase
Musharaka Mutanaqasa means purchasing and acquiring ownership by one
party by sharing in equity and paying rents for the rest of the equity
held by the Bank/or other party. Under this mode, the Bank and the
client on contract basis jointly purchase vehicles, machineries,
building, apartment etc. The client 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 in
installments together with its rents as agreed upon.
The features of this mode are elaborated below:
a) The client applies to the Bank expressing his/her wishes to
purchase the assets/properties and the bank accords its approval after proper evaluation/ scrutiny.
b)
The client deposits his/her share of equity with the bank
afterobtaining approval and the bank pays total price of the
assets/properties together with its equity.
c) Before purchase of
the assets/properties an agreement is executedstipulating the actual
prices, monthly rents, price of the bank’s portion of
theassets/properties, payment schedule and installment amount and the
nature of the security etc.
d)The bank shall rent out its own portion of the assets/properties to the client as per terms & conditions of the agreement.
e)
The client (Hirer) pays off in installments bank’s portion of equity on
the assets together with its fixed rent as per the terms and conditions
of the agreement.
f) With the payment of installments by the
client, the ownership of the bank in the assets/properties gradually
diminishes, while that of the client increases.
g) The amount
of the rent receivable by the bank, reduces gradually
proportionate to the increase in the ownership of the client on the
assets/properties.
h)The client acquires full ownership of the goods/assets after payment of the entire dues of the bank.
i)The
client may acquire the full ownership of the assets/properties before
expiry of the deal by paying off the entire dues to the bank.
j)The rent remains payable in proportion to Bank’s ownership, if the client fails to pay the due installment(s).
k)
The bank can take of the assets / properties under its control, if the
client fails to pay the installment(s) as per the terms and conditions
of the agreement.
L) The ownership of the assets/properties
remains with the bank until the entire equity provided by the bank
together with the fixed rent is fully paid off. On full payment/
adjustment of Bank’s dues, it transfers the ownership to the client.
m) The amount which the bank receives as rent is its income. The rent should not treat as a part of the equity in any way.
10. Direct Investment:
Under this mode, the bank can under its full proprietorship
conduct business by directly investing in the industries,trading,
transports etc. In these cases, the profit/loss fully goes to the bank.
11.Investment Auctioning:
Selling
by auction of those assets/goods acquired bythe bank through direct
investment is called Investment auctioning. Generally, the bank
establishes industrial units by direct investment, makes the same
operationally profitable and then sells out on auction. This mode of
investment is very helpful for
industrialization of the country.
12.Quard:
It
is a mode to provide financial assistance/ loan with the stipulation to
returnthe principal amount in the future without any increase thereon.
13. Quard Hassan:
This
is a benevolent loan that obliges a borrower to repay the lender
theprincipal amount borrowed on maturity. The borrower, however, has
the discretion to reward the lender for his loan by paying any amount
over and above the amount of the principal provided there will be no
reference (explicit or implicit) in this regard. If a bank provides its
client any loan, it can receive actual expenditure relating to the
loan as service charge only once. It can not charge annually at a
percentage rate. If a loan is provided against the money deposited by a
client in the bank, it has the right not to pay any profit against the
amount of money given as loan. But profit should be paid on the rest of
the amount deposited as per previous agreement.
