Islamic Banking Reading Material

Islamic Banking
Islamic Banking
Table of Contents
1. ISLAMIC ECONOMIC SYSTEM ....................................................................................................... 3

Introduction ............................................................................................................................................... 3
Sources of Shariah .................................................................................................................................... 3
Introduction of Islamic Economics ........................................................................................................... 4
Difference between Islam, Capitalism and Socialism............................................................................... 4
2. FACTORS OF PRODUCTION IN ISLAM ......................................................................................... 5
The Capitalist View .................................................................................................................................. 5
The Socialist View .................................................................................................................................... 5
The Islamic View ...................................................................................................................................... 5
3. RIBA ITS PROHIBITION AND KINDS ............................................................................................. 6
What is Riba? ............................................................................................................................................ 6
Types of Riba: ........................................................................................................................................... 6
4. ISLAMIC BANKING VS CONVENTIONAL BANKING ................................................................. 8
5. LAWS OF CONTRACT ....................................................................................................................... 9
Types of Contract (Aaqd) ......................................................................................................................... 9
General Prohibitions ............................................................................................................................... 10
Elements of a Valid Sale ......................................................................................................................... 10
6. DEPOSIT PRODUCTS ...................................................................................................................... 12
Basis of Deposit Products in BAHL-IBD ............................................................................................... 12
Qard: ....................................................................................................................................................... 12
Modaraba ................................................................................................................................................ 12
Musharakah:............................................................................................................................................ 13
Types of Musharakah:............................................................................................................................. 13
Basic Rules of Musharakha..................................................................................................................... 14
Combination of Modarba & Musharaka (Mudarba Mushtaqrika) .......................................................... 14
Illustration of Modaraba cum Musharaka: .............................................................................................. 14
Types of Modaraba ................................................................................................................................. 14
Operating Expense in Modaraba: ............................................................................................................ 15
Profit & Loss Sharing ............................................................................................................................. 15
Termination of Modaraba ....................................................................................................................... 15
7. FINANCING PRODUCTS ................................................................................................................. 16
Financing Products of BAHL – Islamic Banking ................................................................................... 16
Islamic Banking – Training Manual Page 1

Murabaha Finance................................................................................................................................... 16
Murabaha – Product Process Flow for Advance Payment ...................................................................... 16
Murabaha – Product Process Flow for Credit Payment .......................................................................... 17
Musawamah Finance .............................................................................................................................. 18
Musawamah – Product Process Flow for Local Sales ............................................................................ 19
Musawamah – Product Process Flow for Export Sales .......................................................................... 20
Istisna Finance: ....................................................................................................................................... 21
Istisna – Product Process Flow ............................................................................................................... 22
Ijarah Finance.......................................................................................................................................... 23
Ijarah & Ijarah wa Iqtina: ........................................................................................................................ 23
Basic Rules for Ijarah.............................................................................................................................. 23
Ijarah – Product Process Flow ................................................................................................................ 24
Difference between Lease & Ijarah ........................................................................................................ 25
Diminishing Musharaka Finance ............................................................................................................ 26
Basic Rules for Diminishing Musharaka: ............................................................................................... 26
Diminishing Musharaka – Transaction Flow .......................................................................................... 27
8. FAQs ................................................................................................................................................... 29

1. ISLAMIC ECONOMIC SYSTEM
Introduction
The Islamic Economic system is a system which is in conformity with the rules of Shariah. Shariah can be
explained as a "Pathway to be followed" and can further be explained as a set of divine injunctions and
laws that regulates every aspect of human beings in their individual and collective lives.
All aspects of individual and collective life of human beings can be divided into five categories. Thus,
Shariah provides a pathway to be followed in all these five categories which are;
1) Beliefs (Aqaid)
2) Acts of Worship (Ibadaat)
3) Dealing with others (Muamlaat)
4) Moral & Social Values (Ikhlaqiat)
5) Constitutional Laws (Qawaneen)
Sources of Shariah
The rules and regulations laid down by Islamic Shariah are derived from the following sources:
1. Quran
2. Sunnah
3. Ijma
4. Qiyas
1. Quran
The Holy Quran is the primary source of knowledge and Shariah rulings for Muslims. The injunctions
mentioned in the Holy Quran are mandatory to follow and anyone who denies express injunctions of the
Holy Quran is regarded as Non-Muslim. Most of the injunctions mentioned in the Holy Quran are
prescriptive in nature such as Order for offering Salah but information about method and other descriptive
information about offering Salah may be obtained from other sources of Shariah such as Sunnah.
2. Sunnah
Sunnah is defined as a word spoken or act done or rectified by the Holy Prophet (PBUH) .The Sunnah
provides detailed information about the code of conduct for every spheres of life and is also considered as
Divine Revelation. The details about Sunnah are preserved in the form of Ahadiths. On the basis of clear
injunctions of Holy Quran, Sunnah can thus be regarded as the second source of Islamic Shariah after
Quran.
3. Ijma
Ijma means consensus of scholars of Ummah on a particular issue. It is one of the most authoritative
sources of Islamic Shariah since it encompasses the unanimous opinion of the scholars of a particular era
over the interpretation of Quran and Hadiths on some particular issue.
4. Qiyas
Qiyas means to apply a recognized rule of Shariah expressly mentioned in the Holy Quran and Sunnah, to
a similar thing or situation by way of analogy.

Introduction of Islamic Economics
The economic philosophy of Islam has no concept of Riba because according to Islam, Riba is that curse
in society, which causes wealth to accumulate among handful of people and it results inevitably in
creating monopolies, opening doors for selfishness, greed, injustice and oppression.
The distribution of wealth is one of the most important and most controversial subjects concerning the
economic life of man, which has given birth to global revolutions in today's world and has affected every
sphere of human activity from international politics down to the private life of the individuals.
Basic principles which distinguish the Islamic point of view about economics from the non-Islamic point
of view are as follows;
1. The Importance of the Economic Goals
According to Materialistic Economics:

"Livelihood is the fundamental problem of man and economic developments are the ultimate end of
human life."
While according to Islamic Economics:

"Livelihood is necessary and indispensable, but cannot be the true purpose of human life."
2. The Real Nature of Wealth and Property
The other fundamental principle, which can help solve the problem of the distribution of wealth, is the
concept of ‘wealth’ in Islam. According to the illustration of the Holy Quran, ‘wealth’ in all its possible
forms is a thing created by Allah, and is, in principle His "property". Allah delegates the right of His
property over a thing, which accrues to man, to Him.
It places the following guidelines before us:
a) Whatever wealth man possesses has been given by Allah.

b) Man has to use it in such a way that his ultimate purpose should be to seek the bounties and
blessings of Allah in this world and hereafter.
c) Since wealth has been given by Allah, its use by man must necessarily be subject to the
commandment of Allah.
Difference between Islam, Capitalism and Socialism
Now we are in a position to draw clear boundary lines that separate Islam, Capitalism and Socialism from
one another. Capitalism affirms an absolute and unconditional right to private property, whereas
Socialism totally denies the right to private property. But the truth however, lies between these two
extremes .i.e. Islam admits the right to private property but does not consider it to be an absolute and
unconditional right that is bound to cause "disorder on the earth".

2. FACTORS OF PRODUCTION IN ISLAM
The Capitalist View
According to the Capitalistic economy, the four factors of production are;
1. Capital:
It has been defined as "the produced means of production" - In other words, a commodity which has
already undergone one process of human production, and is again being used as a means of another
process of production.
2. Labor:
It is defined as, any exertion on the part of man.
3. Land:
It is defined as ‘‘natural resources’’ (i.e. those things which are being used as means of production
without having previously undergone any process of human production).
4. Entrepreneur or Organization:
The fourth factor that brings together the other three factors exploits them and bears the risk of profit and
loss in production.
The Socialist View
On the other hand, under the Socialist economy, capital and land instead of being private property are
considered to be national or collective property. So, the question of rent (or revenue) does not arise at all
under the philosophy of this system.
Under the Socialist system, the entrepreneur too is not an individual but the state itself. So profit as well is
out of the question here - at least in theory. Now, there remains only one factor namely “Labor” and labor
alone is considered to have a right to wealth under the Socialist system, which it gets in the shape of
"Wages".
The Islamic View
The factors of production under Islamic view are three instead of four.
1. Capital & Entrepreneur:
In Islamic Economic Capital and Entrepreneur is considered as one factor of production. It is not
legitimate to earn interest on the capital, without taking risk on it. Islam allows profit and sharing based
ventures like Musharaka and Modaraba.
2. Land:
That is, those means of production, that are used in the process of production in a way that their original
and external form remains unaltered, and which can hence be let or leased (for example, land houses,
machines etc.). Its share is in the form of rent.
3. Labor:
That is, human exertion, whether of the bodily organs or mind or heart. This exertion thus includes
organization and planning too. The share of labor comes in the form of wages as in the case of Modaraba
(Islamic mode of partnership); the compensation of labor is in the form of profit.

