MGT 489 sec-16

Name- Adnan Mahfuz Khan

ID- 1721938630
Submitted to: Mr. Syed Javed Iqbal

Define the following Shariah banking products with simple calculations:

1) Mudaraba

The term ‘Mudaraba’ was derived from an Arabic word '‫'ﺏﺮﺿ‬

which means ‘travel’. In other words, it defines ‘Travel’ to do business.

Being an Islamic Bank Organization, it is believed that interest on loans are

forbidden by Islam. Thus, Islamic Banks invests the money deposited to
different profit-making locations, instead of giving those deposited money as
loan and gain interest. Thus, Mudaraba acts as a contract between two parties.
The party that provides capital or cash to the bank in hope for a Halal return,
known as Rabb-ul-maal and the party that provides skill and labor for investing
in commercial enterprise, known as Mudarib. Both the parties share the profit
upon a given and agreed ratio.

Calculation-
For instance, If the capital provided is Tk 200,000/- They cannot agree on a
condition that Mudarib will take Tk20,000/- out of the profit, neither can they
agree to give 20% of the capital will be given to the Provider of capital, Rabb-
ul-maal. The agreement should be made like- 60% of the profit shall go to
Rabb-ul-maal and 40% of the profit will go to Mudarib. Portions or percentage
depends on different situation.

In case of loss, which is unlikely as the loss can be offset by profits on other
investment projects, Rabb-ul-maal will lose his capital and Mudarib will lose
the time and effort of investing in the project. In case of any breach of contract
or negligent business, Mudarib will be held accountable.

2) Musharaka

The word Musharaka is derived from Arabic word, which means ‘sharing’

Musharaka acts as a joint enterprise or partnership, where partners can share

profit or loss of an enterprise. Since it has no specific end date, Musharaka is
long term financing, until the partners decide to dissolve it.
The sources of capital contribution of partners may vary from cash, goods,
tangible and intangible assets, services or even reputation (in case of Sharika).
The ratio of profit for each partner must be agreed at the time of making
contract. The Profit gained from the project will be shared according to the
agreed ratio, Not according to the capital invested by partners. The bank also
might provide funds which are mingled with the funds of other partners. All the
partners have the right to manage the project. He may also waive the right of
participation in favor of others, acting as a sleeping partner with possible
liabilities.

Calculation-
For instance, Abrar invested Tk 500,000. The Islamic Bank invested skills
required to do the business and Zahid invested his land to do the business. The
Ratio is agreed as 30% for Abrar, 30% for the Bank and 40% for Zahid. Thus,
the profit or loss from that project will be shared accordingly.

3) Murabaha

The word Murabaha is derived from the Arabic word ‘Ribh’, which means
‘Profit’. Murabaha refers to Cost-plus financing, where buyer and seller agree to
the cost and markup of an asset. Murabaha contract of sale is used if an
individual wants to buy an asset taking loan from a bank. We know in Islamic
law, loan interest is forbidden, but credit sales are not forbidden. Thus, the
client can pay up the money borrowed from bank, by instalment without
interest, but the catch is, the client has to pay back the borrowed money and in
addition to that, he also has to pay Markup of the asset. How this works is a
client petitions a bank to purchase an item on their behalf. Complying with the
client’s request, the bank sets a contract addressing the cost and profit for the
item, with repayment typically in instalments, avoiding interests. The purchaser
does not become the full owner of the asset until the borrowed money is paid.

Calculation-
Client Petitions a bank to purchase an asset worth Tk 50,00,000/- on their
behalf. The bank sets a contract addressing the cost of the asset and a markup of
the asset, which the client shall agree on. Let’s assume the markup is 8%. Thus,
the Total amount (Cost + markup profit) would be = Tk 50,00,000/- x 1.08
(markup)
= Tk 54,00,000/-
Thus, the client will pay the full amount of Tk 54,00,000/- in instalment to the
bank. And instead of taking interest on loan, the bank will profit from the
markup of the asset.
4) Bai muajjal

The term ‘Bai muajjal’ has been derived from Arabic words Bai’un and Ajalun,
which means ‘Purchase and sales’ and ‘fixed time’.

In other words, Bai mujjal is a contract between a buyer (Client) and a seller
(Bank), where a seller sells certain goods (permissible under Shariah and Law
of the country) as per client’s requirement and specification at an agreed price
payable with in a fixed future date, in lump-sum or by fixed installments.

