Islamic Financial Systems

and Takaful

Imran Yasin (Chartered Insurer)-FCII (UK), ARM (USA), M.B.Econ (PU),

MS Banking & Financial Economics (GCU), CITIP (UK), PGDAE (PU),
DIS (PU), Senior Vice President (Head of agri) – EFU General
Insurance Ltd.
1
Murabaha

2
Murabaha (Definition)
• Murabaha is a particular kind of sale where the seller discloses
its cost and profit charged thereon.
• The price in this sale can be both on spot and deferred.
Banking Murabaha
• It is a contract wherein the institution, upon request by the
customer, purchases an asset from the third party usually a
supplier/vendor and resells the same to the customer either
against immediate payment or on a deferred payment basis.
• It is called Murabaha to the purchase orderer .
• It is a bunch of contracts completed in steps and ultimately
suffices the financial needs of the client.
• The sequence of their execution is extremely important to
make the transaction Sharia compliant.

3
 Murabaha (Definition)
❖Murabaha is a type of contract,
which is considered as a form of SUPPLIER
sale, where the seller expressly 1. Bank purchases
the goods.
mentions the costs of the sold Customer will act
commodity he has incurred, and as Bank’s agent 2. Bank makes
sells it to another person by adding payment
upon
some profit or mark-up thereon. receipt of
trade
❖The only feature distinguishing it document
from other kind of sale is that the CUSTOMER
seller expressly discloses the cost of
the asset sold and how much profit
3. Bank sells the goods via
he is going to charge in addition to execution of Murabahah
the cost Contract Note

❖The Bank purchases the asset from

the supplier / vendor and sells it to
BANK
the customer at a mark-up price. CUSTOMER
❖Being a sale, and not a loan, the 4. Customer shall make
Murabahah should fulfill all the payment as per
manner agreed
necessary conditions for a valid
sale.
4
Murabaha (Stages)
• 1. Promise Stage
• 2. Agency Stage
• 3. Acquiring Possession
• 4. Execution of Murabaha
• 5. After Execution of Murabaha

5
Ijarah

6
Ijarah (Definition)
• Transferring of usufruct not ownership
To another person for an agreed price, at an agreed
consideration.
• Subject of lease
Valuable, Identified and Quantified
• Consumable things cannot be leased out
Anything which cannot be used without consuming cannot
be leased out; e.g., money, wheat etc.
• All Liabilities of ownership are borne by lessor

7
 Ijarah (Definition)
❖ Ijarah refers to manfaah (usufruct/benefit)
type of contract whereby a lessor (owner)
leases out an asset or an equipment to a
client at an agreed rental fee and pre- 3. Payment to Vendor
determined lease period upon the aqad’ VENDOR
(contract).
❖ The ownership of the lease equipment
remains in the hands of the lessor. 1. Customer
❖ Ijarah can be divided into two types, i.e., purchases
finance lease and operating lease. the asset 2. Customer enters into a purchase
agreement with the Bank.
❖ For finance lease, it is known as Ijarah
Muntahiyah bittamlik (leasing which ends CUSTOMER
BANK
with transfer of ownership). 4. Execute the Ijarah Agreement
and customers pays
❖ In normal Ijarah, the leased asset must be installment (rental) to the
in existence upon execution of leasing Bank.
agreement. However, the specified under
construction asset/property can be used as 5. Bank sells the asset at the end
a leased asset under principle of Ijarah of tenure at a nominal amount
or any agreed price.
Mawsufah fi Zimmah (forward lease).

8
Salam

9
Salam (Definition)
•Seller agrees to supply specific goods to the buyer at
a future date in exchange of an advanced price fully paid
at spot.
•Price is in cash but the supply of goods is deferred.
•Salam is beneficial to the seller, because he receives the price
in advance and it is beneficial to the buyer also because
normally the price in salam used to be lower then the price in
spot sales.

10
Salam (Conditions)
1. Advance Payment of Price at the time of execution of Salam.
2. Only those goods can be sold through a Salam contract in
which the quantity and quality can be exactly specified.
3. Quality must be specified.
4. Quantity must be known.
5. Salam cannot be effected on a particular commodity or on a
product of a particular field or farm.
6. The exact date and place of delivery must be specified in the
contract.
7. Salam cannot be effected in respect of things, which must
be delivered at spot. e.g. Salam b/w wheat and barley.
8. The commodity of Salam contract should remain in the
market right from day of contract up to the date of delivery
or at least at the date of delivery.
9. there should be actual delivery of commodity.
11
Istisna

12
Itisna (Definition)
INTRODUCTION
• Istisna’ is sale transaction where commodity is transacted
before it comes into existence.
DEFINITION
• It is an order to producer to manufacture a specific
commodity for the purchaser.
CONDITIONS OF ISTISNAA
1. The subject of Istisnaa is always a thing which needs
manufacturing.
2. Manufacturer uses his own material
3. Quality and Quantity should be agreed in absolute term.
4. Purchase price should be fixed with mutual consent.

13
Itisna (Models)
1) Single Istisna’
1. Customer places an order to construct the Istisna’ asset
and pays progress billings

CUSTOMER BANK
2. Bank delivers Istisna’ asset upon full settlement of
progress billings

2) Parallel Istisna’

CONTRACTOR (other than

customer)

2. Bank agrees and

request contractor 3. Upon completion, contractor
to construct the delivers Istisna’ asset to the
Istisna’ asset Bank

4. Bank delivers Istisna’ asset

BANK CUSTOMER

1. Customer places an order to construct

the Istisna’ asset and pays progress
billings

14
 Types of Use of Contract Underlying Asset Can Financiers take
Contract collaterals?
Murabahah Working Capital for Assets Tangible asset Yes
acquisitions
Ijarah Operating/Financial Lease Leased asset Yes

Istisna’ Construction/Project Financing Construction project Yes

mudarabah Deposit/Working capital for Customer’s Yes (to protect

business business/project capital in case of
negligence)
Musharakah Working capital for business Customer’s Yes (to protect
and asset acquisition business/project capital in case of
negligence)

Wakalah Working capital for business/ Customer’s Yes (to protect

project business/project capital in case of
negligence)

15
16
17