3. RIBA ITS PROHIBITION AND KINDS
What is Riba?
Riba is any excess compensation without due consideration over and above the principal. Shariah has
differentiated between the excess in capital due to sale and the excess resulted from interest.
Shariah has a balanced approach, on one hand a wide area is left at the sole judgment of human being and
on the other hand human activities are governed and subjected to some set of principals. It is the belief of
every Muslim that every principal and condition of Shariah must be followed and fulfilled. Shariah does
not deny the market forces and profit motive is also admitted in Shariah. But Shariah has strictly
prohibited transactions which are based on Riba.
In Holly Quran, Allah says (Surah al-Baqarah, verse 275):
"Those who take Riba (usury or interest) will not stand but as stands the one whom the demon has driven
crazy by his touch. That is because they have said: "Sale is but like Riba", while Allah has permitted sale,
and prohibited Riba. So, whoever receives an advice from his Lord and desists (from indulging in riba),
then what has passed is allowed for him, and his matter is up to Allah. As for the ones who revert back,
those are the people of Fire. There they will remain forever”. [275]
Types of Riba:
1. Riba An Nasiyah
It is the real and primary form of Riba. This form of Riba is discussed in Quran that is the reason it is also
named as Riba A Quran. Riba an Nasiyah can be defined as:
“A loan where specified repayment period and an amount in excess of capital is predetermined”
The Holly Prophet said “Every Loan that draws interest/premium is Riba”. Riba an Nasiyah refers to a
condition for the loan that additional premium is paid to lender in return for his waiting and is technically
the same as interest. The phrase “That draws interest” is of immense importance. This phrase made it
clear that the payment of premium or interest is the pre requisite of loan contract. If this is not a pre
requisite of the loan agreement or the parties do not mention the same at the time of borrowing and
lending and if the borrower pays some additional amount at the time of repayment. It will not be
considered as Riba.
"As for the Riba An-Nasiah, it was a transaction well-known and recognized in the days of Jahiliyya i.e.
they used to give money with a condition that they will charge a particular amount monthly and the
principal will remain due as it is. Then on the maturity date they demanded the debtor to pay the
principal. If he could not pay, they would increase the term and the payable amount. So it was the riba
practiced by the people of Jahiliyya."
The same explanation is given by Aadil Al-Dimashqi in his detailed Tafseer Al-Lubaab v.4 p.448.
Parah 42
2. Riba Al Fadl
"Gold for gold, silver for silver, wheat for wheat, barley for barley, date for date, salt for salt, must be
equal on both sides and hand to hand. Whoever pays more or demands more (on either side) indulges in
Riba." Para 58
It means that if wheat is exchanged for wheat, the quantity on both sides must be equal to each other and
if the quantity of any one side is more or less than the other, this transaction is also a Riba transaction,
because in the tribal system of Arab these commodities were used as money, and the exchange of one
kilogram of wheat for one and a half (1 1/2) kilogram of another wheat would stand for the exchange of
one dirham for one and a half (1 1/2) dirham. However, this transaction was termed as riba by the Holy
Prophet (Peace be Upon Him), and this meaning was not covered by the term 'Riba al-Jahiliyya'.
Therefore, it was called as 'Riba al-Fadl' or 'Riba-al-Sunnah' or ‘Riba Al Hadith’.
It actually means the excess which is taken in exchange of specific homogenous goods and encountered in
hand to hand purchase and sale. The concept of Riba Al Fadl is derived from the following famous
hadith:
The Prophet (Peace be upon Him) said “Sell gold in exchange of equivalent gold, sell silver in exchange
of equivalent silver, sell dates in exchange of equivalent dates, sell wheat in exchange of equivalent
wheat, sell salt in exchange of equivalent salt, sell barley in exchange of equivalent barley, but if a person
transacts in excess, it will be usury. However, sell gold for silver anyway you please on the condition it is
hand to hand and sell barley for date anyway you please on the condition it is hand to hand”
The prohibition of Riba Al Fadl is intended to ensure justice and remove all forms of exploitation through
unfair exchanges and to close all the back doors to Riba An Nasiyah.

4. ISLAMIC BANKING VS CONVENTIONAL BANKING
In today’s modern economic world all business activities are largely dependent upon efficient banking
system. But the existing banking system revolves around interest whether it is the case of deposit
generation or is the case of financing.
This phenomenon is in conflict with the Muslim faith. So, there is a dire need to have a banking system
which is free of Riba. Although Shariah has not defined any set of rules for banking but it laid down
certain guidelines and introduces some modes of financing on the basis of which; an Islamic banking
model has been developed.
Shariah treats money as medium of exchange and not as a commodity which can be sold or bought. As
discussed earlier profit motive is not prohibited in Islam but this profit is to be generated through sale
activities.
Islamic banking fundamentally differs from conventional banking in the following manners;
a. Conventional banking accepts loan at less rate of interest and lends funds at higher rate of
interest. The depositor is the creditor to the bank. While in Islamic Banking people pool their
funds and the bank invest the same in trade or business. The profit derived from such activity is
shared between the depositors and the bank.
b. In conventional banking the basic relationship between the depositor and bank is that of creditor
and debtor. The bank return is paid as interest. While in case of Islamic Banking the relationship
between the bank and depositor is that of partners and they share the profit.
c. The Conventional bank’s assets mainly comprise of debt and monetary asset and they earn
interest on these assets.
d. Islamic banks deals in real assets and they earn either profit by selling them or earn rent by
leasing them etc.
e. In conventional banking the return of the depositor and the principal is guaranteed. In case of
Islamic banking the bank assumes the risk of ownership and the return depends on trading result.
f. Conventional bank does not involve itself in trade while Islamic banks actively participate in
trade.

5. LAWS OF CONTRACT
A contract is an agreement between two or more persons OR parties for doing something. A contract is
also defined as an agreement which in enforceable by law, recognized by law and effects legal rights and
duties of the parties. E.g. Contract of Sale, Contract of Marriage etc.
A contract is a fundamental basis of every Banker – Customer relationship.
Types of Contract (Aaqd)
1. Uqood e Mu’awadah (Compensatory or Financial Contract)

2. Uqood e Ghaer Mu’awadah (Non Compensatory or Social Contract)
Compensatory or Financial Contract:
This is a contract in which there is an exchange of either goods or services against an agreed
compensation / price / fee / charges.
Non-Compensatory or Social Contract:
This is a contract in which there is exchange of either goods or services with out any compensation / price
/ fee / charges. These contracts are also known as “Uqood e Tabarru”.

General Prohibitions
Islam not only prohibits Riba, but also few transactions which are strictly prohibited in Shariah;
Gharar:
It literally means “Uncertainty”. A sale is not allowed if there is an Uncertainty “Gharar” in its important
elements i.e Price and Subject Matter.
Qimar:
Qimar means “Gambling”. Sometimes another term “Maysir” is also used. It refers to a transaction based
on speculation or luck, outcome of which is not known. Shariah strictly prohibits Qimar.
Conditional Contract:
A contract; outcome of which is contingent on certain conditions is also void. E.g. Twin contracts in a
single contract OR Executing two sales which are dependent on each other in a single contract.
Elements of a Valid Sale
A sale is a transaction between two parties where the buyer receives goods (tangible or intangible),
services and / or assets in exchange for money. A sale functions as a contract between the buyer and seller
of the selected good or service. Since all the Financing Modes in Islamic Banking involves Sale of
Commodities by one way or another. Therefore it is imperative to discuss the elements of a valid sale.
There are five elements of a Valid Sale.
1. Contracting Parties
2. Sold Good or Subject Matter
3. Price
4. Delivery or Possession
5. Transfer of Ownership
1. Contracting Parties:
A party to a contract is one who holds the obligations and receives the benefits of a legally binding
agreement. When two parties enter into an agreement, there are two distinct roles each play: the promisor
and the promise.
2. Subject Matter:
The subject matter of the Sale should be Existent, Valuable, Usable, and Capable of being Owned,
Capable of delivery, Specific and Quantifiable. Further the seller must possess the Title & Risk associated
with the Goods.
3. Price:
Price should be known, specific & certain.
4. Delivery or Possession:
The Delivery or Possession of the subject matter should take place; either physical or constructive.

5. Transfer of Ownership:
The title of goods should also be transferred to the new owner, giving full rights & obligations with
respect to the subject matter.

6. DEPOSIT PRODUCTS
Basis of Deposit Products in BAHL-IBD:
Contract is the basis of establishing relationship between the customer and the bank. Therefore it is also
imperative to understand the nature & type of contract for various deposit products.
The operation of Fixed Deposits, Current and Savings account in Islamic banks will be different from
conventional banks because the deposit in Islamic banks will be based on the principals of Qard,
Modaraba & Musharakah.
Qard:
Qard is an interest-free loan in Islamic Banking i.e. a loan, which under Islamic law is always free of
profit. A qard may also be a bank deposit, which is considered a loan to a bank for its use but which must
be returned to the depositor upon request.
Modaraba:
Mudarabah is a kind of partnership wherein one partner provides capital to another partner to invest the
same in some commercial enterprise. The investment comes from one partner who is called Rab-ul-Mal,
while the management and work is the exclusive responsibility of the other partner called Mudarib.
Although Modaraba is a kind of partnership but it differs from Musharakah on the following grounds:
Musharakah Modaraba
Capital:
Capital may be contributed by all partners Capital is contributed only by Rab-ul Mal
Ownership of Assets:
The assets acquired or created in partnership are The Rab-ul-Mal owns the asset.
jointly owned by all partners
Liability:
Normally the liability of all partner is unlimited The liability of Rab-ul-Mal is limited to the
extent of funds invested.
Management:
Every partner can participate in the management of Rab-ul-Mal can’t participate in the management
the business enterprise. of the business.
Loss Sharing:
The financial loss is born by all the partner in their Only Rab-ul-Mal bears the financial loss.
ratio of investment

Musharakah:
Musharakah is a joint partnership structure with profit/loss sharing implications that is used in Islamic
Banking instead of interest-bearing loans. Musharakah allows each party involved in a business to share
in the profits and risks. Since Shariah has prohibited interest, therefore interest cannot be used as the basis
for determining return of any kind. Therefore, Musharakah can play a vital role in an economy based on
Shariah principles.
Types of Musharakah:
The Shariah has broadly classifies the Musharakah into two categories:
1. Shirkat-ul-Milk.
2. Shirak-ul Aqd.
Shirkat-ul-Milk:
It means joint ownership of two or more persons in a particular property. This kind of “Shirkah” may
come into existence in two different ways:
Optional Shirkat-ul-Milk (Ikhtiyari):