Calculation-
For example, If, a client needs 200 bags of rice worth Tk 5,000/- each. The
Bank would buy that 200 bags of rice for Tk 5,000/- in present time and give
the required products i.e. 200 bags of rice to the client, upon the agreement
stating that the client have to pay Tk 5,100/- each, for 200 bags of rice, on an
agreed date on the future. The borrowed money can be paid in installments or in
a lump sum. The profit Bank makes is the markup of the item which was 2%.
It is necessary according to Shariah, that the item should come in the possession
of the bank before handing over to the client. Or the supplier of rice could set
the 200 bags of rice for the bank and hand it to any person that the bank
instructs, this is more efficient than the other method.

5) Salam

The term ‘Bai Salam’ is an Arabic word which translates to ‘Advance purchase
and sale’

Salam is a form of forward contract, where the price for the item or asset is paid
immediately in real time of the contract for the item or asset to be delivered
later on a given time. The contract of Salam creates a moral obligation on the
seller to the deliver the goods. In the case of Salam contract, the assets must
have these features.
1. The seller should have full ownership of the asset on the time of making
contract. Or else the seller with no full ownership do not have the right to
form the agreement.
2. The seller should have full possession of the asset that may be physical or
constructive.

The Bank will purchase the item from seller with full advance payment of the
price say and delivery on an agreed specified date, the seller will deliver the
commodity at the agreed time and place. This helps small scale business or
agriculture with liquid money. Later on, the bank will sell the commodity to any
third party on credit. After taking delivery from the seller on the agreed date, the
bank may sell the commodity at a higher rate of make delivery to the purchaser
of commodity. The purchaser executes the purchase and takes delivery from the
Bank and signs a promissory note against payment on an agreed specified time.
The seller shall give a security in the form of Mortgage or a Guarantee. In the
case of failure to deliver the commodity, the Bank may ask the guarantor to
deliver the same commodity or may sell the mortgaged property.

Calculation-

Assuming that a farmer needs liquid cash to run his family and pay expenses.
Thus, he as a seller will agree a Salam forward contract with the bank to buy his
potatoes worth of Tk 50,000/- today, and the delivery of the potato will be made
3 months from now. The bank buys the potatoes in advance and takes delivery 3
months later. Because the seller sold the potatoes relatively at a lower rate to the
bank 3 months earlier, the bank now can make a profit by selling the potatoes to
a buyer at a higher rate which gives a total of say Tk 55,000/-. Thus, earning a
profit of Tk 5,000/-

6) Istisna

Istisna refers to a contract used to finance manufacturing, assembling or

processing goods. Istisna avoids making or receiving interest payments, which
is forbidden by the Islamic religion. The commodity is transacted before it
comes into existence. It means to order a manufacturer to produce specific
commodity for the purchaser. It’s basically a contract between a manufacturer
and a buyer, where the manufacturer sells specific products after manufacturing,
(permissible under Islamic shariah and Law of the country) at an agreed price
payable in advance or by instalments with in a fixed period or future date, based
on the agreement. There are two types of Istisna- Classical Istisna and Parallel
Istisna. Both the calculation of Classical Istisna and Parallel Istisna are provided
below-

Calculation-

Bank pays Tk 100,000/- to Pencil manufacturer during manufacturing as agreed

on the contract. Manufacturer delivers pencils at the date agreed on. Bank sells
the pencils to purchaser at Tk 110,000/- and makes a profit of Tk10,000/- as
markup. This is an example of Classic Istisna.

In parallel Istisna, the client funds capital of Tk 100,000/- and enters a contract
with the bank. The bank then enters Istisna Contract with the pencil
manufacturer. Other things are same as classical Istisna i.e. Markup profit, and
when the delivery of pencils is made to the Bank, the Bank then delivers the
product to the Client.

In case of house finance,

Assuming I want to buy 2 Flats which costs Tk 100,00,000/-, but I only have Tk
40,00,000/-. So, I will enter Istisna with a bank. I made a contract with the bank
that, in return for the remaining Tk 60,00,000/-, which the bank will provide to
aid me buy the assets, I will pay Tk 60,00,000/- and rent of 5 years period to the
bank. The method of payment I agreed on was installment.