If two or more persons purchase equipment, it will be owned jointly by both of them and the relationship
between them with regard to that property is called “Shirkat-ul-Milk.” Here this relationship has come
into existence at their own option, as they themselves elected to purchase the equipment jointly.
Un-optional Shirkat-ul-Milk (Ghair Ikhtiyari):

There are cases where this kind of “Shirkah” comes to operate automatically without any action taken by
the parties. For example, after the death of a person, all his heirs inherit his property which comes into
their joint ownership as an automatic consequence of the death of that person
Shirak-ul Aqd:
This is a second type of shirkat/ musharakh, which is defined as “A partnership effected by a mutual
contract. It may also be translated as “Joint commercial enterprise.”
This type of Shirkat (Partnership) is further divided into three categories:
Shirkat-ul- Amwal:
When the partners contribute capital into a business; it becomes shirkat-ul-amwal. It is not necessary that
all partners contribute equal portion of capital.
Shirkat-ul-A’mal:
Where the partners jointly undertake to render some services and agree to share the revenue generated
from providing such services.
Shirkat-ul-Wujooh:
Where the partners do not contribute capital rather purchase the goods on deferred payment basis and sell
the same at spot. The profit so generated is shared in agreed ratio.

Basic Rules of Musharakha
 The partner must be capable of entering into a contract and must enter into contract with free will.
 All the assets are jointly owned by the partners.
 Capital may be contributed in cash or in kind. In case the capital is provided other than cash then
its market value will be considered.
 It is not allowed to fix a lump sum amount for any partner nor a fix rate tied up with capital be
allowed.
 The profit sharing ratio must be defined at the time of commencement of Musharakah.
 Where any partner is not taking part in business i.e. he is sleeping partner then his profit sharing
ratio cannot be higher than his capital contribution ratio.
 The ratio of profit for each partner must be determined in proportion to the actual profit earned.
 The loss if any must be shared amongst the partners in the ratio of capital.
Combination of Modarba & Musharaka (Mudarba Mushtaqrika):
In Modaraba the capital is assumed to be provided by Rab-ul-Mal; but there may be situation where the
Mudarib also invests his capital. This arrangement is a combination of Musharakah and Modaraba. In this
situation Mudarib has two capacities, one he is the partner with Rab-ul-Mal (Depositors) pool and the
other is Mudarib being a Fund Manager to manage the different pools existing in the Bank.
In this scenario; Mudarib will be entitled for two profits one as shareek and other as mudarib. In case of
shareek his profit sharing ratio could be any but the profit ratio of other Rab-ul-Mal should not be higher
than its capital ratio. The Mudarib is also entitled for mudarib profit. Both these profit sharing ratios must
be defined at the commencement of Modaraba cum Musharakah.
Illustration of Modaraba cum Musharaka:
Suppose the total investment of the bank is Rs. 15 Million in which the depositors have invested Rs. 10
Million on Modaraba basis and the shareholders as Mudarib have invested Rs. 5 Million. This means that
one third (1/3) share of the total capital belong to the shareholders and two third (2/3) to the depositors.
The role of Mudarib in the 2/3rd capital raised by depositors is played by the shareholders, therefore their
ratio of profit as manager (Mudarib) can be agreed between themselves through mutual consent but their
ratio of profit, as shareholders cannot be less than 1/3rd. If their share is agreed at less than 1/3rd, it would
mean that the depositors' share has exceeded 2/3rd although it has been established that they will not be
managing the bank and their share of profit will not exceed their ratio of investment.
If it has been agreed in the above example that the shareholders as managing partners will get 1/3rd of the
profit and the rest 2/3rd will be distributed equally between depositors and shareholders as per the
Modaraba contract between them, then if for e.g. the profit amount is Rs. 1.5 Million, then the
shareholders will get its share on the basis of 1/3 i.e. Rs. 0.5 Million as the investor (Rab-ul-mal) and half
of the 2/3rd profit i.e. Rs. 0.5 Million as the manager (Mudarib) whereas, the other half of the 2/3rd profit
will go to the depositor as Rab-ul-maal. The above procedure can be adopted to run the bank on the
principles of Musharakah.
Types of Modaraba:

The Modaraba can be classified into two categories:
Restricted Modaraba (Modaraba Muqayyadah):
Where the Rab-ul-Mal identified the business avenue where his funds should be invested or he puts
certain condition on Mudarib it becomes ‘Restricted Modaraba’.
Un-Restricted Modaraba (Modaraba Mutlaqah):
Where the Rab-ul-Mal does not restrict Mudarib on any material aspect relating to investment OR any
other decision, it is called ‘Un-restricted Modaraba’
Operating Expense in Modaraba:

Since in Modaraba the business is managed by Mudarib all operating expenses will be born by Mudarib.
Profit & Loss Sharing:

The profit may be shared in any ratio which is agreed at the commencement of Modaraba. However, the
loss if any; will be born by Rab-ul-Mal. In case of loss modarib will be deprived of the profit which
would have been given to him if such loss does not occur. However if the loss occurred due to gross
negligence of the mudarib, then the loss will not be born by the Rab-ul-Mal.
Termination of Modaraba:
Each partner can terminate Modaraba at any time. If a time period is fixed in Mudarib, all partners will be
responsible for the completion of this period. The physical liquidation is not necessary, constructive
liquidation can also be carried out. In case of physical liquidation the capital will be returned to Rab-ul-
Mal and the excess amount is profit which is shared in the agreed ratio. In case the proceeds are less than
the amount invested in the business the whole Rab-ul-Mal will bear the financial loss and the Mudarib
will be deprived from the profit which he would have been entitled, if this loss had not been occurred.
Where constructive liquidation is done the market value of assets will be assessed and the profit will be
shared in agreed ratio.

7. FINANCING PRODUCTS
Financing Products of BAHL – Islamic Banking:
BAHL – Islamic Banking offers the following Financing Products for Individuals/Traders/Industries.
1. Murabaha Finance
2. Istisna Finance
3. Musawama Finance
4. Ijarah Finance
5. Diminishing Musharaka Finance
Murabaha Finance:
It refers to a particular type of sale where the seller agrees with the buyer to sell particular commodity on
certain profit added to its cost. In other words if the seller discloses his cost and the profit to buyer the
sale is considered as Murabaha Sale. The payment of Murabaha price may be advance or deferred/ on
credit. Murabaha is widely used for Raw Material financing. Contract price in Murabaha could be
determined as;
Murabaha Contract Price = Cost Price of Goods + Profit of Bank
Murabaha being a sale transaction must fulfill all the conditions of a valid sale as laid down in the
elements of a valid sale.
Murabaha - Principal Documents:
a. Master Murabaha Financing Agreement

b. Master Agency Agreement (either Global or Specific Agency)
Murabaha - Transaction Documents:
a. Purchase Requisition / Intimation to Purchase

b. Acceptance by the Bank
c. Offer and Acceptance of Sale and Purchase
d. Repayment Schedule
Murabaha – Product Process Flow for Advance Payment:

(The blanks appearing the process flow will be according to the arrangement/business model of the client)
1. After necessary credit and Shariah approvals, BAHL & Customer shall enter into MMFA (Master
Murabaha financing agreement) and global or specific Agency Agreement for the purchase of
raw material from the aforementioned supplier.
2. The Branch RM will educate the customer about the process flow and especially about signing
the declaration and Murabaha contract before the consumption/sale of goods and sorting the
goods purchased for BAHL separate from the goods already available with the customer.
3. In case of frequent purchase customer is appointed as an agent under global agency agreement
whereas for specific purchase the customer is appointed as an agent under specific agency
agreement.
4. Upon requirement for the purchase of assets the customer must negotiate the deal with the
supplier as an agent of the Bank and must submit purchase requisition to the Bank. Purchase
requisition must be provided before placing order with the supplier.

5. As per the Intimation of purchase/ purchase requisition BAHL will make 100% direct payment
and issue Banker’s cheque in the name of the supplier for the purchase of raw material/ goods to
be purchased.
6. The tentative delivery date should be mentioned on Purchase requisition. This should be in line
with the Shari’ah approved Industry wise threshold period.
7. The minimum inventory Holding Period of the Client is **Days.
Method of Goods Identification:
1. BAHL goods will be separately stacked upon the receipt of goods.

2. The customer will inform BAHL about the receipt of goods through signed Declaration form
accompanied with proof of purchase as permissible under IBD circular 1, 2012 immediately on
the same day of receipt of goods and before consumption.
3. To ensure that the goods are not consumed before signing of Murabaha Contract, Physical
Inspection may be conducted for at least 20% of transaction and in remaining cases Telephonic
Confirmation will be done. The visit/confirmation report is attached with the Murabaha Contract.
4. At the same time the customer will offer to purchase the same goods from BAHL under
Murabaha arrangements.
5. The offer is accepted by the bank. The Murabaha price must explicitly define the cost and profit
charged thereon. The Murabaha price is fixed and it can not be changed.
6. Upon maturity, the murabaha will be settled by the Customer.
7. In case of delayed payment customer undertakes to pay charity at deal applicable rate.
8. In case of early payment entire maturity value will be recovered.
9. The Bank is authorized to conduct supplier verification and confirm the genuineness of purchase
evidences provided by the customer as and when required and in case of any misrepresentation
bank reserves the right to call back the facilities.
Murabaha – Product Process Flow for Credit Payment:

1. After necessary credit and Shari’ah approvals, BAHL & Customer shall enter into MMFA(Master
Murabaha Financing Agreement) and Global Agency Agreement for the purchase of raw
material to be purchased from the aforementioned supplier.
2. The Branch RM will educate the customer about the process flow and especially about signing
the declaration and Murabaha contract before the consumption/sale of goods and sorting the
goods purchased for BAHL separate from the goods already available with the customer.
3. It is to be noted that customer is appointed as an agent for the credit purchases under Global
agency agreement.
4. Upon requirement for the purchase of assets the customer must negotiate the deal with the
supplier as an agent of the Bank and must submit a purchase requisition to the Bank. Purchase
requisition must be provided along with payment details and after placing order with the supplier.
5. The tentative delivery date should be mentioned on Intimation of purchase. This time must be in
line with the Shari’ah approved industry wise threshold period.
6. The minimum inventory Holding Period of the Client is **Days.
7. This process flow is only for Credit payment purchase pattern of the customer and does not cover
Advance payment purchases of the customer.

Method of Goods Identification:
1. BAHL goods will be separately stacked upon the receipt of goods.

2. The customer will inform BAHL about the purchase of goods through duly signed Goods
Declaration intimation as and when the goods are received, accompanied with proof of purchase
as permissible under IBD circular 1, 2012. Subject to Shari’ah approval, declaration may also be
executed through email.
3. At the same time the customer will offer to purchase the same goods from BAHL under
Murabaha arrangements. Subject to Shari’ah approval, the customer may also place an offer to
purchase goods through email.
4. The offer is accepted by the bank. The Murabaha price must explicitly define the cost and profit
charged thereon. The Murabaha price is fixed and it cannot be changed. Subject to Shari’ah
approval, the Bank may also accept the offer made by the customer by responding the email.
5. It is mandatory to use the average KIBOR of an offer and acceptance day while pricing the credit
Murabaha transactions.
6. To ensure that the goods are not consumed before signing of Murabaha Contract, conduct
Physical Inspection in at least 20% of the transactions. Telephonic Confirmation will be done in
remaining cases. The visit/confirmation report is attached with the Murabaha Contract.
7. The payment can be made through cross cheque issued by the customer in favour of supplier and
the photocopy of the same should be provided or the Banker’s cheque may be issued in favor of
supplier.
a) Upon presentation of cross cheque in clearing funds are disbursed.
b) In case there is a delay in presentation of cheque, the funding tenor should remain the
same by amending the maturity date.
8. Upon maturity, the murabaha will be settled by the Customer.
9. In case of delayed payment customer undertakes to pay charity at deal applicable rate.
10. In case of early payment entire maturity value will be recovered.
11. The Bank is authorized to conduct supplier verification and confirm the genuineness of purchase
evidences provided by the customer as and when required and in case of any misrepresentation
bank reserves the right to call back the facilities.
Musawamah Finance:
Musawama is a kind of sale where in price of commodity to be traded is stipulated without any reference
to cost or profit incurred by the seller. It is different from Murabaha with respect to pricing formula.
The product is offered as an alternative for financing receivables; as customers require post shipment
finance to meet their financial needs till the proceeds are realized. Musawma Finance could be used for
financing Local Credit Sales & Exports on D/A OR Usance basis. The tenure of Musawamah should be
according to the credit terms of sales and price of Musawama (disbursement amount) is to be determined
by maintaining an appropriate margin on Invoice Price. Other conditions necessary for executing
musawama are as follows;
 Goods must exist at the time of sale

 Must be in the ownership of seller
 Must be in the possession of the seller
 Price must be certain
 Goods must be identified
 Sale must be unconditional & instant

Musawamah - Principal Documents:
a. Master Musawama Agreement

b. Master Sale Agency Agreement
c. Master Corporate Guarantee
Musawamah - Transaction Documents:
a. Written Offer to Sell by the customer

b. Acceptance to offer by the bank
c. Goods Receipt Note by the customer to Bank
d. Instruction to sell to customer by the bank in capacity of Agent
e. Acknowledgment of goods being sent to final buyer
f. Confirmation of Receipt against Goods
Musawamah – Product Process Flow for Local Sales:

1. After necessary Credit and Shari’ah approvals, BAHL and M/s Customer will enter into Master
Musawamah Agreement and subsequent Master Sale Agency Agreement.
2. Upon the requirement of the facility, the customer will furnish a Written Offer to sell the finished
goods to BAHL mentioning complete specification of goods, quantity, delivery date and
Musawamah price.(calculated as Minimum target selling price as per taking an appropriate price
cushion)
3. After proper verification, BAHL will accept the written offer. At this stage BAHL will enter into
Musawamah transaction with the customer (Written offer must be furnished prior to disbursement
of Musawamah).
4. Customer will also give an independent Master Corporate Guarantee for the payment obligation
of the buyer of goods.
OR
5. The Muswamah goods should be kept in the security arrangement of Pledge and pledge stock
report should be attached with the other transactional documents.
OR
6. All eligible securities can be accepted in the Musawamah transaction on the discretion of Bank’s
policy.
7. The customer will inform BAHL regarding the delivery the goods to BAHL at the Point of
Delivery and on the Delivery Date as mentioned in the Written Offer to sell finished goods to
BAHL.
8. To ascertain that the delivered goods are as per the written offer and are separately stacked in an
identifiable manner, the Branch RM or one of his assistant will conduct % physical
inspection and other necessary checks of the BAHL goods. Visit / confirmation note will
accordingly be prepared in case of inspection by RM. At this stage BAHL reserves the right to
reject the goods if the goods are not as per specification of written offer. Photograph of goods will
be attached with the Delivery Note. ( % will be taken as per approval for physical inspection)
9. Upon confirmation that the goods are as per the Written Offer BAHL will accept the delivery and
issue a Delivery Note.
10. BAHL will make the disbursement of the Musawamah price to M/s Customer in full after proving
Delivery Note.

11. At the time of disbursement, Musawamah pricing is calculated on the bases of approved KIBOR
plus spread and the balance amount after paying the Agency fee and Sales commission fee to the
customer.
12. At this stage BAHL through Instruction to sell shall authorize the customer to sell the goods as
BAHL’s Undisclosed Agent at the price declared in the Instruction to sell document. The bank
cannot change the Musawamah Sale price after concluding the first leg of Musawamah sale
transaction.
13. The M/s Customer as an agent will sell the goods on credit only to those buyers whose
independent Corporate Guarantee is provided.
14. The Agent will be entitled to an Agency fee for providing the service as per Master Sale Agency
Agreement (including Takaful Cost, Transportation Cost, and Storage cost etc.). In addition to the
Agency Fee, the (Agent will also be entitled to a Sales commission fee for arranging the
proceeds, earlier than / on the agreed schedule. The increase or decrease in the sales commission
fee may be on a daily basis.
15. Upon selling BAHL’s goods customer shall provide a Confirmation of Sale of Goods for each
Musawamah transaction through any commercial invoice/ Shari’ah approved sale evidence.
16. As per the recovery terms, the Agent will receive payment from the buyer and deposit the same
into non-Cheque in account and informed to BAHL. However, it is come into notice that in some
cases recovery payment may be received in parts (as per normal market practice).
17. BAHL would provide the agency fee, Sales commission fee and any excess over the minimum
sale price from the proceeds and debit the remaining amount from the customer account as its
income earned from Musawamah sale.
18. In case the ultimate buyer defaults (or delay in payment) the Agent shall pay the amount to
BAHL as per the independent Corporate Guarantee submitted earlier by the customer.
Musawamah – Product Process Flow for Export Sales:

1. After necessary internal approvals, BAHL-IBD & the customer will enter into Musawama
Facility Agreement whereby BAHL purchase goods from customer & Sales Agency Agreement
whereby the customer will act as bank’s agent to export the goods in the market.
2. The Relationship Manager will educate customer about the Musawama process flow as an
alternate to Conventional Post Shipment Financing and especially about the importance of
executing Sale Transaction with the Bank, by submitting the offer to sale and acceptance of the
same by the Bank.
3. Once the goods are ready for shipment, the customer will offer to sell the goods clearly
mentioning the quantity, quality and the price. The offer to sell will accompany the export LC/
contract. The Musawama price will be discounted price i.e. a certain margin (**) will be
maintained on the value of sale order.
4. Bank will accept the offer and communicate the same to customer and Musawama is culminated.
Bank will ensure that at least (**) % of the transactions will be physically inspected
5. In case the export documents are under L.C sight, the disbursement will be made at the time of
FDBC lodgement while in case of Usance LC the disbursement will be made upon receipt of
Acceptance. The disbursement (payment of Musawama Price) will be made in FCY.
6. The Bank after assuming the constructive possession, issue Goods Delivery Note (GDN) to
customer as its sale agent and instructs the customer to sell the goods on Bank’s behalf at the
price mentioned in purchase order.
7. The goods will remain on bank’s risk till the Airway Bill or Bill of Lading is issued by Airline/
Shipping Agency, the agent will obtain Transit Takaful from warehouse till air port/ sea port.

8. The customer will submit the export documents and Bank will lodge the FDBC.
9. The Agent (customer) is entitled for incentive bonus/ performance in case of early realization of
sale proceeds.
10. The Customer in the capacity of sales agent, will submit indemnity letter to indemnify BAHL-
IBD in case of loss sustained by BAHL-IBD due to ultimate buyer.
11. In case the documents are rejected by the buyer due to discrepancy, Bank will exercise Khyer-e-
Aib and the Musawama will be cancelled.
12. Upon realization of export bills, the bank will recover its intimated price and excess if any will be
paid to customer as performance bonus. The customer may take FCY rate from treasury on their
performance bonus.
Istisna Finance:
Istisna is a kind of sale where the goods are sold before they exist. The term Istisna is derived from the
word Sa’ana which means manufacture. Istisna transaction is executed for those goods, which requires
manufacturing, processing or construction.
Under Istisna the price is mutually agreed and the delivery of goods is deferred. All other necessary
specifications of the commodity must also be fully settled. The agreed price can be paid up-front, in
installment or at the time of delivery. The payment may also be linked with the stage of completion.
Generally; Istisna is used for financing working capital requirements.
Basic Rules of Istisna are:
 It must require any manufacturing process.

 The materials should be owned by the manufacturer.
 The full payment may be made up-front or in installment or at the time of delivery.
 The description and quality of goods must be explicitly defined leaving no ambiguity whatsoever.
 The delivery date may also be defined.
 The client i.e. the manufacturer may be appointed as selling agent to sell the goods on behalf of
the bank.
 It is a binding contract whereby no party can revoke the contract if either party has started his
commitment.
Istisna - Principal Documents:
a. Master Istisna Agreement

b. Master Istisna Sales Agency Agreement
c. Master Corporate Guarantee
Istisna - Transaction Documents:
a. Written Offer to bank for Manufacturing of Goods

b. Acceptance of Offer by the Bank
c. Goods Receiving Note by the Bank
d. Instruction to Sell by the Bank
e. Goods Receiving Note by the Customer
f. Confirmation of Receipt against Goods

Istisna – Product Process Flow:
1. After necessary Credit and Shari’ah approvals, BAHL and M/s Customers will enter into a
Master Istisna Agreement (MIA) to manufacture above products from time to time.
2. The BAHL & customer will also enter into Master Istisna Sales Agency Agreement (MISAA)
through which customer, acting as BAHL’s agent, will sell the goods.
3. Customer will also give the Independent Master Corporate Guarantee for the payment obligations
of the buyer of goods.
4. upon receipt of confirmed sale contract for production of goods, M/s Customers will give written
Offer to BAHL in order to manufacture the same goods mentioning complete specification of
goods, quantity, place & date of delivery and Istisna price as per agreed payment schedule.
5. BAHL will accept the written offer and make disbursement as per agreed payment schedule (pay
the Istisna price) to customer.
6. After manufacturing the goods, customer will inform us for the acceptance of delivery of Goods
to BAHL-IBD representative. The physical inspection must be conducted by BAHL’s nearby
branch representative) will inspect the above mentioned goods in cases** to ensure the
existence of goods, its proper identifications and separation from the customer owned stocks.
Stacks/ Bags will be separated for the counting. ( % will be taken as per approval for physical
inspection)
7. BAHL representative will take the delivery of the Goods from the factory. A Goods Receiving
Note (GRN) will be executed at the time of Physically Inspection to evidence the delivery of
goods to BAHL. The risk & reward with the goods will be transferred to BAHL at this stage.
Customer will arrange Takaful/ Insurance for the goods on behalf of BAHL. BAHL’s goods
Stacks will be identified through separate placement (after counting) mentioned in the GRN as
method of identification.
8. The Customer must be educated that BAHL’s goods are separately identified till they are sold.
9. After delivery of goods BAHL through “Instruction to sell” as mentioned in the MISAA shall
authorize the customer to sell the finished goods at the price declared in the “Instruction to sell”
(calculated as Minimum target selling price as per taking an appropriate price cushion).
10. As per the MSIAA, the agent (i.e. customer) will sell the goods according to the terms agreed
between Bank and the customer. Customer will sell the goods with 10 days of “Instruction to sell
“and collect the payments with 90-120 days of instruction to sell.
11. The Agent will be entitled for fixed Agency Fees for providing the services as per Agency
Agreement(including Takaful cost, storage etc. as per the approved terms) .In addition to the
Agency Fee , the agent will also be entitled to an Incentive fee for arranging the proceeds
from the ultimate buyers, earlier than the agreed schedule. This increase or decrease in the fee
may be on a daily basis.
12. Upon selling BAHL’s goods customer shall provide a confirmation of sale of goods for each
transaction. If partial sale is made than separate confirmation for each sale is required. As per the
payment, terms the buyers will pay the selling price to the agent. The customer will attach any
evidence of sale of goods for e.g. Commercial invoice.
13. The client will sell the goods to the credible buyers as per confirmed sale order either on credit or
on cash basis.
14. As per payments terms, the buyers will pay the selling price to the agent. After receiving the
payments from the buyers the agent will pass on the proceeds to BAHL.
15. In case of buyers default the agent shall pay the amount to BAHL as per the Guarantee submitted
earlier by the customer.

Ijarah Finance:
Ijarah means to give something on rent. The term Ijarah is used for two different situations;
In first place it means; hiring the services of a person on wages. Wages are given to him for his hired
services. It is termed as Ijarah-ul-Ashkhas or Service Ijarah. Under this agreement the employer is called
Mustajir and the employee is called Ajir.
There is another type of Ijarah which relates to the renting out of an asset. Under this type of Ijarah the
owner of the asset transfers the usufruct of the asset for some consideration. This type of Ijarah is similar
to lease. The owner of the asset (lessor) is called Mujir, Lessee is called Mustajir and the consideration
i.e. rent is called Ujarah. In this case, the term Ijarah may seem similar to the English term 'leasing'.
However, there are many differences between leasing contract of Conventional Bank and Ijarah.
Ijarah & Ijarah wa Iqtina:

Ijarah is the transfer of ownership of a service for an agreed upon consideration. Operating Ijarah does not
end up with the transfer of ownership of leased assets to the lessee. Ijarah wa Iqtina ends up with the
transfer of ownership of leased assets to the lessee. This transfer could be;
a. For No Consideration (Gift)

b. For Price Specified in the Lease
c. For Remaining Amount (if lease is terminated before period)
Basic Rules for Ijarah:

 The Ijarah cannot be executed for consumable goods.
 Subject matter must have valuable use.
 The asset must be capable of being identified.
 Asset cannot be used for any other purpose as defined in the agreement.
 The ownership of asset must remain with the lessor and he will assume all risk.
 The period of lease must be defined in clear terms.
 Rental cannot be charged till the asset is delivered to lessee in workable condition.
 Rental may be Fixed or Variable.
 Either party cannot change the rental unilaterally.
 If the leased asset is totally lost the function for which it was leased and no repair is possible,
Ijarah agreement stands terminated.
 If the loss is due to misuse or negligence of the lessee, he will be liable for such loss.
 Rental for entire period of lease must be defined at the inception of lease.
 Delayed payment charges can not be taken to income.
 If the asset jointly owned by two or more persons is leased out, the rental so received will be
shared amongst all the co-owners in the ratio of their ownership.
Ijarah – Principal Documents:
a. Letter of Agency
b. Undertaking to Lease (description, Rentals etc.)
c. Ijarah Agreement
d. Undertaking to Purchase Ijarah Assets
e. Sale Deed

Ijarah – Product Process Flow:
1. After necessary Credit and Shariah approvals, BAHL and the Customer will enter into Agency
Agreement to procure the asset locally and simultaneously will also sign Lease Facility
Agreement.
2. As an agent of BAHL Customer will negotiate with the supplier to procure the Asset.
3. Upon the requirement of making payment to the supplier as per the Customer’s intimation BAHL
will make Direct Payment by issuing a Banker’s Cheque (B.C.) for the Purchase Price. Customer
instruction would be taken to issue B.C. in favor of seller of above mentioned Asset. WHT will
be deducted and deposited wherever applicable as per law.
4. BAHL representative should ensure that the Credit Limit for Ijarah should have a cushion for the
freights and other direct expenses to be paid against the purchase of Asset.
5. Customer acting as agent of BAHL will take the delivery of the Asset.
6. Customer intimates about as and when payment of freight and other direct expenses related to the
procurement of the asset accompanying the payment proof of direct expenses.
7. Since the Ijarah will be done on an identified Asset, Cost incurred by customer, mentioned in
point 6 above, will not be added to the Invoice value of the Leased asset.
8. The Security deposit as per approval of invoice value of Leased asset will be held on trust basis
under the custody of BAHL and returned to the customer on early termination/maturity of Lease.
9. Accordingly BAHL will sign Lease Agreement with the customer right after the delivery of the
machine/asset to the customer in usable condition.
10. The Customer will sign an ‘Undertaking to Purchase’ to ensure that he will purchase the asset
upon the early termination / maturity of the lease period.
11. Periodic Payment under Lease Agreement (Lease rentals) will start from the next
month/Quarter/semi annual/ annual Period.
12. The cost after netting off expenses incurred by customer in point 6 will be used for determining
the Lease rentals.
13. The rental amount may be calculated with reference to a well known benchmark (with a clearly
defined balanced Floor & Cap) agreed upon at the time of signing of Lease Agreement. However,
the amount of rental for the first period should be specified in Rupees Terms at the beginning of
the First Period at the time of signing of Lease Agreement and should be mentioned in Rental
Schedule.
14. The assets should be covered through Takaful. BAHL will bear the Takaful contribution of the
asset at any given time. In case the customer has been appointed as agent of the bank through
Takaful Agency Agreement BAHL should reimburse the Takaful contribution to the customer.
For this purpose the Takaful contribution reimbursable to the customer will be added as part of
the first rental due after payment of Takaful Contribution each year and the reimbursable amount
will be set off from this added amount.
15. On completion of the tenor of the lease and upon receipt of all rentals and other dues from the
customer the Bank shall gift the asset to the customer by executing the Gift Deed.
16. Upon early termination of the lease, the customer will purchase the asset from BAHL at the
relevant price as set out in the under the Undertaking to Purchase via executing the Sale Deed.

Difference between Lease & Ijarah:
Lease Ijarah
Commencement:
Once the agreement is signed the rental starts. Rentals starts only when the asset is delivered to
lessee and it is ready to be used
Security Deposit:
It is the security towards asset It is security towards rental payment
Insurance:
It is the responsibility of lessee Insurance is the responsibility of lessor
Break down of Asset:

Rental will not stop Bank will not charge the rental till the asset
becomes functional again.

Diminishing Musharaka Finance:
Musharaka is a word of Arabic origin which literally means sharing. In the context of business and trade
it means a joint enterprise in which all the partners share the profit or loss of the joint venture. It is an
ideal alternative for the interest-based financing with far reaching effects on both production and
distribution. In the modern capitalist economy, interest is the sole instrument indiscriminately used in
financing of every type. Since Shariah has prohibited interest, this instrument cannot be used for
providing funds of any kind. Therefore, Musharaka can play a vital role in an economy based on Shariah
principles.
Diminishing Musharaka:
In Diminishing Musharaka both the partners would be having joint ownership of a property or equipment,
or in a joint commercial enterprise. The share of one partner is further divided into a number of units and
it is understood that one partner (the customer) will purchase the units of the share of the other partner
(the bank) one by one periodically, thus increasing his own share until all the units of the bank are
purchased by the customer so as to make him the sole owner of the property, or the commercial
enterprise, as the case may be.
Basic Rules for Diminishing Musharaka:
 There will be an agreement of Shirkat ul Milk and it will be decided how much investment will
be made by each partner
 With the signing of the agreement the partnership is created and the risk & reward is shared b/w
the customer and the bank
 The ownership must be defined in terms of percentage
 Asset will be purchased and everyone will be the owner of this asset as per ratio of their
investment
 One shareek can rent out this share to other partner OR to a third person
 One of the partners will promise to purchase the share of another partner and in this promise; the
price of unit may be decided
 Unit can be purchased on the basis of offer and acceptance
 All agreements are independent and NOT tied up with each other
Diminishing Musharaka – Principal Documents:
a. Diminishing Musharaka Agreement

b. Rental Agreement
c. Agreement to Purchase Musharaka Units

Diminishing Musharaka – Transaction Flow:
After necessary credit and Shari’ah approvals, BAHL & Customer shall enter into Master Diminishing
Musharakah Agreement for Assets (for the purchase of Property, Plant and Equipment referred as PP&E)
and would mention the tentative proportionate ownership ratios i.e. **% of BAHL & **% for customer
(the ratios are calculated on the basis of purchase price of Property, Plant and Equipment).
1. Simultaneously, the customer will also enter into Master Rental Agreement for Asset (PP&E) as per
IBD approved format.
2. After signing the Master Rental Agreement for Asset, the customer will enter into the Master
Agreement for purchase of Musharakah units.
3. Upon execution of Master Diminishing Musharakah Agreement for Assets (PP&E), as per the
instruction from the customer, BAHL will disburse the amount through Pay order or Banker’s Cheque
up to the amount of BAHL’s share in the name of the seller to purchase the said Asset (PP&E) on
behalf of the Diminishing Musharakah as per the terms and conditions of Master Musharakah
Agreement for Asset.
4. Customer will contribute his share through Pay order or cross cheque in the name of the seller which
will be paid to the seller along with the BAHL’s contribution at the time of signing Sale Deed.
5. Actual Sale value of the above mentioned DM Asset (PP&E) in the Master Diminishing Musharakah
Agreement for assets would be used to determine each partner’s (BAHL & customer) share in the
DM asset (PP&E).
6. Customer will pay related charges and fee i.e. Lease deed charges, transfer fee, taxes etc. and the paid
amount will be considered as the customer’s share in the DM Asset (PP&E).
7. After making payment of all other costs such as Lease deed Charges, transfer fee, taxes etc. paid by
customer, these charges will be added to the cost of assets and accordingly the shares of BAHL and
customer will be revised (if required) in the Master Diminishing Musharakah Agreement for Assets
(PP&E).
8. Customer will make payment to the seller in the Registrar’s office* in the presence of BAHL’s
representative and Sale Deed will be executed between customer and seller. (*In case of Property*)
9. After execution of Sale Deed, BAHL will start charging rental on the terms and conditions of Master
rental Agreement for Asset on bank’s units.
10. The rental will be calculated with reference to a well known benchmark agreed upon at the time of
execution of Master Rental Agreement for Asset subject to a floor and cap.
11. BAHL will share the Takaful contribution up to the ownership ratio in the DM asset at any given
time.
12. Customer will reimburse the Takaful contribution of his share in the DM asset.
13. The said Takaful contribution will become the part of the first rental, after payment of Takaful at the
end of each year.
14. BAHL’s Musharakah units will be divided in **units and will be purchased by the customer as per
the agreed schedule.
15. In case of customer early purchase of Musharakh units, the buy out price schedule attached with DM
transactional documents should be followed.
16. As the ownership of the DM asset is gradually transferred to the customer through the sale of
Musharakah units.
17. After the purchase of all the Musharakah units, the customer will become the sole owner of the DM
asset.
18. In case of default in payment by the customer, BAHL is entitled for the recovery of overdue rentals
on BAHL’s Musharakah units.

19. The charity will only be marked on the overdue rentals rather than on the unpurchased BAHL
Musharakah units by the customer.

8. FAQs
What is the difference between conventional banking and Islamic banking?
The following are the main differential points between Conventional Banking and Islamic banking:
Sr. CONVENTIONAL BANKING ISLAMIC BANKING
Money is a commodity besides medium of Money is not a commodity though it is used as a

exchange and store of value. Therefore, it can medium of exchange and store of value.
1 be sold at a price higher than its face value Therefore, it cannot be sold at a price higher than
and it can also be rented out. its face value or rented out.
Time value is the basis for charging interest Profit on trade of goods or charging on providing
2 on capital. service is the basis for earning profit.
Interest is charged even in case the Islamic bank operates on the basis of Profit and
organization suffers losses by using bank’s loss sharing. In case, the businessman has suffered
3 funds. Therefore, it is not based on profit and losses, the
loss sharing. bank will share these losses based on the mode of
finance used (Mudarabah, Musharakah).
While disbursing cash finance, running The execution of agreements for the exchange of
finance or working capital finance, no goods & services is a must, while disbursing funds
4 agreement for exchange of goods & services under Murabaha, Salam & Istisna contracts.
is made.
Conventional banks use money as a Islamic banking tends to create link with the real
5 commodity which leads to Inflation. sectors of the economic system by using trade
related activities. Since, the money is linked with
the real assets therefore it contributes directly in
the economic development.
Does the prohibition of Riba apply equally to the loan obtained from or extended to Muslim as well
as Non-Muslim?
With respect to the receipt and payment of interest, there is no distinction between Muslims and non-
Muslims or between individuals and states because interest is prohibited not only in Islamic scriptures but
also in other religious scriptures of the world. Therefore, prohibitions of interest apply to Muslims as well
as to non-Muslims.
Does interest/Riba is related only to consumption loans or it also applies to commercial loans?
The interest is prohibited whether it is consumption loan (loan for meeting day to day human needs) or
commercial loan (loan for business purpose). There are quite a number of ahadith which clarify that in the
days of Holy prophet (Peace be upon Him), people not only borrowed for consumption purposes but also
for productive purposes.

A few of the ahadith are given as follows for reference:
 Ibn Saad has reported that Hazrat Umar (Radi-Allah-anhu), wanted to send a trade caravan to
Syriya. He borrowed four thousand dirhams from Sayyidna Abdur Rahman Ibn Awaf (Radi-
Allah-anhu) for this purpose
 Ibn Jarrir has reported that Hind, daughter of Utbah and wife of Abu Sufyan borrowed four
thousand dirhams from Sayyidna Umar (Radi-Allah-anhu) for the purpose of her trade. She
invested this money in purchasing goods and selling them in the market of the tribe of Kalb.
This is an ample testimony that the commercial loan was in practice when Quranic verses on Riba were
revealed and the term Riba covers not only consumption loan but also the commercial loan.
What are the basic principles of Islamic Banking?
There are at least six basic principles which are taken into consideration while executing any Islamic
banking transaction. These principles differentiate a financial transaction from a Riba/interest based
transaction to an Islamic banking transaction.
Sanctity of contract: Before executing any Islamic banking transaction, the counter parties have to
satisfy whether the transaction is halal (valid) in the eyes of Islamic Shariah. This means that Islamic
bank’s transaction must not be invalid or voidable.
An invalid contract: Contract, which by virtue of its nature is invalid according to Shariah rulings.
A voidable contract: Contract, which by nature is valid, but some invalid components are inserted in the
valid contract. Unless these invalid components are eliminated from the valid contract, the contract will
remain voidable.
Risk sharing: Islamic jurists have drawn two principles from the saying of Prophet Muhammad (PBUH).
These are “Alkhiraj Biddamaan” and “Alghunun Bilghurum”. Both the principles have similar meanings
that no profit can be earned from an asset or a capital unless ownership risks have been taken by the
earner of that profit. Thus in every Islamic banking transaction, the Islamic financial institution and/or its
deposit holder take(s) the risk of ownership of the tangible asset, real services or capital before earning
any profit there from.
No Riba/interest: Islamic banks cannot involve in riba/interest related transactions. They cannot lend
money to earn additional amount on it. However as stated in point No. 2 above, it earns profit by taking
risk of tangible assets, real services or capital and passes on this profit/loss to its deposit holders who also
take the risk of their capital.
Economic purpose/activity: Every Islamic banking transaction has certain economic purpose/activity.
Further, Islamic banking transactions are backed by tangible asset or real service.
Fairness: Islamic banking inculcates fairness through its operations. Transactions based on dubious terms
and conditions cannot become part of Islamic banking. All the terms and conditions embedded in the
transactions are properly disclosed in the contract/agreement.
No invalid subject matter: While executing an Islamic banking transaction, it is ensured that no invalid
subject matter or activity is financed by the Islamic financial transaction. Some subject matter or activities

may be allowed by the law of the land but if the same are not allowed by Shariah, these can not be
financed by an Islamic bank.
What do you understand by Islamic Banking?
Islamic banking is defined as banking system which is in consonance with the spirit, ethos and value
system of Islam and governed by the principles laid down by Islamic Shariah. In practical sense, Islamic
Banking is the transformation of conventional money lending into transactions based on tangible assets
and real services. The model of Islamic banking system leads towards the achievement of a system which
helps achieve economic prosperity. According to Islamic Shariah, Islamic banking cannot deal in
transactions
 Involving interest/riba (a stipulated increase sought over the principal of a loan or debt).
 Having the element of Gharar (uncertainty) or Maiser (Gambling).
 Subject matter of which is invalid (haram in the eyes of Islam).
Islamic banks focus on generating returns through investment tools which are Shariah compliant. Shariah
links the gain on capital with its performance. Operating within the ambit of Shariah, the operations of
Islamic banking are based on sharing the risk which may arise through trading and investment activities
using contracts of various Islamic modes of finance.
The word “Riba” means excess, increase or addition, which correctly interpreted according to Shariah
terminology, implies any stipulated excess compensation without due consideration (consideration does
not include time value of money). This definition of Riba is derived from the Quran and is unanimously
accepted by all Islamic scholars.
What is meant by Shariah/Islamic Law?
Shariah lexically means a way or path. In Islam Shariah refers to the divine guidance and laws given by
the Holy Quran, the Hadith (sayings) of the Prophet Muhammad (Peace Be Upon Him) and supplemented
by the juristic interpretations by Islamic scholars. Shariah embodies all aspects of the Islamic faith,
including beliefs and practices. Islamic Shariah or the divine law of Islam is derived from the following
four sources:
 The Holy Quran
 The Sunnah of the Holy Prophet (Peace Be Upon Him)
 Ijma’ (consensus of the Ummah)
 Qiyas (Anology)
The end result of Islamic Banking and conventional banking is same. Why do they appear similar?
The validity of a transaction does not depend on the end result but rather the process and activities
executed and the sequence thereof in reaching the end. If a transaction is done according to the rules of
Islamic Shariah it is halal even if the end result of the product may look similar to conventional banking
product. The Best example in this regards that a person who owns Rs.100 and wants to earn Rs.10 over,
so he can opt two cases:
 To lend another person for one month with the condition that he will return Rs.110 after one
month
 To purchase a thing worth Rs.100 and sell it to a person on Rs.110 on credit for one month.
In both the cases he Earn Rs.10, however the first case is Haram because it falls into Riba and the second
case is Halal because it falls into Bai.

The same is also true for Islamic and conventional banking. Therefore, it can be concluded that it is the
underlying transaction that makes something “Halal” (allowed) or “Haram” (prohibited) and not the result
itself. Apparently, Islamic banks may look similar to conventional banks; however the contracts and
product structures used by Islamic banks are quite different from that of the conventional bank.
In the verse 2:275 of the Holy Quran, Allah the Almighty has responded to the apparent similarity
between trade and interest by resolutely informing that he has permitted trade and prohibited Riba
(though they may look similar to someone).
If Islamic banks do not invest in interest based activities then how do they generate profit to pay to
their customers?
The Islamic bank uses its funds in various trades; investment and service related Shariah compliant
activities and earns profit there upon. The profit earned from such activities is passed on to the depositors
according to the agreed terms.
Are not Islamic banks just paying interest and dressing it as profit on trade and investments?
No, Islamic banks accept the deposits either on profit and loss sharing basis or on Qard basis. These
deposits are deployed in financing, trading or investment activities by using the Shariah compliant modes
of finance. The profit so earned by the bank is passed on to the depositors according to the pre-agreed
ratio which, therefore, cannot be termed as interest.
Islamic Banks use interest base system KIBOR as benchmark while determining the profit, how
Islamic Banking can be said to be Islamic?
Islamic banks should ideally have their own benchmark system for determination of profit. Since, the
industry is in its initial stage of development, it is using the available benchmark for the banking industry.
It is expected that once it is grown to a sizable level, it would have its own benchmark. However, using
Interest Rate benchmark for determining the profit of any permissible transaction does not render the
transaction as invalid or haram. It is the nature/mechanism of the transaction that determines its validity
or otherwise.
For example Mr. A and Mr. B are two neighbors. Mr. A sells liquor which is totally prohibited in Islam
whereas Mr. B, being a practicing Muslim dislikes the business of Mr. A and starts the business of soft
drinks. Mr. B wants his business to earn as much profit as Mr. A earns through trading in liquor.
Therefore he decides that he will charge the same rate of profit from his customers as Mr. A charges over
the sale of liquor. Thus he has tied up his rate of profit with the rate used by Mr. A in his prohibited
business.
One may say that Mr. B uses an undesirable benchmark in determining the rate of profit, but obviously no
one can say that the profit charged by him is haram because he has used the rate of profit of the business
of liquor only as a benchmark.
The same is true for Islamic banks, it is most desirable and preferable that Islamic bank develop their own
benchmark however; in the absence of any such alternative, interest rate related benchmark can be used.
Is Islamic Banking only for Muslim?
No, the teachings of Islam are not confined to Muslims only rather these equally address the non-Muslims
due to their universal nature. The basis of Islamic banks is laid down on ethical values and socially
responsible system. The values like justice, mutual help, fee consent and honesty on the part of the parties

to a contract, avoiding fraud, misrepresentation and misstatement of facts and negation of injustice or
exploitation form the basic principles of Islamic banking. Therefore, the principles of Islamic banking
lead the economic system to achieve the common good and economic prosperity. On this premise, Islamic
banking becomes a viable option for everyone irrespective of their religion.
What is Shariah Board?
The Board comprises on Shariah scholars to consider, decide and supervise all Shariah related matters of
the bank. All decisions, rulings, fatawa of the Shariah Board shall be binding on the Bank whereas
Shariah Board is responsible and accountable for all its Shariah related decisions.
Shariah Board comprises of how many Shariah Scholars?
Bank AL Habib – Islamic Banking Division Shariah Board comprises of three Shariah Scholars:
 Chairman Shariah Board
 Member Shariah Board
 Resident Shariah Board Member
How to judge the independence of Shariah Board?
The Shariah Board is discharging its duties independently and objectively. The members of the Shariah
Board continuously assess their relationships with the Bank to identify any situation where any issue
related to independence may actually or potentially arise or can reasonably be inferred.
What do you mean by Shariah Compliance Department (SCD)?
BAHL-IB has a SCD headed by Islamic finance trained and experienced officer recommended by the
Shariah Board. The SCD has dedicated and adequate staff as per the advice of the Shariah Board, so as to
enable it to discharge its due responsibilities in a proper and timely manner. Further, the SCD is working
under the overall guidance and supervision of the Shariah Board and Head report to the Shariah Board.
What are the responsibilities of SCD?
The responsibilities of SCD are as follows:

 Secretarial support to Shariah Board;
 Conduit between Management and the Shariah Board;
 Shariah Compliance Review as per Shariah Board approved plan;
 Enforcement of Shariah Audit Reports; and
 Manage training on Shariah Compliance.
What are the various banking products Bank AL Habib – Islamic Banking Division (BAHL-IBD)
offers?
BAHL-IBD offer following modes of Islamic banking and finance to their clients:
Financing Products
 Murabaha
 Musawama
 Ijarah

 Diminishing Musharaka
 Istisna
 Islamic Export Re-finance Scheme (IERS)
Liability Products
 Different Saving Deposit Account
 Different Current deposit Account
 Islamic Term Deposit Certificate / Receipt
Fee Base
 Local Guarantees
 Financial Guarantees
 Letter of Credit
What do you mean by financing products?
Financing products are those products offered by the Bank in which Bank takes exposure (Risk) on the
client. There are five types of lending products offers by the Bank:
Purchase and sale of goods: The Bank purchases goods on cash basis and sell to client on deferred, on
cost plus profit, basis.
Purchase and Lease / Ijarah: The Bank purchase fixed asset, either from market or from client, and
leases / makes Ijarah of the same to client for the specified period.
Joint Purchase and Lease / Ijarah: The Bank and client jointly purchase fixed asset and then Bank
leases / make Ijarah of its portion of ownership to the client for the specified period.
Funds for manufacturing: The Bank provides financing to client for manufacturing the goods required
under confirmed sale order of the client’s client.
Partnership: The Banks provides funds as partner to run the specific segment of business for specific
period. The profit and loss will be calculated in agreed manner.
How are Islamic Current Accounts, Saving accounts and Term Certificates operated?
The operation of All PKR & FCY current accounts is based on the Islamic principle of Qard. The
structure of Remunerative Saving & Term Deposits Accounts is based on the principle of Mudarabah and
is strictly in conformity with the rules of Islamic Shariah and is approved by the Shariah advisor of ABL
Islamic Banking.
What is Murabaha?
Murabaha is a sale transaction, whereby the seller (Bank) expressly mentions the cost and the profit is
charged thereon while quoting the price. Furthermore: “Murabahah” is in fact a term of Islamic Fiqh and
it refers to a particular kind of sale having nothing to do with financing in its original sense.
What is the purpose of Murabaha?
The purpose of Murabaha is to cater the short term financing requirements of the customer. Under
Murabaha arrangement BAHL-IBD allows customers to purchase from time to time goods / commodities
(raw material/ finished goods etc.) for commercial use up to a specific limit assigned.

What are the basic rules of Murabaha?
 The subject matter must exist at the time of sale.

 The subject matter must be in the ownership of seller.
 The subject matter must be in the possession (absolute or constructive) of seller.
 The price must be agreed and fixed at the time of sale.
 The subject matter must have value from Shariah perspective.
 The transaction can either be spot or on deferred payment basis.
What is the target market for Murabaha?
The target Market for Murabaha Finance is Corporate/Commercial/ Retail and SME sector to meet their
working capital needs. These entities must fulfill BAHL-IBD credit entitlement criteria.
What is the difference between Murabaha and conventional Loan?
Murabaha Conventional loan

Contract A sale contract whereby bank sells A loan contract, whereby bank’s lends money
asset (goods / commodities) to to customer.
customer.
Relationship The relationship between bank and The relationship between bank and customer is
customer is that of seller and buyer. that of lender and borrower.
Income Income on Murabaha is the outcome Income is based on Mark-up on loan.
of sale i.e. profit
Delayed In case of delayed payment, the Mark-up continues to accrue till the loan is
Payment customer undertakes to pay charity repaid.
What is Istisna Finance?
Istisna is a sale contract which is executed for goods which needs to be manufactured or constructed as
per customer’s specification, with the obligation of the seller (manufacturer) to deliver the goods upon
completion.
What is the purpose of Istisna Financing?
The purpose is to finance the working capital requirements of the customer. BAHL-IBD offers Istisna
finance to meet entire working capital finance requirements of Corporate and SME sector that
manufactures/ constructs assets to be sold in local and international market.
What are the basic rules of Istisna?
 The description and the quantity of goods must be explicitly defined

 The price and time of delivery must be fixed.
 The price may be paid in advance, in installment or at the time of delivery.
 Manufacturer becomes the owner of the funds disbursed as Istisna price and can use it for all
business requirements.

What is the target Market in Istisna Transactions?
The Manufacturer in Corporate and SME sector who qualify the BAHL’s minimum credit criteria.
What are the differences between Istisna and Conventional Loan?
Distinguishing Istisna Conventional Loan

Factor
Contract A sale contract whereby bank A loan contract, whereby bank’s lends
purchase the asset needs to be money to customer.
manufactured for the customer.
Relationship The relationship between bank and The relationship between bank and
customer is that of buyer and seller. customer is that of lender and borrower.
Financing Financing is created by paying the Financing is created by granting loan
Istisna Price to customer
Income Income on Istisna is the outcome of Income is based on Mark-up on loan.
sale i.e. profit
Customer’s Customer is liable to deliver the Customer is liable to repay the loan at future
Liability asset at agreed future date date.
What is Musawama?
Musawama is a sale transaction, whereby the seller (Bank) quotes the price without any reference to cost
or profit.
What is the purpose of Musawama?
To cater the post manufacturing / shipment financing requirement of the client by purchasing the
inventory from the customer and subsequently sell the same by appointing the customer as agent. Under
Musawama arrangement BAHL-IBD agrees with customer to purchase goods / commodities (finished
goods) from time to time, up to a specific limit assigned.
What are the basic rules of Musawama?
 The subject matter must exist at the time of sale

 The subject matter must be in the ownership of seller
 The subject matter must be in the possession of seller
 The Price must be certain and agreed at the time of sale
 The subject matter must have value from Shariah perspective
 The transaction can either be spot or on deferred payment basis.
What is the target market of Musawama?
The target market for Musawama Finance is Corporate/Commercial/ Retail and SME sector to meet their
post manufacturing / shipment financing needs. These entities must fulfill BAHL-IBD credit entitlement
criteria.

What are the differences between Musawama & Conventional Loan?
Musawama Conventional Loan

Contract A sale contract whereby bank A loan contract, whereby bank’s lends money to
buys goods from customer. customer.
Relationship The relationship between bank The relationship between bank and customer is that
and customer is that of buyer and of lender and borrower.
seller.
Subsequently principal and agent.
Income Income on Musawama is the Income is based on Mark-up on loan.
outcome of sale i.e. profit
Financing Financing is created by paying the Financing is created by granting loan
Musawama Price to customer
What is Ijarah?
Ijarah is a term of Islamic fiqh and it means “to give something on rent” or “to acquire service”. Ijarah
can be defined as “transferring of usufruct of an asset to another person for an agreed period and agreed
rent”. The asset should be valuable, identified and quantified.
What is the purpose of Ijarah?
To meet the long term business requirements, such as project financing, BMR activities and fleet
financing.
What is the target market for Ijarah?
Corporate, Commercial and SME sector who qualify the BAHL’s minimum credit criteria.
What are the differences between Ijarah and Conventional lease?
Ijarah Lease
Ownership and The asset is owned by bank and all No clear demarcation between rights and
risk ownership related risk are assumed by liabilities of bank and customer
bank
Commencement Rental commenced after the delivery of Installment may starts before the delivery
asset of asset
Delayed Customer pays charity in case of In case of delayed payment a penalty is
Payment delayed payment of rental, which will charged and taken to income
not be part of Bank’s income
Expenses Bank is owner of the asset therefore all Expenses will be borne by the customer
expenses in relation to ownership
incurred will be borne by Bank

What is Diminishing Musharaka?
According to the concept, a bank and customer participate either in the joint ownership of a property or an
equipment, or in a joint commercial enterprise. The share of the bank is further divided into a number of
units and it is understood that the client will purchase the units of the share of the bank one by one
periodically, thus increasing customer’s own share till all the units of the financier are purchased by the
customer so as to become sole owner of the property, or the commercial enterprise.
What is the purpose of Diminishing Musharaka?
To meet the long term business requirements, such as project financing, BMR activities, fleet financing
car financing and house financing.
What is the target market for Diminishing Musharaka?
Corporate, Commercial, SME and consumer sector who qualify the BAHL’s minimum credit criteria.
What are the difference between Diminishing Musharaka and conventional lease?
Diminishing Musharaka Conventional Loan

Contract It is a partnership contract It is a loan contract
Commencement Rental commence after the delivery Installment may starts before the delivery
of asset of asset
Ownership & Asset is jointly owned and the risk is Asset is owned by the customer and all
Risk shared in the proportion of ownership risk are borne by him
Delayed Customer pays charity in case of In case of delayed payment a penalty is
Payment delayed payment of rental charged and taken to income
Income Income is generated by renting out Income is generated by charging mark-up
the bank’s ownership on loan
Repayment Customer pays the rental and Customer pays the installment comprising
purchases the units of mark-up and principal repayment.

Islamic Banking Reading Material

Uploaded by

Copyright:

Available Formats

Islamic Banking Reading Material

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Islamic Banking Reading Material

Uploaded by

Copyright:

Available Formats

Islamic Banking

1. ISLAMIC ECONOMIC SYSTEM ....................................................................................................... 3

Islamic Banking – Training Manual Page 1

Islamic Banking – Training Manual Page 2

Islamic Banking – Training Manual Page 3

1. The Importance of the Economic Goals

According to Materialistic Economics:

While according to Islamic Economics:

2. The Real Nature of Wealth and Property

It places the following guidelines before us:

a) Whatever wealth man possesses has been given by Allah.

Difference between Islam, Capitalism and Socialism

Islamic Banking – Training Manual Page 4

According to the Capitalistic economy, the four factors of production are;

The Socialist View

The Islamic View

1. Capital & Entrepreneur:

Islamic Banking – Training Manual Page 5

In Holly Quran, Allah says (Surah al-Baqarah, verse 275):

Islamic Banking – Training Manual Page 7

Islamic Banking – Training Manual Page 8

A contract is a fundamental basis of every Banker – Customer relationship.

Types of Contract (Aaqd)

1. Uqood e Mu’awadah (Compensatory or Financial Contract)

Compensatory or Financial Contract:

Non-Compensatory or Social Contract:

Islamic Banking – Training Manual Page 9

Elements of a Valid Sale

There are five elements of a Valid Sale.

Price should be known, specific & certain.

Islamic Banking – Training Manual Page 10

Islamic Banking – Training Manual Page 11

Basis of Deposit Products in BAHL-IBD:

Islamic Banking – Training Manual Page 12

Optional Shirkat-ul-Milk (Ikhtiyari):

Un-optional Shirkat-ul-Milk (Ghair Ikhtiyari):

Islamic Banking – Training Manual Page 13

Combination of Modarba & Musharaka (Mudarba Mushtaqrika):

Illustration of Modaraba cum Musharaka:

Islamic Banking – Training Manual Page 14

Restricted Modaraba (Modaraba Muqayyadah):

Un-Restricted Modaraba (Modaraba Mutlaqah):

Operating Expense in Modaraba:

Profit & Loss Sharing:

Islamic Banking – Training Manual Page 15

Murabaha Contract Price = Cost Price of Goods + Profit of Bank

Murabaha - Principal Documents:

a. Master Murabaha Financing Agreement

Murabaha - Transaction Documents:

a. Purchase Requisition / Intimation to Purchase

Murabaha – Product Process Flow for Advance Payment:

Islamic Banking – Training Manual Page 16

Method of Goods Identification:

1. BAHL goods will be separately stacked upon the receipt of goods.

Murabaha – Product Process Flow for Credit Payment:

Islamic Banking – Training Manual Page 17

1. BAHL goods will be separately stacked upon the receipt of goods.

 Goods must exist at the time of sale

Islamic Banking – Training Manual Page 18

a. Master Musawama Agreement